Deck 5: Tests of Trade Models: the Leontief Paradox and Its Aftermath

Question 1

Eurocurrency market is attractive for multinational firms because:

A) it provides cheap Eurocurrency loans as alternative payment form for importers.
B) it serves as a place to store excess liquidity because of higher returns on deposits.
C) it offers lower cost working capital due to no taxes, no regulations, and no required reserves.
D) All of the above are correct.

Answer 1

All of the above are correct.

Question 2

In 1981, the Federal Reserves permitted U.S. banks to establish international banking facilities. International banking facilities IBFs) are:

A) non-controlling ownership in foreign banks by U.S. banks.
B) branches of U.S. banks in foreign countries.
C) records of transactions involving banks and their international customers are kept separate from the rest of the domestic accounts.
D) import-export specialized companies operated by U.S. banks.

Answer 2

records of transactions involving banks and their international customers are kept separate from the rest of the domestic accounts.

Question 3

Interest rates on Eurodollar loans may be lower than those on loans in the U.S. because:

A) Eurobanks only lend to government agencies.
B) Eurobanks have no regulatory expenses.
C) Eurobanks have to hold a larger percentage of their deposits to prevent bank runs.
D) Eurobanks only lend to Americans outside the U.S.

Answer 3

Eurobanks have no regulatory expenses.

Question 4

_________ is the dollar bank accounts outside the U.S.

A) Banking outsource
B) Eurodollar
C) Dollardollar
D) Black market

Question 5

Use the following information to answer questions
General Motors, a U.S. firm, withdraws $100 million from Bank of America in New York and deposits $100 million with Eurobank X in the Bahamas. Then, Eurobank X deposits $100 million in Eurobank Y in Switzerland. A Swiss Chocolate, Inc. borrows $100 million from Eurobank Y to finance a new plant construction.
At the end, the net deposits of the Eurodollar market would be ________.

A) $100 million
B) $200 million
C) $300 million
D) $400 million

Question 6

The Eurocurrency market is a market which:

A) trades euro outside the Eurozone countries.
B) trades dollars in European countries.
C) trade loans and deposits in any currency other than the domestic currency.
D) trade loans and deposits in euro outside Eurozone countries.

Question 7

Bank of America in Chicago offers _________ Bank of America in the Cayman Islands.

A) narrower spread on dollar banking than
B) wider spread on dollar banking than
C) same spread on dollar banking as
D) lower dollar borrowing rate than

Question 8

In 2010, which currency dominated the Eurocurrency market?

A) Eurodollar
B) Euroeuro
C) Euroyen
D) Eurosterling

Question 9

Eurobanks can offer ________ rate of interest on dollar-denominated loans and ________ rate of interest on dollar-denominated deposits than banks in the U.S.

A) Lower; lower
B) Lower; higher
C) Higher; lower
D) Higher; higher

Question 10

Eurobanks operate on a narrower spread in comparison to US banks), but still make profit because:

A) Eurobanks have no reserve requirements, so they can lend a larger percentage of their deposits.
B) Eurobanks have very little or no regulatory expense.
C) Eurobanks have low operating expenses.
D) All of the above are correct.

Question 11

A Eurocurrency is:

A) a bank deposit of non-European currency held in Europe.
B) the currency of the European Union.
C) a bank deposit held in a country that does not issue that currency in which the deposit is denominated.
D) a bank deposit in a European currency held outside of Europe.

Question 12

When a Japanese company deposits 1 million yen in a Canadian bank, the yen deposit is:

A) Canayen
B) Euroyen
C) Japandollar
D) Dollaryen

Question 13

Use the following information to answer questions
General Motors, a U.S. firm, withdraws $100 million from Bank of America in New York and deposits $100 million with Eurobank X in the Bahamas. Then, Eurobank X deposits $100 million in Eurobank Y in Switzerland. A Swiss Chocolate, Inc. borrows $100 million from Eurobank Y to finance a new plant construction.
At the end, these transactions would make the gross deposits in the Eurodollar market to be _______.

A) $100 million
B) $200 million
C) $300 million
D) $400 million

Question 14

Eurobanks are referred to as "offshore banks" because:

A) They are subject to foreign countries' rules of banking.
B) They operate on international waters in order to avoid national regulations.
C) They accept deposits and make loans in domestic currency outside the domestic country.
D) They accept deposits and make loans issued in U.S. dollars within Europe.

Question 15

Which of the following is correct about LIBOR?

A) There is no possible way that bankers can manipulate the LIBOR setting.
B) LIBOR is the second most important interest rate in the world, after the prime rate of the U.S.
C) Every morning the British Bankers' Association averages the submitted interest rates from a group of large London banks.
D) LIBOR is the most active and most watched stock in London Stock Exchange.

