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Student name:__________
1) International banks are different from domestic banks in what way(s)?
A) International banks can arrange trade financing.
B) International banks can arrange for foreign exchange transactions.
C) International banks can assist their clients in hedging exchange rate risk.
D) all of the options
2) Major distinguishing features between domestic banks and international banks are
A) the types of deposits they accept.
B) the types of loans and investments they make.
C) membership in loan syndicates.
D) all of the options
3) Since international banks have the facilities to trade foreign exchange,
A) they generally also make a market as a dealer in foreign exchange.
B) they generally also make a market as a dealer in foreign exchange derivatives.
C) they generally also trade foreign exchange products for their own account.
D) none of the options
4) Banks that both perform traditional commercial banking functions and engage in
investment banking activities are often called
A) international service banks.
B) investment banks.
C) commercial banks.
D) merchant banks.
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5) Universal banks
A) may engage in investment banking activities.
B) may arrange for foreign exchange transactions.
C) may assist their clients in hedging exchange rate risk.
D) all of the options
6) By far the most important international finance centers are
A) Zurich and Moscow.
B) Paris, London, and Tokyo.
C) New York, London, Tokyo, Paris, and Zurich.
D) New York, London, Tokyo, Paris, Zurich, and Frankfurt.
7) Multinational banks are often not subject to the same regulations as domestic banks.
A) There may be increased need to publish adequate financial information.
B) There may be reduced need to publish adequate financial information.
C) The requirements to publish adequate financial information are the same.
D) none of the options
8) A domestic bank that follows a multinational client abroad to preserve that banking
relationship
A) is playing the role of the desperate housewife in this relationship.
B) is pursuing a wholesale defensive strategy.
C) is pursuing a retail defensive strategy.
D) none of the options
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9) A domestic bank that becomes a multinational bank to prevent erosion by foreign banks
of the traveler’s checks, touring, and foreign business market
A) is playing the role of the desperate housewife in this relationship.
B) is pursuing a wholesale defensive strategy.
C) is pursuing a retail defensive strategy.
D) none of the options
10) Managerial and marketing knowledge developed at home can be used abroad with low
managerial costs describes which reason for international banking?
A) low marginal costs
B) knowledge advantage
C) growth
D) risk reduction
11) Greater stability of earnings is possible with international diversification describes which
reason for international banking?
A) low marginal costs
B) knowledge advantage
C) growth
D) risk reduction
12) Growth prospects in a home nation may be limited by a market largely saturated with the
services offered by domestic banks describes which reason for international banking?
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A) low marginal costs
B) knowledge advantage
C) growth
D) risk reduction
13) The foreign bank subsidiary can draw on the parent bank’s knowledge of personal
contacts and credit investigations for use in that foreign market describes which reason for
international banking?
A) low marginal costs
B) knowledge advantage
C) growth
D) risk reduction
14) Banking tends to be
A) a low average cost industry.
B) a high marginal cost industry.
C) a constant average cost industry.
D) none of the options
15) A U.S.-based multinational bank
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A) would not have to provide deposit insurance and meet reserve requirements on
foreign currency deposits.
B) would have to provide deposit insurance and meet reserve requirements on foreign
currency deposits.
C) would not have to provide deposit insurance but would have to meet reserve
requirements on foreign currency deposits.
D) would have to provide deposit insurance but not meet reserve requirements on
foreign currency deposits.
16) A bank may establish a multinational operation for the reason of low marginal costs. The
underlying rationale being that
A) banks follow their multinational customers abroad to prevent the erosion of their
clientele to foreign banks seeking to service the multinational’s foreign subsidiaries.
B) multinational banking operations help a bank prevent the erosion of its traveler’s
check, tourist, and foreign business markets from foreign bank competition.
C) managerial and marketing knowledge developed at home can be used abroad with
low marginal costs.
D) the foreign bank subsidiary can draw on the parent bank’s knowledge of personal
contacts and credit investigations for use in that foreign market.
17) A bank may establish a multinational operation for the reason of knowledge advantage.
The underlying rationale being that
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A) local firms may be able to obtain from a foreign subsidiary bank operating in their
country more complete trade and financial market information about the subsidiary’s home
country than they can obtain from their own domestic banks.
B) by maintaining foreign branches and foreign currency balances, banks may reduce
transaction costs and foreign exchange risk on currency conversion if government controls can
be circumvented.
C) greater stability of earnings is possible with international diversification. Offsetting
business and monetary policy cycles across nations reduces the country-specific risk of any one
nation.
