Deck 21: International Financial Markets and Instruments: an Introduction

Question 1

The recent growth in the last 10-20 years in international bond markets

A) should result in exactly equal interest rates on two identical assets, even though the Assets are located in different countries.
B) should reduce exchange rate risk.
C) will likely slow down, and may even become negative.
D) will likely result in a more efficient allocation of financial capital.

Answer 1

will likely result in a more efficient allocation of financial capital.

Question 2

Present a brief overview of what has happened to financial markets over the past fifteen years. What factors contributed to this phenomenon? What are the implications, if any, for the developing countries?

Answer 2

not answered

Question 3

Eurodollars __________ be borrowed by U.S. banks for use in the United States, and, Because of this fact, the conduct of effective monetary policy in the United States is__________ than would otherwise be the case.

A) cannot; more difficult
B) cannot; easier
C) can; more difficult
D) can; easier

Answer 3

can; more difficult

Question 4

Which one of the following is NOT a component of international bank lending?

A) domestic bank loans in domestic currency to nonresidents
B) domestic bank loans in foreign currency to domestic residents
C) domestic bank loans in domestic currency to a multinational corporation located in the Domestic country
D) domestic bank loans in foreign currency to nonresidents

Question 5

The "globalization of finance" in relatively recent years

A) is an entirely new phenomenon in the world economy.
B) is not an entirely new phenomenon because a similar expansion of financial flows Occurred in the world economy in the 1930s.
C) is not an entirely new phenomenon because a similar expansion of financial flows Occurred in the world economy in the 1870-1914 period.
D) has been primarily associated with the flow of foreign direct investment across Country borders rather than with growth in financial flows such as international Bank lending.

Question 6

An approximation to the "real" interest rate can be calculated by

A) subtracting the nominal interest rate from the inflation rate.
B) subtracting the price level from the nominal interest rate.
C) dividing the nominal interest rate by the inflation rate.
D) subtracting the inflation rate from the nominal interest rate.

Question 7

Why are investors interested in eurodollar interest rate futures and/or interest rate options? How do these instruments relate to financial risk? How might they be used in conjunction with exchange rate derivatives?

Question 8

If a French citizen places $100,000 in an Italian bank and an Italian citizen places $40,000 in a French bank, "international bank lending" has increased by __________.

A) $40,000
B) $60,000
C) $100,000
D) $140,000

Question 9

A eurodollar interest rate put option, which was purchased at a strike price of 93,

A) would not be exercised if the market interest rate was 6½ percent on the contract date.
B) gives the buyer the option of acquiring a lending rate of 9.3 percent on the contract Date.
C) gives the buyer the option of receiving a 7 percent deposit rate on the contract date.
D) would cost the buyer 93 basis points.

Question 10

Discuss why an investor might be interested in foreign stocks and bonds instead of domestic financial instruments. What are the dangers of such purchases?

Question 11

A U.S. mutual fund that purchases packages of equities that contain stocks of
Corporations both in the United States and in other countries worldwide is called

A) an international fund.
B) a global fund.
C) an emerging market fund.
D) a regional fund.

Question 12

If, indeed, international financial markets are well-integrated, why do interest rates differ markedly between countries?

Question 13

If an individual wished to lock in a future deposit rate of 8 percent in the eurodollar Interest rate options market, she should

A) purchase a call at a strike price of 92.
B) purchase a put at a strike price of 108.
C) sell a put at a strike price of 8.
D) sell a call at a strike price of 92.

Question 14

Suppose that short-term interest rates rise in the United States and, consequently, U.K.Financial investors respond by sending funds to the United States (and cover those funds Against any exchange rate change that might occur between the time of the investment And the time of returning the funds and interest to the United Kingdom). In this situation,
Which one of the following events will NOT occur?

A) a rise in short-term eurodollar interest rates in London
B) a fall in the dollar price of the British pound in the spot market
C) a fall in the pound price of the U.S. dollar in the forward market
D) a fall in short-term interest rates on pound deposits in London

Question 15

Which one of the following gives rise to a new eurocurrency deposit?

A) a U.S. exporter receives payment from a U.K. importer in U.S. dollars drawn on a New York bank and places dollars in a London bank
B) a London bank loans out 90 percent of a eurodollar deposit to a firm which then Deposits the eurodollars in a French bank account (in dollars)
C) a French businessman opens up a bank account in Zurich, denominated in French Francs
D) all of the above

Question 16

A surge in international bank lending could be potentially economically destabilizing because

A) it creates the possibility of reduced control of a country's money supply.
B) it directly contributes to destabilizing real investment flows.
C) it results in too much control of world investment by a few large industrial countries.
D) it results in inefficient use of financial capital, and hence reduces world growth rates.

Question 17

If a French citizen places $100,000 in an Italian bank and an Italian citizen places $40,000 in a French bank, "net international bank lending" increased by __________.

A) $40,000
B) $60,000
C) $100,000
D) $140,000

Question 18

Several people have argued that a surge in international lending and the increase in eurodollar accounts and derivatives will contribute to economic instability. Do you agree or disagree with their concerns? Why?

Question 19

The eurodollar deposit rate would theoretically be expected to lie __________ theDomestic U.S. deposit rate, and the eurodollar lending rate would theoretically be Expected to lie __________ the U.S. domestic lending rate.

A) below; below
B) below; above
C) above; below
D) above; above

Question 20

A eurodollar interest rate swap

A) is a type of future rate agreement that extends over several time periods.
B) most often involves the exchange of a fixed rate for a floating rate.
C) can be retraded on the futures market should either party desire to do so.
D) all of the above

Question 21

Global derivative instruments do NOT include which one of the following?

A) interest rate futures
B) stock market index futures
C) currency options
D) checking accounts in commercial banks

Question 22

The increasing importance of international stock transactions most likely will

A) result in international portfolio diversification.
B) facilitate the movement of financial capital to its best use.
C) possibly contribute to greater world volatility in world financial markets.
D) all of the above.

Question 23

A London exporting firm's dollar-denominated checking account in a New York bank __________ of the eurodollar market; a London exporting firm's dollar-denominated checking account in a London bank __________ of the eurodollar market.

A) would be counted as a component; also would be counted as a component
B) would be counted as a component; would not be counted as a component
C) would not be counted as a component; would be counted as a component
D) would not be counted as a component; also would not be counted as a component

Question 24

One hundred basis points in terms of dollars is equal to __________.

A) $0.0001
B) $0.01
C) $0.10
D) $1.00