Deck 16: International Banking

Question 1

Country risk is the possibility that future returns from international activities may be impaired by economic or political events surrounding the foreign country.

Answer 1

True

Question 2

A foreign affiliate bank is also known as a consortium or joint venture bank.

Answer 2

True

Question 3

Transfer risk is the risk resulting from changes in foreign exchange values that affect the return on loans or investments denominated in other currencies.

Answer 3

False

Question 4

Global financial risk is the risk of the effects of a financial crisis in one region or country spreading to another.

Question 5

A sight draft is a bank draft that requires payment some time (usually 30,60 or 90 days)after the goods are received.

Question 6

Regulatory arbitrage is the shifting of operations to jurisdictions,regulators or countries with the least restrictive regulations.

Question 7

Project finance involves the financing of large vessels for the purpose of transporting oil,containers,commodities such as coal and grain,and passengers.

Question 8

Most eurocurrency loans are priced with respect to the average of the current interest rates prevailing in the UK and the US market.

Question 9

The IMF's initial role was to provide long-term finance for post-war reconstruction.

Question 10

The rollover pricing mechanism allows banks to make intermediate-term loans without exposing themselves to the interest rate risk inherent in fixed-rate loans.

Question 11

Correspondent banking is a legal and operational part of a parent bank operating in a foreign country.

Question 12

A shell branch is a foreign branch that has limited access to that country's domestic market.

Question 13

Customers of a foreign branch have access to the full range of the parent bank's services,and the value of these services is based on the worldwide value of the client relationship rather than just the local office relationship.

Question 14

Trade accounts are the simplest form of trade finance and involve the importer paying for the goods once title transfers.

Question 15

Under the Bretton Woods agreement,gold was selected as the reserve currency that was to be used as the international pricing currency for products traded in international markets.

Question 16

A bare-boat charter is a charter in which the operator rents the ship for a specific period and the owner bears the costs and risk.

Question 17

Participation loan arrangements may result in some banks entering into international loans without fully understanding the risk involved.

Question 18

International loans can be denominated in almost any major currency.

Question 19

The US dollar was selected as the reserve currency meaning it is:

A)used as the international pricing currency for products traded in international markets.
B)used as the international trading currency for products traded in international markets.
C)used as the international buying currency for products traded in international markets.
D)used as the international selling currency for products traded in international markets.

Question 20

The Bretton Woods agreement was an obligation for member nations to adopt a monetary policy that maintained exchange rates within a fixed value (within one per cent)of the value of gold.

Question 21

When lending abroad,bankers must take into account:

A)government monetary and fiscal policy,bank regulations,foreign exchange controls and national and regional economic conditions.
B)government monetary,fiscal policy and bank regulations.
C)government monetary,fiscal policy and national and regional economic conditions.
D)government monetary,fiscal policy,bank regulations,and foreign exchange controls.

Question 22

The IMF's initial role was to:

A)provide long-term finance for post-war reconstruction.
B)promote free trade through tariff reduction.
C)promote international monetary cooperation and foreign exchange stability in addition to facilitating the balanced growth of international trade.
D)promote free trade through negotiation.

Question 23

Which of the following statements concerning representative banking offices is correct?

A)Representative offices are established in a foreign country primarily to assist the parent bank's customers in that country.
B)Representative offices can accept deposits,make loans,transfer funds,accept drafts,transact in the international money market or commit the parent bank to loans.
C)Representative offices can cash a traveller's cheque drawn on the parent bank.
D)All of the above.

Question 24

Which of the following forms of international banking organisation is primarily associated with interbank money market transactions?

A)Representative office
B)Shell branch
C)Foreign subsidiary
D)International banking facility

Question 25

Most large (greater than about $50 million)international bank loans are syndicated.This means:

A)several big banks participate in funding the loan.
B)several banks participate in funding the loan,which is packaged by one or more lead banks.
C)two big banks participate in funding the loan.
D)the IMF fund the loan.

Question 26

When associated with ship financing,a time charter is:

A)a charter in which the operating company is responsible for all operating,insurance and maintenance costs associated with the ship.
B)a charter in which the operator rents the ship for a specific period and the owner bears the costs and risk.
C)a charter in which the operator rents the ship for a specific period and the lender bears the costs and risk.
D)a charter in which the operator rents the ship for a specific period and the ship operator bears the costs and risk.

