Chapter 10

ABC International has borrowed $4,000,000 at LIBOR plus a lending margin of .65 percent per annum on a three-month rollover basis from Barclays in London. Three month LIBOR is currently 5.5 percent, but ABC is worried about an increase in three-month LIBOR 3 months from now. What could they do to hedge? A. Buy a 3 × 6 FRA in the amount of $4 million. B. Sell a 3 × 6 FRA in the amount of $4 million. C. Buy a 3 × 3 FRA in the amount of $4 million. D. Buy a 3 × 9 FRA in the amount of $4 million.

A. Buy a 3 × 6 FRA in the amount of $4 million.

So-called subprime mortgages were typically A. mortgages granted to borrowers with less-than-perfect credit. B. backed by the full faith and credit of the U.S. government. C. held to maturity by the originating lender, thereby assuring that default risk was priced into the rate of return. D. none of the options

A. mortgages granted to borrowers with less-than-perfect credit.

A correspondent bank relationship is established when A. two banks maintain deposits with one another. B. two banks write to each other about the credit conditions of their countries. C. a group of banks form a syndicate to spread out the risk and cost of a large bond offering. D. all of the options

A. two banks maintain deposits with one another.

A U.S.-based multinational bank A. would not have to provide deposit insurance and meet reserve requirements on foreign currency deposits. B. would have to provide deposit insurance and meet reserve requirements on foreign currency deposits. C. would not have to provide deposit insurance but would have to meet reserve requirements on foreign currency deposits. D. would have to provide deposit insurance but not meet reserve requirements on foreign currency deposits.

A. would not have to provide deposit insurance and meet reserve requirements on foreign currency deposits.

Teltrex International can borrow $3,000,000 at LIBOR plus a lending margin of 0.75 percent per annum on a three-month rollover basis from Barclays in London. Suppose that three-month LIBOR is currently 5 17⁄32 percent. Further suppose that over the second three-month interval LIBOR falls to 5 1⁄8 percent. How much will Teltrex pay in interest to Barclays over the six-month period for the Eurodollar loan? A. $79,921.875 B. $91,171.88 C. $96,174.39 D. $364,687.52

B. $91,171.88

The Asian crisis A. followed a period of economic recession in the region coupled with record private capital outflows. B. followed a period of economic expansion in the region financed by record private capital inflows. C. began in the fall of 2001 when Japan devalued the yen. D. none of the options

B. followed a period of economic expansion in the region financed by record private capital inflows

A representative office A. is what lawyers' offices are called in Mexico. B. is a small service facility staffed by parent bank personnel that is designed to assist MNC clients of the parent bank in dealings with the bank's correspondents. C. is a small service facility staffed by correspondent bank personnel that is designed to assist MNC clients of the parent bank in dealings with the bank's correspondents. D. none of the options

B. is a small service facility staffed by parent bank personnel that is designed to assist MNC clients of the parent bank in dealings with the bank's correspondents.

Eurocurrency A. is the euro, the common currency of Europe. B. is a time deposit of money in an international bank located in a country different from the country that issued the currency. C. is a demand deposit of money in an international bank located in a country different from the country that issued the currency. D. is either a time deposit of money in an international bank located in a country different from the country that issued the currency or a demand deposit of money in an international bank located in a country different from the country that issued the currency.

B. is a time deposit of money in an international bank located in a country different from the country that issued the currency.

The Eurocurrency market A. is only in Europe. B. is an external banking system that runs parallel to the domestic banking system of the country that issued the currency. C. has languished following monetary union in Europe. D. none of the options

B. is an external banking system that runs parallel to the domestic banking system of the country that issued the currency.

