International Economics, 9e (Husted/Melvin)
Chapter 18 International Banking, Debt, and Risk
18.1 Multiple-Choice Questions
1) Which of the following are true statements about IBFs?
A) IBFs are subject to reserve requirements.
B) IBFs are allowed to receive deposits from, and make loans to, nonresidents of the U.S. or
other IBFs.
C) IBFs are subject to interest rate regulations.
D) All of the above.
2) ________ refers to the irregular meetings of creditor governments with debtor nations desiring
rescheduling of debts.
A) The Paris Club
B) IMF “conditionality”
C) IBF
D) LIBOR
3) An exchange of developing country debt for an ownership position in a developing country
business is called
A) IMF conditionality.
B) indirect investment.
C) debt-equity swap.
D) debt-rescheduling.
4) Voting power in the IMF is determined by a country’s
A) political power.
B) quota.
C) size.
D) All of the above.
5) Which of the following is not a factor which would be relevant to country risk analysis?
A) political uncertainty
B) external debt
C) economic growth
D) none of the above.
6) ________ is(are) department(s) of U.S. banks that are permitted to engage in Eurocurrency
banking.
A) Eurobanks
B) The Paris Club
C) International Banking Facilities
D) Both A and C
7) The difference between a Euroloan interest rate and Eurodeposit interest rate is called
A) net interest rate.
B) the forward premium.
C) net profit rate.
D) the spread.
8) The key interest rate in the Eurocurrency market is the
A) London interbank offer rate.
B) Eurobank spread rate.
C) Prime rate.
D) C.D. rate.
9) Eurodollar deposits arising from OPEC trade surpluses are called
A) OECD-dollars.
B) OPEC-dollars.
C) petrodollars.
D) None of the above.
10) Which of the following statements is true?
A) Eurobanks are able to create money.
B) Eurobanks accept deposits but not loans.
C) Eurobanks are essentially intermediaries.
D) Both A and C.
11) Eurobanks can offer a ________ rate on dollar loans and a ________ rate on dollar deposits
than their domestic U.S. competitors.
A) higher, lower
B) lower, higher
C) lower, lower
D) higher, higher
12) The growth of the Eurodollar market is due to the ________ spreads offered by ________.
A) narrower, Eurobanks
B) narrower, governments
C) narrower, domestic banks
D) Both A and B
13) Regarding IBFs, which of the following is correct?
A) not subject to reserve requirements
B) not subject to interest rate regulations
C) were created to permit U.S. banking offices to compete with offshore banks without having to
use an offshore banking office
D) All of the above.
14) Country risk analysis involves a consideration of
A) forecasting future exchange rates.
B) future export growth.
C) the strength of political dissent.
D) Both B and C.
15) The bulk of Eurocurrency Market transactions are denominated in
A) Eurodollars.
B) Eurosterling.
C) Euroeuros.
D) Euroyen.
16) Which of the following is a Eurodollar claim?
A) A U.S.-dollar deposit by a London firm in a Kansas City bank
B) A Swiss-franc deposit by a German firm in a Swiss bank
C) A U.S.-dollar deposit by a New York firm in a London bank
D) A Canadian-dollar deposit by a London firm in a Toronto bank
17) Which of the following is not a Eurocurrency claim?
A) A U.S.-dollar deposit by a London firm in a Cleveland bank
B) A sterling deposit by a London firm in a New York bank
C) A U.S.-dollar deposit by a London firm in a London bank
D) A Yen deposit by a New York firm in a London bank
18) The international bank deposit and loan market is called the
A) International Banking Facilities.
B) Eurocurrency market.
C) Foreign exchange market.
D) IMF loans and deposits.
19) To measure the amount of credit actually extended through the Eurobanks, we use
A) the net size of the market.
B) the gross size of the market.
C) total deposits minus interbank activities
D) Both A and C.
20) ________ refers to the overall political and financial situation of a country, and the extent to
which these conditions may affect the ability of a country to repay its debts.
A) Debt-rescheduling
B) IMF conditionality
C) Country risk
D) International debt
21) What does LIBOR stand for?
A) London Interbank Offer Rate
B) Least Integral Borrowing Order Rate
C) Local Interest Bank Ongoing Rate
D) Liberalized Interoffer Borrowing Rate
22) Which of the following financial institutions went bankrupt as a result of the financial crisis
that began in 2008?
A) Lehman Brothers
B) Bank of America
C) Citigroup
D) JP Morgan
23) Which of the following countries received a loan from the IMF in November 2008?
A) Japan
B) China
C) Hungary
D) Mexico
24) Which of the following is a factor that is relevant to country risk analysis?
A) political uncertainty
B) external debt
C) economic growth
D) all of the above.
18.2 True or False Questions
1) Eurocurrency activities take place only in Europe.
2) Country risk analysis involves a consideration of only economic factors.
3) The Paris Club refers to the irregular meetings of creditor governments with debtor nations.
4) Eurobank activities cannot have any influence on domestic monetary practice since
Eurodollars do not provide a means of payment.
5) International Banking Facilities (or IBFs) were established in 1981.
6) The Eurocurrency market grew due to a lack of regulation, which permits greater efficiency in
providing banking services.
7) Eurobanks are essentially intermediaries.
8) Eurobank spreads exceed U.S. spreads.
9) The United States is the top-ranked country with respect to country creditworthiness.
10) Government corruption reduces economic growth around the globe, most commonly through
widespread cash payments or gifts to receive a government service.
11) The IMF granted in November of 2008 a $15 billion dollar loan to Hungary, which was at
the time undergoing financial stress as a result of the global crisis.
12) Eurodollars are mainly traded in Europe.
13) The IMF lends at low interest rates and without preconditions.
14) Eurobank spreads are less than U.S. spreads.
18.3 Essay Questions
1) In recent years, “country risk analysis” has become an important part of international business.
What do we mean by “country risk”? Briefly explain the factors that are involved in a country
risk analysis.
2) What are Eurobanks and how are they different from domestic banks?
3) What are the reasons for the development and growth of the Eurodollar market?
4) Briefly discuss the following:
(a) Debt-equity swaps
(b) IMF “conditionality”
(c) LIBOR
(d) Petrodollars
5) What is the role of the IMF for debtor nations experiencing repayment problems? The IMF
has been criticized for imposing conditions that restrict economic growth and lower living
standards in borrowing countries. Do you support this view? Why or why not? Briefly explain.
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6) What is Islamic Banking?