Deck 6: International Parity Relationships and Forecasting Foreign Exchange Rates

Question 1

Which of the following statements is true?

A)ABC Bank will pay XYZ Bank a cash settlement at the beginning of the 92-day FRA period
B)XYZ Bank will pay ABC Bank a cash settlement at the beginning of the 92-day FRA period
C)ABC Bank will pay XYZ Bank a cash settlement at the end of the 92-day FRA period
D)XYZ Bank will pay ABC Bank a cash settlement at the end of the 92-day FRA period

Answer 1

A

Question 2

Short-term notes underwritten by a group of international investment or commercial banks called a facility are

A)eurocredits
B)eurocommercial papers
C)euro facilities
D)euronotes

Answer 2

D

Question 3

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 is called

A)Correspondent bank
B)Representative office
C)Foreign branch
D)Subsidiary bank

Answer 3

B

Question 4

A locally incorporated bank that is either wholly owned or owned in major part by a foreign parent is called

A)Correspondent bank
B)Representative office
C)Foreign branch
D)Subsidiary bank

Question 5

In reference to capital requirements,value-at-risk analysis

A)refers to traditional bank loans and deposits
B)refers to a "risk-focused" approach to determining adequate bank capital
C)provides a level of confidence measure of the probability of the maximum loss that can occur during a period of time
D)b and c

Question 6

Since SR < AR,then

A)ABC Bank will pay XYZ Bank a cash settlement at the beginning of the 91-day FRA period
B)XYZ Bank will pay ABC Bank a cash settlement at the beginning of the 91-day FRA period
C)ABC Bank will pay XYZ Bank a cash settlement at the end of the 91-day FRA period
D)XYZ Bank will pay ABC Bank a cash settlement at the end of the 91-day FRA period

Question 7

Eurodollars refers to dollar deposits when the depository bank is located in

A)Europe
B)Europe, and the Caribbean
C)Europe, the Caribbean, or Asia
D)United States

Question 8

The payment amount under this FRA is:

A)$9,985
B)$10,111
C)$60,667
D)$120,000

Question 9

A country whose banking system is organized to permit external accounts beyond the normal economic activity of the country is called

A)Representative country
B)Offshore banking centre
C)Onshore banking centre
D)Full service country

Question 10

Short-term unsecured promissory notes issued by a corporation or a bank and placed directly with the investment public through a dealer are called

A)eurocredits
B)eurocommercial papers
C)euro facilities
D)euronotes

Question 11

ABC International can borrow $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.Suppose that over the second three-month interval LIBOR falls to 5.0 percent.How much will ABC pay in interest to Barclays over the six-month period for the Eurodollar loan?

A)$ 50,000
B)$100,000
C)$118,000
D)$120,000

Question 12

Japanese yen deposited in U.S.bank are called

A)Americoyen
B)Dollaroyen
C)Euroyen
D)Worldyen

Question 13

How are Canadian dollar interest rates in the Euromarkets and in the Canadian domestic financial markets related?

Question 14

A forward rate agreement (FRA)is a contract between two banks

A)that allows the Eurobank to hedge the interest rate risk in mismatched deposits and credits
B)in which the buyer agrees to pay the seller the increased interest cost on a notional amount if interest rates fall below an agreed rate, and the seller agrees to pay the buyer the increased interest cost if interest rates increase above the agreed rate
C)that is structured to capture the maturity mismatch in standard-length Eurodeposits and credits
D)All of these

Question 15

The Basle Accord calls for the following minimum bank capital

A)Tier I capital 4%, Tier II capital 4%
B)Tier I capital 4%, Tier II capital 8%
C)Tier I capital 8%, Tier II capital 4%
D)Tier I capital 8%, Tier II capital 8%

Question 16

The major feature that distinguishes international from domestic banks is

A)the type of deposits they accept
B)the currency of denomination of the investments they make
C)a and b
D)none of these

Question 17

The payment amount under this FRA is:

A)$2,510
B)$2,526
C)$25,555
D)$100,000

Question 18

Find the VAR for a portfolio of $100M with daily standard deviation of 0.5% over 30-day period.Note: z_1% = 2.326

A)Below $5M
B)Between $5M and $10M
C)Between $10M and $20M
D)Above $20M

Question 19

The London Interbank Offered Rate (LIBOR)is all of the following except:

A)the rate charged by banks on loans to other Eurobanks
B)the rate paid by banks on deposits from other Eurobanks
C)reference rate in London for Eurocurrency deposits
D)reference rate in London for Eurocurrency loans

Question 20

Which of the following statements is not true about Eurocredits?

A)Eurocredits are short-to medium term loans of Eurocurrency extended by Eurobanks
B)Euorcredits are denominated in currencies other than the home currency of the Eurobank
C)Eurocredits are often syndicated loans
D)Eurocredits are less risky than other loans

Question 21

ABC Bank (seller)has made a "three against six" Forward Rate Agreement (FRA),with XYZ Bank (buyer)with the following characteristics:
Notional Amount = $1,000,000
Settlement Rate = 4%
Agreement Rate = 5%
Actual number of days in the three-month agreement period = 91
a)When is this agreement settled?
b)Who pays whom?
c)What is the dollar amount of the settlement?

Question 22

International Corp.can borrow $10,000,000 at LIBOR plus a lending margin of .5 percent per annum on a six-month rollover basis from Deutsche Bank in Frankfurt.Six-month LIBOR is currently 5 percent.Suppose that over the second six-month interval LIBOR rises to 6 percent.How much will International Corp.pay in interest to Deutsche Bank over the one-year period for the Eurodollar loan?

Question 23

ABC Bank (seller)has made a "three against six" Forward Rate Agreement (FRA),with XYZ Bank (buyer)with a notional amount of $1,000,000.The settlement and agreement rates are 6% and 5% respectively.There are 91 actual days in the three-month agreement period.
a)When is this agreement settled?
b)Who pays whom?
c)What is the dollar amount of the settlement?

Question 24

Explain Eurocommerical papers.