The primary activities of offshore banks A. include money laundering where banking secrecy laws are strict. B. is to seek deposits and grant loans in currencies other than the currency of the host government. C. involve check clearing of large bags of checks. D. none of the options

B. is to seek deposits and grant loans in currencies other than the currency of the host government.

A foreign branch bank A. is a small service facility staffed by parent bank personnel that is designed to assist MNC clients of the parent bank in dealings with the bank's correspondents. B. operates like a local bank, but legally is a part of the parent bank. C. is subject to domestic regulation only. D. all of the options

B. operates like a local bank, but legally is a part of the parent bank.

An affiliate bank is A. a locally incorporated bank that is wholly owned by a foreign parent. B. a locally incorporated bank that is majority owned by a foreign parent. C. a locally incorporated bank that is partially owned (but not controlled) by a foreign parent. D. a locally incorporated bank that is wholly (or majority) owned by a foreign parent.

C. a locally incorporated bank that is partially owned (but not controlled) by a foreign parent.

One lesson from the credit crunch is that A. in the aggregate, credit scores tend to understate the probability of default—thereby a pool of subprime mortgages is actually quite a safe investment since not every borrower defaults. B. moral hazard, while an issue in the market for used cars, does not seem to affect the U.S. financial system due to the effective regulatory environment. C. bankers seem not to scrutinize credit risk as closely when they serve only as mortgage originators and then pass it on to MBS investors rather than hold the paper themselves. D. none of the options

C. bankers seem not to scrutinize credit risk as closely when they serve only as mortgage originators and then pass it on to MBS investors rather than hold the paper themselves.

A bank may establish a multinational operation for the reason of low marginal costs. The underlying rationale being that A. banks follow their multinational customers abroad to prevent the erosion of their clientele to foreign banks seeking to service the multinational's foreign subsidiaries. B. multinational banking operations help a bank prevent the erosion of its traveler's check, tourist, and foreign business markets from foreign bank competition. C. managerial and marketing knowledge developed at home can be used abroad with low marginal costs. D. the foreign bank subsidiary can draw on the parent bank's knowledge of personal contacts and credit investigations for use in that foreign market.

C. managerial and marketing knowledge developed at home can be used abroad with low marginal costs.

Euro credits A. are credit cards that work in the euro zone. B. are denominated in currencies that are the same as the home currency of the Euro bank. C. short- to medium-term loans of Euro currency extended by Euro banks to corporations, sovereign governments, non prime banks, or international organizations. D. none of the options

C. short- to medium-term loans of Euro currency extended by Euro banks to corporations, sovereign governments, non prime banks, or international organizations.

Forward rate agreements can be used for speculative purposes. If one believes rates will be less than the agreement rate, A. take a short position in a forward rate agreement. B. the purchase of a FRA is the suitable position. C. the sale of a FRA is the suitable position. D. take a long position in the spot market.

C. the sale of a FRA is the suitable position.

A subsidiary bank is A. a locally incorporated bank that is wholly owned by a foreign parent. B. a locally incorporated bank that is majority owned by a foreign parent. C. a locally incorporated bank that is partially owned (but not controlled) by a foreign parent. D. a locally incorporated bank that is wholly (or majority) owned by a foreign parent.

D. a locally incorporated bank that is wholly (or majority) owned by a foreign parent.

Major distinguishing features between domestic banks and international banks are A. the types of deposits they accept. B. the types of loans and investments they make. C. membership in loan syndicates. D. all of the options

D. all of the options

Which of the following are principles of sound banking behavior? A. Avoid an undue concentration of loans to single activities. B. Control mismatches between assets and liabilities. C. Expand cautiously into unfamiliar activities. D. all of the options

D. all of the options

Which of the following are reasons why a bank may establish a multinational operation? A. Low marginal and transaction costs B. Home nation information services, and prestige C, Growth and risk reduction D. all of the options

D. all of the options

A foreign branch bank operates like a local bank, but legally A. It is not a part of the parent bank. B. a branch bank is subject to neither the banking regulations of its home country nor the country in which it operates. C. a branch bank is subject to only the banking regulations of its home country and not the country in which it operates. D. it is a part of the parent bank, and a branch bank is subject to both the banking regulations of its home country and the country in which it operates.

D. it is a part of the parent bank, and a branch bank is subject to both the banking regulations of its home country and the country in which it operates.