D) the foreign bank subsidiary can draw on the parent bank’s knowledge of personal
contacts and credit investigations for use in that foreign market.
18) A bank may establish a multinational operation for the reason of prestige. The underlying
rationale being that
A) local firms may be able to obtain from a foreign subsidiary bank operating in their
country more complete trade and financial market information about the subsidiary’s home
country than they can obtain from their own domestic banks.
B) the foreign bank subsidiary can draw on the parent bank’s knowledge of personal
contacts and credit investigations for use in that foreign market.
C) very large multinational banks have high perceived prestige, liquidity, and deposit
safety that can be used to attract clients abroad.
D) multinational banks are often not subject to the same regulations as domestic banks.
There may be reduced need to publish adequate financial information, lack of required deposit
insurance and reserve requirements on foreign currency deposits, and the absence of territorial
restrictions.
19) A bank may establish a multinational operation for the reason of risk reduction. The
underlying rationale being that
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A) by maintaining foreign branches and foreign currency balances, banks may reduce
transaction costs and foreign exchange risk on currency conversion if government controls can
be circumvented.
B) greater stability of earnings is possible with international diversification. Offsetting
business and monetary policy cycles across nations reduces the country-specific risk of any one
nation.
C) multinational banks are often not subject to the same regulations as domestic banks.
There may be reduced need to publish adequate financial information, lack of required deposit
insurance and reserve requirements on foreign currency deposits, and the absence of territorial
restrictions.
D) multinational banking operations help a bank prevent the erosion of its traveler’s
check, tourist, and foreign business markets from foreign bank competition.
20) A bank may establish a multinational operation for the reason of regulatory advantage.
The underlying rationale being that
A) banks follow their multinational customers abroad to prevent the erosion of their
clientele to foreign banks seeking to service the multinational’s foreign subsidiaries.
B) multinational banking operations help a bank prevent the erosion of its traveler’s
check, tourist, and foreign business markets from foreign bank competition.
C) by maintaining foreign branches and foreign currency balances, banks may reduce
transaction costs and foreign exchange risk on currency conversion if government controls can
be circumvented.
D) multinational banks are often not subject to the same regulations as domestic banks.
There may be reduced need to publish adequate financial information, lack of required deposit
insurance and reserve requirements on foreign currency deposits, and the absence of territorial
restrictions.
21) Currently, the biggest bank in the world is
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A) ICBC.
B) Bank of America.
C) UBS.
D) The World Bank.
22) A bank may establish a multinational operation for the reason of retail defensive strategy.
The underlying rationale being that
A) banks follow their multinational customers abroad to prevent the erosion of their
clientele to foreign banks seeking to service the multinational’s foreign subsidiaries.
B) multinational banking operations help a bank prevent the erosion of its traveler’s
check, tourist, and foreign business markets from foreign bank competition.
C) by maintaining foreign branches and foreign currency balances, banks may reduce
transaction costs and foreign exchange risk on currency conversion if government controls can
be circumvented.
D) multinational banks are often not subject to the same regulations as domestic banks.
There may be reduced need to publish adequate financial information, lack of required deposit
insurance and reserve requirements on foreign currency deposits, and the absence of territorial
restrictions.
23) A bank may establish a multinational operation for the reason of wholesale defensive
strategy. The underlying rationale being that
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A) banks follow their multinational customers abroad to prevent the erosion of their
clientele to foreign banks seeking to service the multinational’s foreign subsidiaries.
B) multinational banking operations help a bank prevent the erosion of its traveler’s
check, tourist, and foreign business markets from foreign bank competition.
C) by maintaining foreign branches and foreign currency balances, banks may reduce
transaction costs and foreign exchange risk on currency conversion if government controls can
be circumvented.
D) multinational banks are often not subject to the same regulations as domestic banks.
There may be reduced need to publish adequate financial information, lack of required deposit
insurance and reserve requirements on foreign currency deposits, and the absence of territorial
restrictions.
24) Which of the following are reasons why a bank may establish a multinational operation?
A) Low marginal and transaction costs
B) Home nation information services, and prestige
C) Growth and risk reduction
D) all of the options
25) A bank may establish a multinational operation for the reason of transaction costs. The
underlying rationale being that
A) banks follow their multinational customers abroad to prevent the erosion of their
clientele to foreign banks seeking to service the multinational’s foreign subsidiaries.
B) multinational banking operations help a bank prevent the erosion of its traveler’s
check, tourist, and foreign business markets from foreign bank competition.