Question 16

Which of the following best describes LIBOR?

A) LIBOR is the interest rate used in foreign exchange transactions among Eurobanks.
B) LIBOR is the European Central Bank interest rate.
C) LIBOR is used by the Federal Reserves to set interest rates in the U.S.
D) LIBOR is a benchmark interest rate set by surveying a panel of top banks in London each day, asking what rate they have to pay to borrow for various loan periods.

Question 17

In international finance, LIBOR stands for:

A) London Interbank Offered Rate
B) London International Banking Offshored Rate
C) London International Board of Retailers
D) London International Bill of Rights

Question 18

Which of the following statements is NOT true about the Eurocurrency market?

A) It is a market for any currency held in a short-term deposit outside the country of origin.
B) It has no reserve requirements or deposit insurance.
C) It is a large, unregulated market for any currency traded in Europe.
D) It is a market that accepts deposits and makes loans in foreign currencies outside the country of issue.

Question 19

Eurodollars CANNOT be created in _____.

A) the United States of America
B) China
C) Middle Eastern countries
D) Africa

Question 20

Which of the following is an example of Eurocurrency?

A) Eurodollar
B) Euroyen
C) Euroeuro
D) All of the above are examples of Eurocurrency.

Question 21

International banking facilities enable U.S. institutions to

A) Be more competitive for business dealing with foreign-source deposits and loan.
B) Combine Eurobank and domestic activity into one operation and eliminate separate accounting practices.
C) Cut interest rates for U.S. residents on loans.
D) Avoid banking requirements when dealing with domestic businesses.

Question 22

Which of the follow are not reasons for offshore banking? I. Avoid interest rate controls
II) Avoid free entry of new banks
III) Avoid quotas on banking activity
IV) Access more competitive banking

A) II only
B) IV only
C) III and IV
D) All are reasons for offshore banking

Question 23

Swiss francs deposited in a U.S. bank would be considered Eurocurrency.

Question 24

What is LIBOR?

A) The average of London interest rate spreads.
B) The interest rate that only Eurobanks use.
C) The average of a sample of interest rates that large banks face to borrow from each other.
D) The interest rate that London banks use for deposits.

Question 25

If an American company deposited dollars in a Belgian bank, the dollars would be considered:

A) Euros
B) Euroeuros
C) Belgian dollars
D) Eurocurrency

Question 26

LIBOR is set daily by the British Banker's Association for:

A) Domestic banks in London only
B) Use by Eurobanks only
C) The British Pound only
D) Ten major currencies

Question 27

Examining the currency composition of the Eurocurrency market shows that ________ is the most commonly used Eurocurrency.

A) Eurodollar
B) Euroeuro
C) Europound
D) Euroyen

Question 28

Divisions in U.S. banks that are permitted to engage in Eurocurrency type banking in dollars with U.S. citizens are called international banking facilities.

Question 29

For U.S. bank to set up an international banking facility IBF), the bank must:

A) Construct a separate branch for all IBF activity.
B) Keep a separate record of any loans or deposits done by the IBF.
C) Obtain annual permission from the Federal Deposit Insurance Corporation for all IBF activity.
D) Set up a bank in an offshore banking center.

Question 30

Interest rates on ________ are lower at Eurobanks than domestic banks.

A) Loans
B) Deposits
C) Currency exchanges
D) None of the above

Question 31

Consider the case of a U.S. bank operating in the Cayman Islands and a U.S. bank operating in New York. If a business were to apply for a loan in U.S. dollars at the Cayman Island location, then it is probably the case that:

A) The interest rate on the loan is higher than the one in New York.
B) The interest rate on the loan is lower than the one in New York.
C) The interest rates are the same.
D) The interest rate on the loan is lower, but repaid in Cayman Island dollars.

Question 32

The spread is the average of deposit and loan interest rates.

Question 33

Due to fewer regulations domestic banks are able to offer a narrower spread than Eurobanks.

Question 34

Which of the follow are reasons for offshore banking? I. Avoid high costs of domestic regulation
II) Avoid government mandated credit allocations
III) Avoid taxes on capital flows
IV) Avoid attempts to seize foreign deposits

A) II only
B) I and III
C) I,II, and III
D) I, II, III, and IV

Question 35

Bank syndicates are used to

A) Create "shell" branches for U.S. banks.
B) Approve new Eurobanks.
C) Conduct offshore banking in domestic offices.
D) Make large eurocurrency loans.

