Chapter 11 Study Questions

Transcription

1 International Finance Final Exam Study Guide Chapter 11 Study Questions 1. Discuss reasons for international banking, opening foreign branches, and offshore banking. Why a bank may establish a multinational operation? 2. 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. 3. A bank may establish a multinational operation for the reason of knowledge advantage. 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. 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.

2 4. 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. 5. A bank may establish a multinational operation for the reason of risk reduction. 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. 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. 6. 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.

3 7. 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. 8. A bank may establish a multinational operation for the reason of wholesale 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. 9. 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 above

4 10. 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. 11. 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. 12. 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.

5 13. 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. Both a) and c) 14. 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. 15. A foreign branch bank operates like a local bank, but legally A. it is a part of the parent bank. B. a branch bank is subject to both the banking regulations of its home country and 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. both a) and b) 16. An Offshore banking center is A. a country whose banking system is organized to permit external accounts beyond the normal economic activity of the county. B. is external to any government, frequently located on old oil drilling platforms located in international waters. C. a country like North Korea. 17. 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. 18. 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. 19. Define and discuss forward rate agreement (FRA).

6 20. 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 above 21. 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. 22. 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 above 23. You are a bank and your customer asks you to quote an agreed-upon rate for a 3 9 FRA. You observe the following rates. What rate should you quote? A. 5.96% B. 4.96% C. 1.94% D. None of the above

7 ABC Bank (seller) has made a "three against six" Forward Rate Agreement (FRA), with XYZ Bank (buyer). Assume that the: 24. 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. 25. 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. 26. 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. 27. Discuss the Asian crisis and the Global Financial Crisis. 28. 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.

8 29. Proceeding the Asian crisis, 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. bankers were willing to lend huge amounts to borrowers with a limited potential to repay. E. all of the above 30. 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. 31. 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. both a) and b) 32. So-called subprime mortgages were typically 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. 33. 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.

9 34. 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. supermodels, 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. 35. Many lessons should be learned from the credit crunch. 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 borrowers 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 above 36. So-called subprime mortgages were typically A. not held by the originating bank, but instead were resold for packaging into mortgagebacked securities. B. aggregated and then sliced into tranches each representing a different risk class: AAA, AA-BB, or unrated. C. both a) and b) D. None of the above 37. One enduring truth of banking is that A. for some reason, 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. Chapter 19 Multinational Cash Management 1. Multinational cash management A. is really no different for a MNC than for a purely domestic firm in a closed economy. B. concerns itself with the size of cash balances, their currency denominations, and where

10 these cash balances are located among the MNC's affiliates. C. concerns itself with the size of cash balances and their currency denominations, but not where these cash balances are located among the MNC's affiliates, since intra-affiliate default risk is not an issue. 2. Mislocated funds are defined as: A. Funds being found in the wrong account. B. Funds being denominated in the wrong currency. C. Funds being invested with the wrong maturity. D. None of the above 3. Efficient cash management techniques can A. reduce the investment in cash balances and foreign exchange transaction expenses. B. provide for maximum return from the investment of excess cash. C. result in borrowing at lowest rate when a temporary cash shortage exists. 4. Cash management refers to A. the decision to grant credit to customers or to remain "cash and carry". B. the investment the firm has in transaction balances and precautionary balances. C. a domestic firm's investment in foreign currency. 5. Precautionary cash balances A. are necessary in case the firm has underestimated the amount of cash need to cover transactions. B. are necessary to cover scheduled outflows of funds during a cash budgeting period. C. both a) and b) 6. A firm keeps a precautionary cash balance to cover unexpected transactions during the budget period. The size of this balance depends on how safe the firm desires to be in its ability to meet unexpected transactions. A. The larger the precautionary cash balance, the greater is the firm's ability to meet unexpected expenses. B. The larger the precautionary cash balance, the less is the risk of financial embarrassment and loss of credit standing. C. The larger the precautionary cash balance, the greater the potential opportunity cost. D. All of the above