C) by maintaining foreign branches and foreign currency balances, banks may reduce
transaction costs and foreign exchange risk on currency conversion if government controls can
be circumvented.
D) multinational banks are often not subject to the same regulations as domestic banks.
There may be reduced need to publish adequate financial information, lack of required deposit
insurance and reserve requirements on foreign currency deposits, and the absence of territorial
restrictions.
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26) A bank may establish a multinational operation for the reason of growth. The rationale
being that
A) growth prospects in a home nation may be limited by a market largely saturated with
the services offered by domestic banks.
B) multinational banks are often not subject to the same regulations as domestic banks.
There may be reduced need to publish adequate financial information, lack of required deposit
insurance and reserve requirements on foreign currency deposits, and the absence of territorial
restrictions.
C) greater stability of earnings is possible with international diversification. Offsetting
business and monetary policy cycles across nations reduces the country-specific risk of any one
nation.
D) by maintaining foreign branches and foreign currency balances, banks may reduce
transaction costs and foreign exchange risk on currency conversion if government controls can
be circumvented.
27) A bank may establish a multinational operation for the reason of home country
information services. The underlying rationale being that
A) by maintaining foreign branches and foreign currency balances, banks may reduce
transaction costs and foreign exchange risk on currency conversion if government controls can
be circumvented.
B) local firms may be able to obtain from a foreign subsidiary bank operating in their
country more complete trade and financial market information about the subsidiary’s home
country than they can obtain from their own domestic banks.
C) the foreign bank subsidiary can draw on the parent bank’s knowledge of personal
contacts and credit investigations for use in that foreign market.
D) greater stability of earnings is possible with international diversification. Offsetting
business and monetary policy cycles across nations reduces the country-specific risk of any one
nation.
28) A correspondent bank relationship is established when
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A) two banks maintain deposits with one another.
B) two banks write to each other about the credit conditions of their countries.
C) a group of banks form a syndicate to spread out the risk and cost of a large bond
offering.
D) all of the options
29) Correspondent bank relationships can be beneficial
A) because a bank can service its MNC clients at a very low cost.
B) because a bank can service its MNC clients without the need to have personnel in
many different countries.
C) because a bank can service its MNC clients without developing its own foreign
facilities to service its clients.
D) all of the options
30) Consider a U.S. importer desiring to purchase merchandise from a Dutch exporter
invoiced in euros, at a cost of €160,000. The U.S. importer will contact his U.S. bank (where, of
course, he has an account denominated in U.S. dollars) and inquire about the exchange rate,
which the bank quotes as €0.6250/$1.00. The importer accepts this price, so his bank will
proceed to __________ the importer’s account in the amount of __________.
A) debit; $256,000
B) credit; €512,100
C) credit; $500,000
D) debit; €100,000
31) The current exchange rate is £1.00 = $2.00. Compute the correct balances in Bank A’s
correspondent account(s) with bank B if a currency trader employed at Bank A buys £45,000
from a currency trader at bank B for $90,000 using its correspondent relationship with Bank B.
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A) Bank A’s dollar-denominated account at B will rise by $90,000.
B) Bank B’s dollar-denominated account at A will fall by $90,000.
C) Bank A’s pound-denominated account at B will rise by £45,000.
D) Bank B’s pound-denominated account at A will rise by £45,000.
32) Correspondent bank services include
A) prepaid postage and packing materials.
B) letters of introduction.
C) foreign exchange conversions.
D) Both B and C are correct
33) The current exchange rate is £1.00 = $2.00. Compute the correct balances in Bank A’s
correspondent account(s) with bank B if a currency trader employed at Bank A buys £45,000
from a currency trader at bank B for $90,000 using its correspondent relationship with Bank B.
A) Bank A’s dollar-denominated account at B will fall by $90,000.
B) Bank B’s dollar-denominated account at A will rise by $90,000.
C) Bank A’s pound-denominated account at B will rise by £45,000.
D) Bank B’s pound-denominated account at A will fall by £45,000.
E) all of the options
34) The current exchange rate is €1.00 = $1.50. Compute the correct balances in Bank A’s
correspondent account(s) with bank B if a currency trader employed at Bank A buys €100,000
from a currency trader at bank B for $150,000 using its correspondent relationship with Bank B.
A) Bank A’s dollar-denominated account at B will fall by $150,000.
B) Bank B’s dollar-denominated account at A will fall by $150,000.
C) Bank A’s euro-denominated account at B will fall by €100,000.