Question 27

Which of the following factors is an important consideration in international lending?

A)credit risk
B)country risk
C)currency risk
D)all of the above

Question 28

Regulatory arbitrage is:

A)the shifting of operations to jurisdictions,regulators or countries with the most restrictive regulations.
B)the shifting of operations to jurisdictions,regulators or countries with the least restrictive regulations.
C)the shifting of operations to jurisdictions,regulators or countries with major trade barriers.
D)the shifting of operations to jurisdictions,regulators or countries with heavy government intervention.

Question 29

International lending based on the LIBOR rate with a rollover-pricing feature protects the bank from:

A)liquidity risk.
B)interest rate risk.
C)default risk.
D)solvency risk.

Question 30

Which of the following forms of international banking organisation is an extension of a domestic bank but is located in a foreign country?

A)Foreign branch
B)Shell branch
C)Representative office
D)Foreign subsidiary

Question 31

The major drivers of international banking in recent years include:

A)increasing globalisation with the consolidation of national boundaries.
B)large scale cross-border mergers between banks creating large multinational institutions.
C)rapid innovation and use of technology in the industry.
D)all of the above.

Question 32

Most large international loans are negotiated and funded in:

A)international bank market.
B)the eurocurrency market.
C)the United States.
D)the IMF.

Question 33

Transfer risk is

A)similar to contagion risk.
B)the risk that domestic currency cannot be converted into foreign currency.
C)the risk that the goods will not be delivered.
D)similar to country risk.

Question 34

The risk of the effects of a financial crisis in one region or country spreading to another is called

A)contagion risk.
B)global financial risk.
C)country risk.
D)currency risk.

Question 35

A trade account is:

A)short-term financing of importing and exporting activities across the globe.
B)a financial instrument that provides an exporter with a written guarantee that a financial institution will honour payment once the goods have been delivered.
C)a bank draft that requires payment when the goods are received.
D)the simplest form of financing international trade,involving the importer paying for the goods only after they are received and title to them has been transferred.

Question 36

All but one of the following is a reason why American banks expanded their international activities.

A)The growth of U.S.based multinational corporations
B)The expansion of U.S.world trade
C)Regulatory restrictions in U.S.banking markets
D)The World Bank provided assistance to expand globally.

Question 37

A sight draft is:

A)a bank draft that requires payment when the goods are received.
B)a bank draft that requires payment some time (usually 30,60 or 90 days)after the goods are received.
C)short-term financing of importing and exporting activities across the globe.
D)a bank draft that requires payment before the goods are delivered.

Question 38

International bank lending is characterised by all of the following except that loans:

A)are unsecured.
B)have floating rates.
C)are made for relatively small amounts.
D)are priced relative to the LIBOR.

Question 39

Sovereign risk is:

A)the possibility that political factors may impair a borrower's ability to meet debt-servicing obligations.
B)the risk resulting from changes in foreign exchange values that affect the return on loans or investments denominated in other currencies.
C)the possibility that a sovereign country as a borrower may become unable or unwilling to service its foreign obligations or meet guarantees of nongovernmental or private borrowings.
D)the possibility that a sovereign country as a borrower may become bankrupt.

Question 40

Project finance involves the:

A)structuring and finance of large-scale projects and developments,such as mines,property developments,hotels and resorts,heavy industry developments and infrastructure projects such as roads,bridges and rail projects.
B)financing of large vessels for the purpose of transporting oil,containers,commodities such as coal and grain,and passengers.
C)short-term financing of importing and exporting activities across the globe.
D)None of the above.

Question 41

The primary reason(s)Australian banks engage in international activities is/are:

A)to attain growth through expanding their operations to a larger client base.
B)encouragement from the Australian government to become international.
C)to obtain a more favourable regulatory and taxation environment.
D)all of the above.

Question 42

In international lending,what are the risks that concern bankers the most?

Question 43

Compare and contrast the strategies in reducing the risks of international lending.

Question 44

Explain what contagion risk is and how it affects the financial market.

Question 45

Foreign banks provide __________ competition for Australia's domestic banks:

A)little
B)some
C)moderate
D)significant

Question 46

There are a number of ways to deliver international banking services.Identify and explain one way of delivery.

Question 47

What is a foreign branch bank and what regulation is it subject to?