11 7. Good cash management boils down to A. investing excess funds at the most favorable interest rate and borrowing at the lowest rate when there is a temporary cash shortage. B. investing excess funds at the lowest rate and borrowing at the highest rate when there is a temporary cash shortage. C. hedging currency exposure with judicious use of futures, forwards, and currency option contracts. 8. With a CENTRALIZED CASH DEPOSITORY A. There is less chance for an MNC's funds to be denominated in the wrong currency. B. The central cash manager has a global view of the MNC's overall cash position. C. There is less chance of mislocated funds. D. All of the above 9. With a CENTRALIZED CASH DEPOSITORY A. a MNC can facilitate fund mobilization. B. system-wide excess cash are invested at the most advantageous rates. C. system-wide cash shortages are borrowed at the most advantageous rates. 10. One benefit of a centralized cash depository is A. the MNC's investment in precautionary cash balances can be substantially reduced without a reduction in its ability to cover unforeseen expenses. B. each affiliate will have greater autonomy in managing its own cash balances. C. exchange rate restrictions can be easily circumvented. 11. Not all countries allow MNCs the freedom to net payments, A. by limiting netting, more needless foreign exchange transactions flow through the local banking system. B. MNCs can avoid these restrictions by using a Centralized Cash Depository. C. MNCs can avoid these restrictions by using wire transfers. D. both b) and c)

12 12. Which of the following statements about multilateral netting system are correct? (i)- Each affiliate nets all its interaffiliate receipts against all its disbursements (ii)- Each affiliate transfers or receives a balance, depending on whether it is a net payer or receiver (iii)- The net funds to be received by the affiliates will equal the net disbursements to be made by the affiliates (iv)- Only two foreign exchange transactions are necessary since the affiliates' net receipts will always be equal to zero (v)- Only two foreign exchange transactions are necessary since the affiliates' net disbursements will always be equal to zero A. (i) and (ii) B. (i), (ii), and (iii) C. (i), (ii), (iii), and (iv) D. (i), (ii), (iii), and (v) 13. Under multilateral netting A. each affiliate nets all its inter-affiliate receipts against all its disbursements. It then transfers or receives the balance, respectively, if it is the net payer or receiver. B. each pair of affiliates determines the net amount due between them, and only the net amount is transferred. C. no inter-affiliate payments are made or even computed, since no real cash flows are involved. 14. Discuss the optimal size of cash balances based on the following chart. Chapter 15 International Portfolio Investment Highlighted ones are essay questions and the rest are multiple choices. 1. Discuss the international correlation structure and risk diversification 2. Under the investment dollar premium system, A. U.K. residents received a premium over the prevailing commercial exchange rate when they sold foreign securities and repatriated the funds to the U.K. B. U.K. residents had to pay a premium over the prevailing commercial exchange rate when they bought foreign currencies to invest in foreign securities. C. none of the above 3. In the context of investments in securities (stocks and bonds), portfolio risk

13 diversification refers to A. the time-honored adage "Don't put all your eggs in one basket". B. investors' ability to reduce portfolio risk by holding securities that are less than perfectly positively correlated. C. the fact that the less correlated the securities in a portfolio, the lower the portfolio risk. 4. In the graph below, X and Y represent A. U.S. stocks and international stocks. B. international stocks and U.S. stocks. C. systematic risk and unsystematic risk.

14 5. Systematic risk is A. nondiversifiable risk. B. the risk that remains even after investors fully diversify their portfolio holdings. C. both a) and b) 6. The "world beta" measures the A. unsystematic risk. B. sensitivity of returns on a security to world market movements. C. risk-adjusted performance. D. risk of default and bankruptcy. 7. The less correlated the securities in a portfolio, A. the lower the portfolio risk. B. the higher the portfolio risk. C. the lower the unsystematic risk. D. the higher the diversifiable risk. 8. Regarding the mechanics of international portfolio diversification, which statement is true? A. Security returns are much less correlated across countries than within a county. B. Security returns are more correlated across countries than within a county. C. Security returns are about as equally correlated across countries as they are within a county. D. None of the above 9. Systematic risk A. is also known as non-diversifiable risk. B. is market risk. C. refers to the risk that remains even after investors fully diversify their portfolio holdings. 10. A fully diversified U.S. portfolio is about A. 75 percent as risky as a typical individual stock. B. 27 percent as risky as a typical individual stock. C. 12 percent as risky as a typical individual stock. D. Half as risky as a fully diversified international portfolio.