D) Bank B’s euro-denominated account at A will rise by €100,000.
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35) A representative office
A) is what lawyers’ offices are called in Mexico.
B) is 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.
C) is a small service facility staffed by correspondent bank personnel that is designed to
assist MNC clients of the parent bank in dealings with the bank’s correspondents.
D) none of the options
36) A representative office
A) is a way for the parent bank to provide its MNC clients with a level of service greater
than that provided through merely a correspondent relationship.
B) is 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.
C) is a step up from a correspondent relationship, but below a foreign branch.
D) all of the options
37) A foreign branch bank
A) is 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.
B) operates like a local bank, but legally is a part of the parent bank.
C) is subject to domestic regulation only.
D) all of the options
38) What is the primary reason a U.S. bank would open a foreign branch bank?
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A) Because this form of bank organization can allow a U.S. bank to provide a fuller
range of services for its MNC customers than it can through a representative office.
B) To avoid U.S. banking regulation on transactions routed through that foreign
country.
C) Because this form of organization allows the bank to service MNC clients at low cost
and without the need of having bank personnel located in the country.
D) Because this form of bank organization can allow a U.S. bank to provide a fuller
range of services for its MNC customers than it can through a representative office, and to avoid
U.S. banking regulation on transactions routed through that foreign country.
39) Why would a U.S. bank open a foreign branch bank instead of a foreign chartered
subsidiary?
A) This form of bank organization allows the bank to be able to extend a larger loan to a
customer than a locally chartered subsidiary bank of the parent.
B) To slow down check clearing and maximize the bank’s float.
C) To avoid U.S. banking regulation.
D) This form of bank organization allows the bank to be able to extend a larger loan to a
customer than a locally chartered subsidiary bank of the parent, as well as avoid U.S. banking
regulation.
40) The most popular way for a U.S. bank to expand overseas is
A) branch banks.
B) representative offices.
C) subsidiary banks.
D) affiliate banks.
41) A foreign branch bank operates like a local bank, but legally
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A) it is not a part of the parent bank.
B) a branch bank is subject to neither the banking regulations of its home country nor
the country in which it operates.
C) a branch bank is subject to only the banking regulations of its home country and not
the country in which it operates.
D) it is a part of the parent bank, and a branch bank is subject to both the banking
regulations of its home country and the country in which it operates.
42) The major legislation controlling the operation of foreign banks in the U.S.
A) specifies that foreign branch banks operating in the U.S. must comply with U.S.
banking regulations just like U.S. banks.
B) specifies that foreign branch banks operating in the U.S. must comply with their
country-of-origin banking regulations just like U.S. banks operating abroad.
C) specifies that the “shell” branches are illegal for U.S. and foreign banks.
D) specifies that foreign branch banks operating in the U.S. must comply with U.S.
banking regulations just like U.S. banks, and also specifies that the “shell” branches are illegal
for U.S. and foreign banks.
43) A subsidiary bank is
A) a locally incorporated bank that is wholly owned by a foreign parent.
B) a locally incorporated bank that is majority owned by a foreign parent.
C) a locally incorporated bank that is partially owned (but not controlled) by a foreign
parent.
D) a locally incorporated bank that is wholly (or majority) owned by a foreign parent.
44) An affiliate bank is
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A) a locally incorporated bank that is wholly owned by a foreign parent.
B) a locally incorporated bank that is majority owned by a foreign parent.
C) a locally incorporated bank that is partially owned (but not controlled) by a foreign
parent.
D) a locally incorporated bank that is wholly (or majority) owned by a foreign parent.
45) Both subsidiary and affiliate banks
A) operate under the banking laws of the country in which they are incorporated.
B) operate under the banking laws of the U.S.
C) can underwrite securities, but not accept dollar-denominated deposits.
D) operate under the banking laws of the country in which they are incorporated, as well
as the banking laws of the U.S.
46) U.S. banks that establish subsidiary and affiliate banks
A) are allowed to underwrite securities.
B) must provide FDIC insurance on their foreign-currency denominated demand
deposits.
C) can underwrite securities, but not accept dollar-denominated deposits.
D) are allowed to underwrite securities and must provide FDIC insurance on their
foreign-currency denominated demand deposits.
47) Foreign banks that establish subsidiary and affiliate banks in the U.S.
A) tend to avoid states that are major centers of financial activity.
B) tend to avoid the highly populous states of New York, California, Illinois, Florida,
Georgia, and Texas.
C) can underwrite securities, but not accept dollar-denominated deposits.