Question 36

What is the eurocurrency market?

A) A market in which the domestic currency is exchanged for international deposits and loans.
B) A currency exchange for the purchasing and selling of Euros.
C) A market in which the loans are purchased in the domestic currency and repaid in the future with Euros.
D) A market in which international deposits and loans are exchanged in a currency other than the domestic currency.

Question 37

The "Euro" prefix in eurocurrency market was developed:

A) Because all transactions are in Euros.
B) Because the eurocurrency market was initially started in Europe.
C) Because the European Union regulates the Eurocurrency market.
D) Because each currency market has a physical location in the Eurozone.

Question 38

The currency in a Euro bank account outside the Eurozone would be referred to as Euroeuro.

Question 39

A U.S. bank based in the Cayman Islands that accepts U.S. dollar deposits and makes loans in U.S. dollars is referred to as an):

A) Dollarbank
B) Eurobank
C) Cayman dollarbank
D) Offshore financial center

Question 40

An offshore financial center is:

A) A branch of a bank located in a foreign country.
B) The collection of domestic banks that deal primarily with non-residents.
C) A country with financial institutions that deal primarily in foreign currency.
D) A country where financial institutions are prohibited from operating with domestic currency.

Question 41

Fewer regulations allow _______ to offer narrower spreads than ________.

A) Domestic banks, state owned banks
B) Eurobanks, domestic banks
C) Domestic banks, offshore banks
D) Offshore banks, eurobanks

Question 42

U.S. banks created "shell" branches by

A) Having a bank branch located in offshore banking center.
B) Created a branch to deal only with non-residents.
C) Setting up an international banking facility in a domestic branch.
D) Merging with foreign banks to create offshore banks.

Question 43

Due to fewer regulations domestic banks are able to offer a narrower spread than Eurobanks.

Question 44

Which of the following would not be considered eurocurrency?

A) Yen bank accounts inside the Eurozone.
B) Dollar bank accounts outside the U.S.
C) Euro bank accounts inside the Eurozone.
D) Pound bank accounts inside Japan.

Question 45

If a country was host to several Eurobanks, then it may be reasonable to find:

A) Strict quota enforcement on all capital leaving for the Eurozone.
B) One set of rules for banking in domestic currency and a different one for foreign currency.
C) Interest rate controls on deposits, but not loans.
D) Standards on required reserves for all banks in the country.

Question 46

International banking facilities may make loans and deposits to only:

A) U.S. residents and other IBFs
B) IBFs only
C) Both U.S. residents and non-residents
D) Non-residents and other IBFs

Question 47

The value of LIBOR is determined by

A) The British Banker's Associtation
B) The eurocurrency market
C) The International Monetary Fund
D) The financial exchange in New York

Question 48

Divisions in U.S. banks that are permitted to engage in Eurocurrency type banking in dollars with foreign residents are called ________.

A) Foreign advisories
B) Offshore banking centers
C) International banking facilities
D) Foreign currency specialists

Question 49

The London Interbank Offered Rate or LIBOR is used as a benchmark to set loan interest rates.

Question 50

The spread is the average of deposit and loan interest rates.

Question 51

Efficiency in the eurocurrency market comes from all of the following except

A) Higher profits for Eurobanks.
B) Low cost borrowing.
C) Free entry of new banks.
D) Lack of government regulation.

Question 52

What is a spread?

A) The average of the deposit and loan interest rates.
B) The quarterly increase of earnings for Eurobanks.
C) The difference between the deposit and loan interest rates.
D) The tool used by regulators to monitor deposit and loan interest rates.

Question 53

Which of the follow are examples of characteristics of offshore financial centers? I. Different regulations for domestic and foreign currencies
II) Low or no) taxes
III) Banks work confidential interaction with clients
IV) Strict rules on deposit insurance

A) I only
B) I and IV
C) I, II, and III
D) I, II, III, and IV

Question 54

The prefix "Euro" was added after the creation of the Euro.

Question 55

Compared to domestic banks, Eurobanks have:

A) Wider spreads.
B) Lower operating costs.
C) Limits on deposits.
D) Higher interest rates for loans.

Question 56

Eurocurrency deposits are like certificates of deposit because both:

A) Are guaranteed by deposit insurance.
B) Have fixed terms.
C) Are stated in terms of LIBOR.
D) Are adjusted every three months.

Question 57

Interest rates on ________ are higher at Eurobanks than domestic banks.

A) Loans
B) Deposits
C) Currency exchanges
D) None of the above

Question 58

The Eurocurrency market is a market in which international credit, deposits, and loans are exchanged in a currency other than the domestic currency.