15 11. Studies show that international stock markets tend to move more closely together when the volatility is higher. This finding suggests that A. investors should liquidate their portfolio holdings during turbulent periods. B. since investors need risk diversification most precisely when markets are turbulent, there may be less benefit to international diversification for investors who liquidate their portfolio holdings during turbulent periods. C. this kind of correlation is why international portfolio diversification is smart for today's investor. 12. Discuss the optimal international portfolio selection 13. The "Sharpe performance measure" (SHP) is A. a "risk-adjusted" performance measure. B. the excess return (above and beyond the risk-free interest rate) per standard deviation risk. C. the sensitivity level of a national market to world market movements. D. both a) and b) 14. The "Sharpe performance measure" (SHP) is A. B. C. 15. With regard to the OIP, A. the composition of the optimal international portfolio is identical for all investors, regardless of home country. B. the composition of the optimal international portfolio varies depending upon the numeraire currency used to measure returns. C. the composition of the optimal international portfolio is identical for all investors, regardless of home country, if they hedge their risk with currency futures contracts. D. both b) and c)

16 16. With regard to the OIP, A. the composition of the optimal international portfolio is identical for all investors, regardless of home country. B. the OIP has more return and less risk for all investors, regardless of home country. C. the composition of the optimal international portfolio is identical for all investors, regardless of home country, if they hedge their risk with currency futures contracts. 17. With regard to the OIP, A. the composition of the optimal international portfolio is identical for all investors, regardless of home country. B. the OIP has more return and less risk for all investors, regardless of home country. C. the composition of the optimal international portfolio is identical for all investors of a particular country, whether or not they hedge their risk with currency futures contracts. 18. With regard to the OIP, A. the optimal international portfolio contains investments from every country. B. the OIP has more return and less risk for all investors. C. the composition of the optimal international portfolio changes according to IRP. 19. Which of the following is a true statement? A. Generally, exchange rate volatility is greater than bond market volatility. B. When investing in international bonds, it is essential to control exchange risk to enhance the efficiency of international bond portfolios. C. The real-world evidence suggests that investing in Swiss bonds largely amounts to investing in Swiss currency. D. All of the above 20. Compared with bond markets A. the risk of investing in foreign stock markets is, to a lesser degree, attributable to exchange rate uncertainty. B. the risk of investing in foreign stock markets is, to a much greater degree, attributable to exchange rate uncertainty. C. exchange risk is lower than default risk and interest rate risk.

17 21. Exchange rate fluctuations contribute to the risk of foreign investment through three possible channels: (i)- the volatility of the investment due to the volatility of the exchange rate (ii)- the contribution of the cross-product term (iii)- its covariance with the local market returns Which of the following contributes and accounts for most of the volatility? A. (i) and (ii) B. (ii) and (iii) C. (i) and (iii) D. only (ii) 22. Recent studies show that when investors control exchange risk by using currency forward contracts, A. they can substantially enhance the efficiency of international bond portfolios. B. they can substantially enhance the efficiency of international stock portfolios. C. the risk of investing in foreign stock markets is can be completely hedged. D. both a) and b) 23. Advantages of investing in U.S.-based international mutual funds include A. lower transactions costs relative to direct investing. B. circumvention of many legal and institution barriers to direct portfolio investment in many foreign markets. C. professional management, potentially expertise in security selection, definitely recordkeeping. 24. American Depository Receipt (ADRs) represent foreign stocks A. denominated in U.S. dollars that trade on European stock exchanges. B. denominated in U.S. dollars that trade on a U.S. stock exchange. C. denominated in a foreign currency that trade on a U.S. stock exchange. D. non-registered (bearer) securities. 25. WEBS are A. World Equity Benchmark Shares. B. exchange-traded open-end country funds designed to closely track foreign stock market indexes. C. both a) and b)