D) tend to locate in states that are major centers of financial activity, as well as the
highly populous states of New York, California, Illinois, Florida, Georgia, and Texas.
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48) Edge Act banks are so-called because
A) they are federally chartered subsidiaries of U.S. banks that are physically located in
the United States and are allowed to engage in a full range of international banking activities.
B) Senator Walter E. Edge of New Jersey sponsored the 1919 amendment to Section 25
of the Federal Reserve Act to allow U.S. banks to be competitive with the services foreign banks
could supply their customers.
C) they can only be chartered in states that are on the borders of the United States—on
the “edge” of the map.
D) none of the options
49) Edge Act banks
A) can accept foreign deposits, extend trade credit, finance foreign projects abroad,
trade foreign currencies, and engage in investment banking activities with U.S. citizens involving
foreign securities.
B) are federally chartered subsidiaries of U.S. banks that are physically located in the
United States and are allowed to engage in a full range of international banking activities.
C) can underwrite securities, but can only be located in states on the edge of the U.S.
D) Both A and B are correct.
50) Edge Act banks
A) are not prohibited from owning equity in business corporations.
B) are prohibited from owning equity in business corporations.
C) could be prohibited (or not) from owning equity in business corporations.
D) none of the options
51) An offshore banking center is
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A) a country whose banking system is organized to permit external accounts beyond the
normal economic activity of the country.
B) is external to any government, frequently located on old oil drilling platforms located
in international waters.
C) a country like North Korea.
D) none of the options
52) Offshore banks
A) are frequently located on old oil drilling platforms located in international waters.
B) are often located in “pariah” countries like North Korea and Iran.
C) operate as branches or subsidiaries of the parent bank.
D) none of the options
53) The primary activities of offshore banks
A) include money laundering where banking secrecy laws are strict.
B) is to seek deposits and grant loans in currencies other than the currency of the host
government.
C) involve check clearing of large bags of checks.
D) none of the options
54) Which banks cannot accept foreign deposits?
A) Domestic banks located in the U.S.
B) Edge Act banks located in the U.S.
C) Subsidiary banks located overseas
D) Foreign branches located overseas
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55) In reference to capital requirements,
A) bank capital adequacy refers to the amount of equity capital a bank holds as reserves
against impaired loans.
B) bank capital adequacy refers to the amount of debt capital a bank holds as reserves
against risky assets to reduce the probability of bank failure.
C) most bank regulators agree with the doctrine of “less is more.”
D) none of the options
56) Examples of operational risk include
A) computer failure
B) poor documentation
C) fraud
D) all of the options
57) In reference to Basel Accord minimum bank capital adequacy requirements, risk-
weighted assets
A) refers to traditional bank loans.
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) none of the options.
58) The core of the international money market is
A) the Eurocurrency market.
B) the market for foreign exchange.
C) the futures forwards and options markets on foreign exchange.
D) none of the options
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59) Eurocurrency
A) is the euro, the common currency of Europe.
B) is a time deposit of money in an international bank located in a country different
from the country that issued the currency.
C) is a demand deposit of money in an international bank located in a country different
from the country that issued the currency.
D) is either a time deposit of money in an international bank located in a country
different from the country that issued the currency or a demand deposit of money in an
international bank located in a country different from the country that issued the currency.
60) The Eurocurrency market
A) is only in Europe.
B) is an external banking system that runs parallel to the domestic banking system of the
country that issued the currency.
C) has languished following monetary union in Europe.
D) none of the options
61) LIBOR
A) is the rate at which prime banks in London will offer Eurocurrency in the interbank
market.
B) is a government set rate, like the discount rate.
C) is the rate at which prime banks in London will accept interbank deposits.
D) none of the options
62) LIBOR
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A) is the London Interbank Offered Rate.
B) is the reference rate in London for Eurodollar deposits.
C) one of several reference rates in London: there is a LIBOR for Eurodollars, Euro yen,
Euro—Canadian dollars, and even euro.
D) all of the options
63) The rate charged by banks with excess funds is referred to as the interbank offered rate;
they will accept interbank deposits at the interbank bid rate.
A) The spread is generally 10 – 12 basis points for most major Euro currencies.
B) The spread is generally referred to as “the TED spread.”
C) The spread is generally referred to as the bid-ask commission.
D) none of the options
64) The LIBOR rate for euro
A) is EURIBOR.
B) is a government set rate.
C) is the rate at which Interbank deposits of euro are offered by one prime bank to
another in the euro zone.
