Deck 1: An Overview

Question 1

The study of international finance encompasses:

A) exchange rate determination and volatility
B) the joint determination of the exchange rate and the Balance of Payments
C) the financial operations of firms in the international environment
D) all of the answers given

Answer 1

all of the answers given

Question 2

The term 'international operations' encompasses:

A) international trade
B) international investment and financing operations
C) carrying out production abroad
D) all of the answers given

Answer 2

all of the answers given

Question 3

Which of the following statements is false?

A) The US stock markets are by far the most influential with respect to their effect on other stock markets
B) There is not a significant amount of multilateral interaction among national stock markets
C) Developments in the US stock markets are rapidly transmitted to other stock markets
D )Richard Roll's 1988 study found that out of 23 international stock markets studied, 19 markets declined by more than 20% immediately following the US market crash of October 1987

Answer 3

There is not a significant amount of multilateral interaction among national stock markets

Question 4

The term 'international business firm' refers to:

A) a firm engaged in cross border activities such as importing and exporting, without necessarily engaging in offshore production or ownership of foreign assets
B) a firm engaged in production in another country
C) a firm which owns a subsidiary located in another country
D) a firm which is known around the world for its quality

Question 5

Which of the following statements is false?

A)Excessive financial regulation is thought by the majority of observers to be one of the factors causing the global financial crisis to materialise and become pronounced
B) Excessive financial deregulation is thought by the majority of observers to be one of the factors causing the global financial crisis to materialise and become pronounced
C) Major countries shifted to a system of flexible of floating exchange rates in 1973
D) By the 1980s exchange rates had become volatile and misaligned

Question 6

Which of the following issues is least likely to be a source of concern for finance managers?

A) Financial contagion
B) The rising price of coffee
C) Balance of payments difficulties
D) Fluctuations in exchange rates and interest rates

Question 7

Balance of payments difficulties are a source of concern for the finance manager because:

A) they affect interest rates
B) they affect exchange rates
C) they create constraints on economic policy
D) all of the answers given

Question 8

The appreciation of the domestic currency is:

A) always good for firms with international operations
B) always bad for firms with international operations
C) good or bad, depending on the specific conditions of the situation
D) good or bad, depending on the interest rate differential

Question 9

The depreciation of the domestic currency is:

A) always good for firms with international operations
B) always bad for firms with international operations
C) good or bad, depending on the specific conditions of the situation
D) good or bad, depending on the interest rate differential

Question 10

Interest and exchange rates are linked via:

A) purchasing power parity
B) uncovered interest parity
C) covered interest parity
D) the Fisher effect

Question 11

Studying international finance is important for the finance manager because:

A) it helps the manager decide how international events affect the firm
B) it helps the manager anticipate events and to make profitable decisions before the events occur
C) it helps the manager understand and control risks affecting the firm
D) all of the answers given

Question 12

The globalisation of finance has been driven by:

A) advances in information and computer technology
B) globalisation of national economies
C) liberalisation of national financial and capital markets
D) all of the answers given

Question 13

Which of the following is the least likely indicator of the internationalisation of finance?

A) The volume of international bank lending
B) Convergence of inflation rates
C) the value of security transactions with foreigners
D) the value of daily turnover in the global foreign exchange market

Question 14

The Eurocurrency market:

A) is a market for assets denominated in currencies other than that of the country in which they are held
B) is a market in which euro-denominated assets are bought and sold
C) is a foreign currency market based in Europe
D) includes all foreign currency trading conducted in the European Union

Question 15

The introduction of the euro as a hard currency:

A) is sufficient to create a single market for European business
B) is a necessary, but not a sufficient, step towards the creation of a single market for European business
C) is neither a necessary, nor a sufficient, step towards the creation of a single market for European business
D) is both a necessary and a sufficient step towards the creation of a single market for European business

Question 16

Which of the following statements is UNTRUE?

A) The Bretton Woods Agreement was signed in 1944
B) The European Economic Community was established by the Treaty of Rome in 1950
C) The Mexican crisis of 1994-95 was the first in what has now become a long series of financial crises
D) The Asian currency crisis of 1997-98 initially began in Thailand

Question 17

Between 1962 and 2007, the size of the US economy:

A) has increased relative to that of Europe, China and Japan
B) has decreased relative to that of Europe, China and Japan
C) has increased relative to that of Europe and decreased relative to that of both China and Japan
D) has decreased relative to that of Europe and increased relative to that of both China and Japan

Question 18

The deterioration of the US external position in the early 1970s led to the:

A) end of the Vietnam War
B) resignation of President Nixon
C) collapse of the Bretton Woods system
D) intensification of the Cold War

Question 19

The twin deficit problem refers to deficits in the United States':

A) current account and budget
B) capital account and budget
C) capital account and unilateral transfers
D) budget and unilateral transfers

Question 20

The effect of changes in oil prices:

A) depends on the policy response
B) is to increase inflation
C) is to increase interest rates
D) is to reduce output

Question 21

The trend towards increasing international use of currencies other than the US dollar in both current and capital account transactions is indicated by:

A) a lower US dollar share of trading volumes in the foreign exchange market
B) a lower US dollar share of Eurocurrency deposits
C) a lower US dollar share of international bond issues
D) all of the answers given

Question 22

Gross capital flows reflect:

A) current account imbalances
B) international indebtedness
C) cross-border banking and flows of securities
D) capital account imbalances

Question 23

Financial market integration requires:

A) free capital movement
B) substitutability between domestic and foreign assets
C) membership of a currency area
D) both free capital movement and substitutability between domestic and foreign assets

Question 24

Which of the following is NOT a factor that has contributed to increased financial market integration?