18 26. For those investors who desire international equity exposure, WEBS A. may well serve as a major alternative to such traditional tools as international mutual funds, ADRs and closed-end country funds. B. are probably overpriced relative to international mutual funds, ADRs and closed-end country funds. C. would provide no international equity exposure since they are pools of bonds. 27. Hedge fund advisors typically receive a "2-plus-twenty" management fee A. meaning 2 percent per year of the assets under management, plus performance fee 20 percent of any capital appreciation. B. meaning 2 percent per year of the assets under management, plus performance fee 20 basis points. C. meaning 2 percent per year of the assets under management, plus performance fee of 20 percent of the excess return. D. meaning 2 percent per year of the assets under management, plus performance fee 20 percent of gross return net of the risk-free rate. 28. Discuss the home bias in the context of international portfolio investments. 29. Explanations for Home Bias include A. domestic securities may provide investors with certain extra services, such as hedging against domestic inflation, that foreign securities do not. B. there may be barriers, formal or informal, to investing in foreign securities. C. investors may face country-specific inflation in violation of PPP. 30. The degree of home bias varies across investors A. wealthier, more experienced, and sophisticated investors are less likely to exhibit home bias. B. wealthier, more experienced, and sophisticated investors are more likely to exhibit home bias. C. wealthier, more experienced, and sophisticated investors are less likely to invest in foreign securities. D. both b) and c) Chapter 20 International Trade Finance 1. Discuss the three basic documents involved in a typical foreign trade transaction 2. International trade is more difficult and risky from the exporter's perspective than is domestic trade because A. the exporter may not be familiar with the buyer, and thus not know if the importer is a good credit risk.

19 B. if the merchandise is exported abroad and the buyer does not pay, it may prove difficult, if not impossible, for the exporter to have any legal recourse. C. political instability makes it risky to ship merchandise abroad certain to parts of the world. 3. A typical foreign trade transaction requires three basic documents: A. letter of credit, time draft, and bill of lading. B. letter of credit, banker's acceptance, and bill of lading. C. letter of credit, time draft, and a banker's acceptance. 4. A bill of lading A. is a document issued by the common carrier specifying that it has received the foods for shipment; it can serve as title to the goods. B. later becomes a banker's acceptance. C. is a time draft that calls for payment upon physical delivery of goods. 5. The sends a purchase order to the. The applies to his bank for a letter of credit. A. importer, exporter, exporter B. exporter, importer, importer C. importer, exporter, importer D. exporter, importer, exporter 6. The 's bank sends the letter of credit to the 's bank. After sending the merchandise, the gives the shipping documents and time draft to his bank. A. importer, exporter, exporter B. exporter, importer, importer C. importer, exporter, importer D. exporter, importer, exporter 7. A time draft A. is a document issued by the common carrier specifying that it has received the foods for shipment; it can serve as title to the goods. B. later becomes a banker's acceptance. C. written order instructing the importer or his agent that calls for payment the amount specified on its face on a certain date.

20 8. A banker's acceptance is created when A. is a document issued by the common carrier specifying that it has received the foods for shipment; it can serve as title to the goods. B. after taking title to the goods via a bill of lading, the importer's bank accepts the time draft. C. a time draft that calls for payment upon physical delivery of goods matures. 9. A time draft can become a negotiable money market instrument called A. Eurodollars. B. a banker's acceptance. C. a letter of credit. D. a bill of lading. 10. Define and discuss forfaiting 11. Forfaiting, in which a bank purchases at a discount from an importer a series of promissory notes in favor of an exporter, A. is a short-term form of trade financing. B. is a medium-term form of trade financing. C. is a long-term form of trade financing. 12. The term "forfaiting" A. means relinquishing, waiving, yielding, and penalty. B. is a type of medium-term trade financing used to finance the sale of capital goods. C. involves the sale of promissory notes signed by the importer in favor of the exporter, who might sell the notes at a discount from face value. D. both b) and c) 13. In a forfaiting transaction, the forfait is usually A. the importer. B. the exporter. C. the bank. D. the title to the goods, or the bill of lading.