D) is the rate at which Interbank deposits of euro are offered by one prime bank to
another in the London Eurocurrency market.
65) In the wholesale money market, denominations
A) are at least $10,000, but sizes of $100,000 or larger are more typical.
B) are at least $100,000, but sizes of $500,000 or larger are more typical.
C) are at least $500,000, but sizes of $1,000,000 or larger are more typical.
D) none of the options
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66) Approximately __________ of wholesale Euro bank external liabilities come from fixed
time deposits, the remainder from Negotiable Certificates of Deposit.
A) 50 percent
B) 75 percent
C) 90 percent
D) none of the options
67) Eurodollars refers to dollar deposits when the depository bank is located
A) in Europe.
B) in Europe, and the Caribbean.
C) outside the United States.
D) in the United States.
68) Euro credits
A) are credit cards that work in the euro zone.
B) are denominated in currencies that are the same as the home currency of the Euro
bank.
C) short- to medium-term loans of Euro currency extended by Euro banks to
corporations, sovereign governments, non prime banks, or international organizations.
D) none of the options
69) Euro credits
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A) are often so large that individual banks cannot handle them.
B) short- to medium-term loans of Euro currency extended by Euro banks to
corporations, sovereign governments, non prime banks, or international organizations.
C) frequently require the use of a banking syndicate.
D) all of the options
70) Euro credits feature rollover pricing.
A) Rollover pricing was created on Euro credits so that Euro banks do not end up
paying more on Euro currency time deposits than they earn from the loans.
B) Because of the rollover pricing feature, a Euro credit may be viewed as a series of
shorter-term loans, where at the end of each time period (generally three or six months), the loan
is rolled over and the base lending rate is repriced to current LIBOR over the next time interval
of the loan.
C) The lending rate on these Euro credits is stated as LIBOR + X percent, where X is
the lending margin charged depending upon the credit worthiness of the borrower. LIBOR is
reset according to a set schedule.
D) all of the options
71) Teltrex International can borrow $3,000,000 at LIBOR plus a lending margin of 0.75
percent per annum on a three-month rollover basis from Barclays in London. Suppose that three-
month LIBOR is currently 5 17⁄32 percent. Further suppose that over the second three-month
interval LIBOR falls to 5 1⁄8 percent. How much will Teltrex pay in interest to Barclays over the
six-month period for the Eurodollar loan?
A) $79,921.875
B) $91,171.88
C) $96,174.39
D) $364,687.52
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72) A bank agrees to buy from a customer a “three against six” FRA at the market rate for
such instruments. How can the bank hedge this obligation?
A) Go long a 6-month Eurodollar deposit in the amount of the FRA at the current 6-
month rate financed by going short a 3-month Eurodollar deposit in the amount of the FRA at the
current 3-month rate.
B) Go short a 6-month Eurodollar deposit in the amount of the FRA at the current 6-
month rate; go long a 3-month Eurodollar deposit in the amount of the FRA at the current 3-
month rate.
C) Borrow a 3-month Eurodollar deposit in the amount of the FRA at the current 3-
month rate.
D) none of the options
73) In a forward rate agreement (FRA)
A) the buyer agrees to pay the seller the increased interest costs on a notational amount
if interest rates rise above the agreement rate
B) the seller agrees to pay the buyer the increased cost if interest rates increase above
the agreement rate.
C) the seller agrees to pay the buyer the increased cost if interest rates decrease below
the agreement rate.
D) none of the options
74) A forward rate agreement (FRA) is a contract between two banks
A) that allows the Euro bank 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 Euro deposits
and credits.
D) all of the options
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75) A bank bought a “three against six” FRA. Payment is made when?
A) At the end of 3 months
B) At the end of 6 months
C) At the end of 9 months
D) none of the options
76) In an FRA, the buyer agrees to pay the seller
A) the increased interest cost on a notional amount if interest rates fall below an
agreement rate.
B) the increased interest cost if interest rates increase above the agreement rate.
C) the increased interest cost on a notional amount if interest rates rise above an
agreement rate.
D) none of the options
77) In an FRA, the seller agrees to pay the buyer
A) the increased interest cost if interest rates fall below the agreement rate.
B) the increased interest cost if interest rates increase above the agreement rate.
C) the increased interest cost on a notional amount if interest rates fall below an
agreement rate.
D) none of the options
78) ABC International has borrowed $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, but ABC is worried about an increase in three-month LIBOR 3
months from now. What could they do to hedge?
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A) Buy a 3 × 6 FRA in the amount of $4 million.
