Deck 17: Global Banking Activities

Question 1

If the spot rate is 1.67CAN$/US$ and the 1-month forward rate is 1.70CAN$/US$:

A) the Canadian dollar is selling at a premium.
B) the Canadian dollar is selling at a discount.
C) the U.S. dollar is selling at a discount.
D) the U.S. dollar is selling at par.
E) none of the above

Answer 1

B

Question 2

The most dominant type of Eurocurrency deposits are:

A) Euroyens.
B) Eurodollars.
C) Eurosterlings.
D) Eurofrancs.
E) Euromarks.

Answer 2

B

Question 3

The default risk associated with loans made to borrowers outside a bank's home country is called:

A) foreign exchange risk.
B) sovereign risk.
C) euro risk.
D) country risk.
E) LC risk.

Answer 3

D

Question 4

Which of the following is not true regarding Edge Act banks?

A) Edge Act banks may be owned by U.S. banks.
B) Edge Act banks may be owned by foreign banks.
C) Edge Act banks may be owned by bank holding companies.
D) Edge Act banks may be located outside the U.S.
E) Edge Act banks may be located in the U.S.

Question 5

Which of the following is not a member of the European Community (EC)?

A) France
B) Germany
C) Australia
D) Spain
E) United Kingdom

Question 6

The world's largest financial company (as of September 2013) is:

A) Industrial & Commercial Bank of Chia
B) J.P. Morgan Chase & Co.
C) Citigroup
D) HSBC Holdings
E) BNP Paribas

Question 7

Put the following steps of the creation of a banker's acceptance in order.
I. Shipping documents delivered
II. Letter of credit delivered
III. Bankers' acceptance presented at maturity
IV. Goods are shipped

A) I, IV, II, III
B) II, IV, III, I
C) II, IV, I, III
D) I, IV, III, II
E) I, II, III, IV

Question 8

Use the following information for questions
A London based firm has a subsidiary located in New York. The subsidiary has $1,000 in assets and $750 in liabilities. The current spot rate is $1.60/£.
What is the U.S. firm's net exposure?

A) $250
B) $750
C) $1,000
D) $1,750
E) Cannot be determined.

Question 9

The first type of international office that a bank forms outside its home country that is exploratory in nature is known as:

A) an Edge Act bank.
B) a head office.
C) a representative office.
D) an agreement corporation.
E) a foreign branch.

Question 10

The European Community is currently made up of how many member countries?

A) 20
B) 25
C) 29
D) 30
E) 32

Question 11

Which of the following is an example of a Eurocurrency?

A) A branch of a Canadian bank located in Paris accepts a deposit in U.S. dollars.
B) A branch of a U.S. bank located in Tokyo accepts a deposit in Japanese yen.
C) A branch of a U.S. bank located in New York accepts a deposit in U.S. dollars.
D) A branch of a London bank located in Paris accepts a deposit in Euros.
E) A branch of a Swiss bank located in Mexico City accepts a deposit in Mexican pesos.

Question 12

Covered interest rate arbitrage is possible when:

A) both currencies are appreciating.
B) the actual inflation rates are identical in both countries.
C) the difference in the interest rates in two countries exactly equals the spot-to-forward exchange rate differential.
D) the difference in interest rates in two countries is out of line with the spot-to-forward exchange rate differential.
E) none of the above

Question 13

A bank's net balance sheet exposure to changes in the value of Euros is measured as:

A) the amount of assets denominated in U.S. dollars minus the amount of liabilities denominated in Euros.
B) the amount of assets denominated in Euros minus the amount of liabilities denominated in U.S. dollars.
C) the amount of liabilities denominated in Euros minus the amount of liabilities denominated in U.S. dollars.
D) the amount of assets denominated in Euros minus the amount of assets denominated in U.S. dollars.
E) the amount of assets denominated in Euros minus the amount of liabilities denominated in Euros.

Question 14

A forward market exchange in foreign currencies is an agreement to exchange:

A) currencies in the future at an unspecified time at an exchange rate determined at the time the contract is agreed to.
B) currencies in the future at a specified time at an unknown exchange rate.
C) currencies in the future at an unspecified time at an unknown exchange rate.
D) a product for a foreign currency in the future at a specified time.
E) currencies in the future at a specified time at an exchange rate determined at the time the contract is signed.

Question 15

Non-performing international loans do not completely reflect potential losses because:

A) foreign governments have never defaulted on their debts.
B) banks often loan borrowers funds to make payments on existing loans.
C) U.S. banks can easily recover the funds in foreign courts.
D) the U.S. government has strongly discouraged U.S. banks from making international loans.
E) all of the above

Question 16

Which country has not adopted the Euro?:

A) France.
B) Germany.
C) Spain.
D) United Kingdom.
E) All of these countries have adopted the Euro.

Question 17

The largest financial company in the United States (as of September 2013) is:

A) J.P. Morgan Chase & Co.
B) Citigroup Inc.
C) Bank of America
D) Wells Fargo
E) The Bank of New York Mellon.

Question 18

Eurodollar deposits:

A) are very different from domestic CDs from the depositor's perspective.
B) have no maturity.
C) pay interest rates slightly above CDs issued by U.S. banks.
D) are subject to reserve requirements established by the Fed.
E) are generally small in nature, with a maximum denomination of $10,000.

Question 19

A time draft for payment at a future date, often used in international trade is known as:

A) a reverse repurchase agreement.
B) a repurchase agreement.
C) a line of credit.
D) a letter of credit.
E) a bankers acceptance.

Question 20

The risk that a foreign government will suspend debt service payments is known as:

A) LC risk.
B) foreign exchange risk.
C) euro risk.
D) sovereign risk.
E) country risk.

Question 21

When it comes to making international loans, political risk is easier to assess than economic risk.

Question 22

Explain how and why bankers' acceptances are used in international trade.

Question 23

Foreign banks generally operate with higher capital ratios than U.S. banks.

Question 24

What is the difference between Edge Act corporations and foreign branches of U.S. banks?

Question 25

Before the Great Depression, many U.S. banks operated as universal banks.

Question 26

Foreign branches of U.S. banks are subject to U.S. reserve requirements.

Question 27

How has the creation of the European Community impacted the banking industry in the U.S. and in Western Europe?

Question 28

Eurobonds are subject to fewer regulations than U.S. issued bonds.

Question 29

Explain the impact of foreign exchange risk, economic risk, sovereign risk and political risk on the credit analysis of international loans.

Question 30

Discuss the advantages and disadvantages of a universal banking model.