21 14. In a forfaiting transaction, the forfait A. buys the notes at a discount from face value from the importer. B. buys the notes at a discount from face value from the exporter. C. redeems the notes at a face value to the exporter. 15. In the event of a default A. the forfait does not have recourse against the exporter in the event of a default by the importer. B. the forfait does have recourse against the exporter in the event of a default by the importer. C. the exporter will have to return the goods to the importer Under the terms of Islamic finance (Shari'ah law) A. selling debt at a reduced value is strictly forbidden. B. charging interest is OK, but short selling stock is forbidden. C. buying low and selling high is forbidden. 17. The primary methods of payment for foreign trades, ranked in the order of most secure to least secure for the exporter is A. open account, consignment, letter of credit/time draft, and cash in advance. B. consignment, letter of credit/time draft, cash in advance, and open account. C. cash in advance, letter of credit/ time draft, consignment, and open account. D. cash in advance, letter of credit/ time draft, open account, and consignment. 18. Export-Import Bank (Eximbank) is an independent agency of the United States government that facilitates and finances U.S. export trade. Eximbank's purpose is to provide financing in situations where private financial institutions are unable or unwilling to because of which of the following reasons: A. (i) and (ii) B. (i), (ii), and (iii) C. (i), (ii), (iii), and (iv) D. (i), (ii), (iii), (iv), and (v)

22 19 Through its Export Credit Insurance Program, Eximbank helps U.S. exporters develop and expand their overseas sales by A. protecting them against loss should a foreign buyer default. B. guaranteeing the loans made by private financial institutions to foreign importers. C. providing liquidity via the purchase of notes issued by Eximbank to finance the loans. 20. Through its Medium and Long-Term Guarantee Program, Eximbank helps U.S. exporters develop and expand their overseas sales by A. protecting them against loss should a foreign buyer default. B. guaranteeing the loans made by private financial institutions to foreign importers. C. providing liquidity via the purchase of notes issued by Eximbank to finance the loans. 21. The term "countertrade" refers to A. many different types of transactions in which the seller provides a buyer with goods or services and promises in return to purchase goods or services from the buyer. B. barter, clearing arrangement, and switch trading. C. buy-back, counter purchase, and offset. 22. A switch trade A. is the purchase by a third party of one country's a clearing agreement balance for hard currency. B. is a form of barter. C. involves two parties agreeing to buy a specified amount of goods or services from one another. 23. A buy-back transaction A. is also called a bilateral clearing agreement. B. involves a technology transfer via the sale of a manufacturing plant: as part of the terms, the seller of the plant agrees to purchase a certain portion of the plant output. C. involves two parties agreeing to buy a specified amount of goods or services from one another. 24. A counterpurchase A. involves a technology transfer via the sale of a manufacturing plant: as part of the terms, the seller of the plant agrees to purchase a certain portion of the plant output. B. is similar to a buy-back transaction but the seller of the plant agrees to buy unrelated goods. C. is a form of barter. D. involves two parties agreeing to buy a specified amount of goods or services from one another.

23 Discussion on Bernanke s first lecture about the gold standard According to the Associated Press, ( In Rep. Ron Paul's fantasy playbook, abolition of the Federal Reserve and restoration of the gold standard would usher in an era of reduced government, economic growth and jobs, jobs, jobs. Conversely, maintenance of the Fed's hand on the money printing press - with no substance to back up the dollar - would mean more and more government spending, economic stagnation and continuing high unemployment. Discuss the advantages and disadvantages of the gold standard. Be sure to discuss the relation of the gold standard and the Great Depression. Discussion on Bernanke s third lecture about the financial crisis 1. Define the two main tools of central banking 2. Discuss the key trigger of the financial crisis 3. a). Discuss the lessons from the Great Depression and b). Describe the global response to the financial crisis