B) Sell a 3 × 6 FRA in the amount of $4 million.
C) Buy a 3 × 3 FRA in the amount of $4 million.
D) Buy a 3 × 9 FRA in the amount of $4 million.
79) ABC International can borrow $4,000,000 at LIBOR plus a lending margin of 0.65
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
80) You entered into a long 3 × 6 forward rate agreement on a notional amount of
$10,000,000 at an agreement rate of 3 percent. Suppose at the settlement date of the FRA, the
settlement rate is 3.5 percent. What is the cash settlement of the FRA?
A) Net payment of $12,391.57 to you
B) Net payment of $12,500 to you
C) Net payment of $50,000 to you
D) Net payment of $48,309.18 to you
81) A bank bought a “three against six” $5,000,000 FRA for a three-month period beginning
three months from today and ending six months from today. The reason that the bank bought the
FRA was to hedge: the bank accepted a 3-month deposit and made a six-month loan. The
agreement rate with the seller is 5 percent. Assume that three months from today the settlement
rate is 5.25 percent. Who pays whom? How much? When? The actual number of days in the
FRA is 90.
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A) The bank pays $3,084.52 at the end of 3 months
B) The bank pays $3,084.52 at the end of 6 months
C) The counterparty pays $3,084.52 at the end of 3 months
D) The counterparty pays $3,084.52 at the end of 6 months
82) A bank sold a 3 × 9 FRA. Payment is made when?
A) At the end of 3 months
B) At the end of 6 months
C) At the end of 9 months
D) none of the options
83) Since SR < AR, then
ABC Bank (seller) has made a “three against six” Forward Rate Agreement
(FRA), with XYZ Bank (buyer).
Assume that the:
Notional Amount = $4,000,000
Settlement Rate (SR) (i.e., three-month market LIBRO) = 5%
Agreement Rage (AR) = 6%
Actual number of days in the three-month agreement period = 91
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.
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84) The payment amount under this FRA is
ABC Bank (seller) has made a “three against six” Forward Rate Agreement
(FRA), with XYZ Bank (buyer).
Assume that the:
Notional Amount = $4,000,000
Settlement Rate (SR) (i.e., three-month market LIBRO) = 5%
Agreement Rage (AR) = 6%
Actual number of days in the three-month agreement period = 91
A) $9,985.
B) $10,111.
C) $60,667.
D) $120,000.
85) A “three against nine” forward rate agreement
A) could call for a buyer to sell a six-month Eurobond in three months at prices agreed
upon today.
B) could call for a buyer to pay the seller the increased interest cost on a notational
amount if six-month interest rates fall below an agreed rate beginning three months from now
and ending nine months from now.
C) is a forward contract on a three-month Eurobond with a nine-month maturity.
D) is a forward contract on a nine-month Eurobond with a three-month maturity.
86) Forward rate agreements can be used for speculative purposes. If one believes rates will
be less than the agreement rate,
A) take a short position in a forward rate agreement.
B) the purchase of a FRA is the suitable position.
C) the sale of a FRA is the suitable position.
D) take a long position in the spot market.
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87) The most widely used futures contract for hedging short-term U.S. dollar interest rate risk
is
A) the Eurodollar contract.
B) theEuroyen contract.
C) the EURIBOR contract.
D) none of the options
88) Consider the position of a treasurer of a MNC, who will receive $20,000,000 that his firm
will not need for the next 90 days. To hedge against an interest rate decline
A) He could borrow the $20,000,000 in the money market.
B) He could take a long position in Eurodollar futures contracts.
C) He could take a short position in Eurodollar futures contracts.
D) none of the options
89) A decrease in the implied three-month LIBOR yield causes Eurodollar futures price
A) to increase.
B) to decrease.
C) there is no direct or indirect relationship.
D) none of the options
90) Which of the following are principles of sound banking behavior?
A) Avoid an undue concentration of loans to single activities.
B) Control mismatches between assets and liabilities.
C) Expand cautiously into unfamiliar activities.
D) all of the options
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91) Who benefits from debt-for-equity swaps?
A) The creditor bank
B) The LDC
C) The market maker
D) all of the options
92) The Brady Bond is named after
A) U.S. Treasury Secretary, Nicholas F. Brady.
B) U.S. Treasury Secretary, Brady F. Nichols.
C) U.S. bank robber, Nicholas F. Brady.
D) none of the options
93) The Asian crisis
A) followed a period of economic recession in the region coupled with record private
capital outflows.