A) relaxation of capital controls
B) financial deregulation
C) the fall of communism
D) new technology

Question 25

Financial deregulation has been encouraged by:

A) the desire to improve financial efficiency
B) the growth of international trade
C) privatisation
D) all of the answers given

Question 26

Capital mobility is:

A) a sufficient and a necessary condition for financial market integration
B) a sufficient but not a necessary condition for financial market integration
C) neither a sufficient nor a necessary condition for financial market integration
D) any of the answers given, depending on the circumstances

Question 27

One reason why the ANZAC was not developed into a fully-fledged common currency for Australia and New Zealand is:

A) political differences
B) differences in the size of the two economies
C) their terms of trade often moved in different directions
D) the desire to encourage multilateral trade

Question 28

Exchange rate volatility refers to:

A) long-term movements
B) short-term movements around the long-term trend
C) short-term movements relative to what is implied by the interest rate differential
D) exchange rate movements

Question 29

Increased volatility of exchange rates can be traced back to:

A) the Vietnam War
B) the collapse of the Bretton Woods system
C) speculative attacks on the EMS
D) the 1985 Plaza Accord to intervene in the foreign exchange market

Question 30

Increased volatility of interest rates can be traced back to:

A) 1971, with the collapse of the Bretton Woods system
B) 1979, when the US Federal Reserve System shifted from a policy of interest rate targeting to a policy of money supply targeting
C) 1973-74, with the OPEC-led oil price rise
D) 1989, with the agreement to establish NAFTA

Question 31

Currency crises spread in several ways, including:

A) when one country is forced to devalue its currency, its exports gain an advantage, exposing countries with competing exports to the risk of speculative attacks on their currencies
B) when investors lose heavily in a particular currency they may be forced to sell assets denominated in other currencies just to maintain liquidity
C) once a country has suffered a crisis, investors tend to worry about others in similar situations
D) all of the answers given

Question 32

Examples of a currency crisis include:

A) the EMS crisis in 1992-93
B) the Asian crisis in 1997-98
C) the Argentinean crisis in 2001-02
D) all the answers given

Question 33

'Securitisation' refers to:

A) the deregulation of securities houses
B) banking deregulation
C) selling off public assets by listing on a securities exchange
D) raising capital by issuing securities

Question 34

The global financial crisis of the 21 century is more complex than earlier crises as:

A) financial innovation allowed the creation of complex assets whose risk profiles were hard to assess
B) financial innovation allowed the creation of complex assets which were hard to value
C) it spread more quickly from the US to other countries
D) all of the answers given

Question 35

Subprime loans are:

A) housing loans granted to borrowers who do not qualify for loans at the market rate of interest as they have poor credit records
B) housing loans granted to borrowers who qualify for loans at the market rate of interest
C) housing loans granted to borrowers at a rate of interest below the market rate of interest
D) housing loans granted to borrowers solely to extend the primary mortgage on the property

Question 36

Which of the following statements is UNTRUE?

A) A moral hazard is typically created by a government intervention to rescue a failed institution, as it signals the government's willingness to come to the rescue whenever similar institutions are in trouble
B) In the US, financial institutions traditionally had kept mortgage loans on their books until maturity, . but prior to the subprime crisis they changed from 'originate and hold' to 'originate and distribute'
C) The existence of a moral hazard in relation to financial institutions and the shift to an 'originate and distribute' modus operandi by mortgage originators lead to an increase in the complacency about the credit risk of subprime borrowers by US financial institutions
D) All of the answers given

Question 37

One reason for the US housing bubble in the early 2000s was the low interest rate policy of the US Federal Reserve, which:

A) distorted interest rates and asset prices
B) diverted funding into wrong instruments
C) motivated a shift away from fixed rate loans in favour of adjustable rate loans
D) all the answers given

Question 38

Securitisation has the following benefits:

A) lowers borrowing costs
B) provides for an efficient use of capital
C) facilitates the sale of risk to investors with an appetite for risk
D) all of the answers given

Question 39

According to Koos Timmermans 'three types of leverage helped propel the boom and have now accentuated the bust':

A) US financial institutions loaded up on debt; US corporations increased their debt to equity ratios; and the US government increased the national debt
B) US financial institutions were exposed to liquidity leverage via their use of structure investment vehicles; US corporations increased their debt to equity ratios; and the US government increased the national debt
C) US financial institutions were exposed to product leverage via complex instruments such as CDOs; US corporations increased their debt to equity ratios; and the US government increased the national debt
D) BUS financial institutions loaded up on debt; US financial institutions were exposed to liquidity leverage via their use of structure investment vehicles; and US financial institutions were exposed to product leverage via complex instruments such as CDOs

Question 40

Martin Wolf identifies the following benefits of modern finance:

A) it allows the creation of vast enterprises out of the combined capital, supplied at modest cost, by millions of individual investors
B) it facilitates risk sharing
C) it allows the creation of vast enterprises out of the combined capital, supplied at modest cost, by . millions of individual investors AND it facilitates risk sharing
D) it has developed as an industry in its own right employing millions of people