B) followed a period of economic expansion in the region financed by record private
capital inflows.
C) began in the fall of 2001 when Japan devalued the yen.
D) none of the options
94) Proceeding the Asian crisis,
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A) bankers from industrialized countries actively sought to finance the growth
opportunities in the region.
B) the risk exposure of the lending banks in East Asia was primarily to local banks and
commercial firms, and not to sovereignties, as in the LDC debt crisis.
C) bankers failed to correctly assess the political and economic risks.
D) all of the options
95) Proceeding the Asian crisis,
A) domestic price bubbles in East Asia, particularly in real estate, were fostered by
capital inflows from bankers from the G-10 countries.
B) the liberalization of financial markets coupled with capital inflows from bankers
from the G-10 countries contributed to bubbles in financial asset prices.
C) the close interrelationships common among commercial firms and financial
institutions in Asia resulted in poor investment decision making.
D) all of the options
96) Proceeding the Asian crisis,
A) it may have been implicitly assumed that the governments would come to the rescue
of their private banks should financial problems develop.
B) the history of managed growth in the East Asian region at least suggested that the
economic and financial system, as an integral unit, could be managed in an economic downturn.
C) it may have been implicitly assumed that the governments would come to the rescue
of their private banks should financial problems develop, and the history of managed growth in
the East Asian region at least suggested that the economic and financial system, as an integral
unit, could be managed in an economic downturn.
D) none of the options
97) So-called subprime mortgages were typically
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A) mortgages granted to borrowers with less-than-perfect credit.
B) backed by the full faith and credit of the U.S. government.
C) held to maturity by the originating lender, thereby assuring that default risk was
priced into the rate of return.
D) none of the options
98) One lesson from the credit crunch is that
A) in the aggregate, credit scores tend to understate the probability of default—thereby a
pool of subprime mortgages is actually quite a safe investment since not every borrower defaults.
B) moral hazard, while an issue in the market for used cars, does not seem to affect the
U.S. financial system due to the effective regulatory environment.
C) bankers seem not to scrutinize credit risk as closely when they serve only as
mortgage originators and then pass it on to MBS investors rather than hold the paper themselves.
D) none of the options
99) The models that the credit rating firms (e.g., Moody’s, S&P, and Fitch) used to evaluate
the risk of the various tranches of MBS debt and thereby assign a credit rating (e.g. AAA, AA-
BB, or unrated) were
A) right on target, but only in the aggregate.
B) poorly specified.
C) superfluous, since the CDOs turned out to be backed by the full faith and credit of
the U.S. Treasury.
D) super models, and while as a group they were not so good at evaluating credit risk,
they made up for it with their good looks and impeccable fashion sense.
100) Many lessons should be learned from the credit crunch.
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A) One lesson is that credit rating agencies need to refine their models for evaluating
esoteric credit risk created in MBS and CDOs.
B) One lesson is that lenders must be more wary of putting complete faith in credit
ratings.
C) One lesson is that bankers seem not to scrutinize credit risk as closely when they
serve only as mortgage originators and then pass it on to MBS investors rather than hold the
paper themselves.
D) all of the options
101) So-called subprime mortgages were typically
A) not held by the originating bank, but instead were resold for packaging into
mortgage-backed securities.
B) aggregated and then sliced into tranches each representing a different risk class:
AAA, AA-BB, or unrated.
C) not held by the originating bank, but instead were resold for packaging into
mortgage-backed securities. Additionally, they were aggregated and then sliced into tranches
each representing a different risk class: AAA, AA-BB, or unrated.
D) all of the options
102) One enduring truth of banking is that
A) bankers always seem willing to lend huge amounts to borrowers with a limited
potential to repay.
B) credit ratings work, but only in the aggregate.
C) when liquidity dries up, bankers are typically able to ride out the storm by buying up
other investors debt at pennies on the dollar, holding it until the crisis is over, and then selling at
a huge profit.
D) none of the options
103) With regard to creating money,
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A) only central banks such as the Federal Reserve can create money.
B) money is created when a bank customer invests in a time deposit.
C) commercial banks can create money when a bank lends out funds borrowed from
another customer who invested in a time deposit.
D) none of the options
104) Edge Act banks are not prohibited from owning equity in business corporations, unlike
domestic commercial banks.
⊚ true
⊚ false
105) An Edge Act bank is typically located in a state different from that of its parent in order
to get around the prohibition on interstate branch banking.
⊚ true
⊚ false
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Answer Key
Test name: chapter 11
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