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Banking
Q:
Traditional country risk analysis (CRA) that is based on discriminant statistical models often suffers from problems of using data that is not current.
Q:
A positive relationship is considered to exist between domestic money supply growth and the probability of rescheduling debt.
Q:
The export revenue variance (VAREX) should be negatively related to the probability of debt rescheduling.
Q:
Export revenue may be highly variable due to the quantity of exports and the prices that may be realized on the exported products.
Q:
In international finance, the variance of export revenue is based solely on the quantity of product available for export.
Q:
In the statistical modeling of the country risk analysis, the investment ratio is considered to have a negative impact on the probability of rescheduling because the larger expenditures on investment infrastructure leaves less funds for debt payment.
Q:
In international finance, the investment ratio measures the amount of real investment relative to the gross national product of the country.
Q:
The larger the import ratio of a country; the higher is the probability that the country will have to schedule its debt payments.
Q:
The debt service ratio of a country should be negatively related to the probability of rescheduling.
Q:
The Economist Intelligence Unit is a rating of sovereign risk based on economic and political risk within a country.
Q:
Sometimes banks received criticism because domestic governments take special political steps to reduce the probability that foreign borrowers will default or repudiate their debt contracts, an occurrence that could cause financial harm to the domestic banks.
Q:
International loan contracts that contain cross-default provisions allow the country to select specific lenders for special default treatment.
Q:
Rescheduling loans is easier than renegotiating payments on bonds because the same FIs typically form loan syndicates that create cohesiveness in negotiations.
Q:
Prior to World War II, most international debt was in the form of bank loans.
Q:
International bond finance is more likely to be rescheduled than international loan finance because of the relatively fewer lenders involved with a loan finance issue.
Q:
Sovereign risk involves restrictions placed on borrowers and investors regarding the movement of funds into and out of a foreign country.
Q:
Lenders often are willing to reschedule debt payments to avoid forcing the borrower into outright bankruptcy.
Q:
All of the following are relevant determinants of sovereign risk exposure: the rate of domestic money supply growth; the variance of export revenue, and the size of the population.
Q:
A lending decision to a firm in a foreign country should involve both a credit risk analysis and a sovereign risk analysis.
Q:
Sovereign country risk is largely independent of the credit standing of the foreign borrower.
Q:
Sovereign country risk exposure is a result of the FI's inability to be fully diversified.
Q:
FIs that lend to foreign entities often need to make provisions to their loan loss reserves.
Q:
If the credit risk of a foreign borrower is good, then the sovereign country risk is irrelevant.
Q:
The market in which foreign currency is traded for immediate delivery is the
A. spot market.
B. forward market.
C. futures market.
D. currency swap market.
E. London capital market.
Q:
Which of the following is NOT a source of foreign exchange risk?
A. Trading foreign currencies.
B. Making domestic-currency loans to foreign corporations.
C. Buying foreign-issued securities.
D. Issuing foreign currency-denominated debt.
E. Making foreign currency loans.
Q:
Long-term violations of the interest rate parity relationship may occur if imperfections in the international financial markets are allowed to exist.
Q:
Violation of the interest rate parity theorem would allow arbitrage profits.
Q:
Interest rate parity implies that the discounted spread between interest rates in two currencies should equal the percentage spread between forward and spot exchange rates.
Q:
Purchasing power parity is based on the difference in productive output (GDP) that exists between two countries.
Q:
During the late 2000's financial crisis, global stock market return correlations decreased relative to the decade before the crisis.
Q:
The real interest rate reflects the underlying real sector demand and supply for funds denominated in the domestic currency.
Q:
The use of an exchange rate forward contract assures the FI of the opportunity to buy (or sell) the foreign currency at a future time at a known price.
Q:
Directly matching foreign asset and liability books in the same FX currency will allow an FI to hedge or lock in a profit spread regardless of future changes in exchange rates.
Q:
On-balance-sheet hedging involves making changes in the on-balance-sheet assets and liabilities to protect FI profits from FX risk without the use of derivative securities.
Q:
Off-balance-sheet hedging involves taking a position in FX forward or other derivative securities even though no FX assets or liabilities are on the balance sheet.
Q:
An FI can control its FX risk exposure by on-balance-sheet and off-balance-sheet hedging.
Q:
The total FX risk for a domestic bank that is making a one-year loan in a foreign currency is that the interest income expected on the loan is exposed to a depreciation of the foreign currency.
Q:
Profits in foreign exchange trading have grown despite the decreased volatility in FX rates in European countries.
Q:
The reason an FI receives a fee when purchasing foreign currencies to allow customers to complete international transactions is because the FI assumes some FX risk.
Q:
During 2012, the top four banks that operate in foreign currency trading comprised almost half of the market.
Q:
FX trading income is derived only from profit (or loss) on the FI's speculative currency positions.
Q:
FX trading risk exposure continues into the night until all FI operations are closed.
Q:
Average daily turnover in the FX market has recently been over $4 trillion.
Q:
The foreign exchange market in Tokyo is the largest FX trading market.
Q:
The FX markets of the world have become one of the largest of all financial markets.
Q:
Most profits or losses on foreign trading come from taking an open position in currencies.
Q:
As of March 2012, U.S. banks were net short British pounds.
Q:
A positive net exposure position in FX implies the FI is net short in a currency.
Q:
A positive net exposure position in FX implies an FI has purchased more foreign currency than it has sold.
Q:
The underlying cause of foreign exchange volatility reflects fluctuations in the demand and supply of a country's currency.
Q:
Most nonbank FIs have foreign exchange risk exposure that is smaller than the exposure of the large U.S. money-center banks.
Q:
State regulation of the U.S. insurance industry has an effect on the ability of insurance companies to invest in foreign securities.
Q:
U.S. life insurance companies generally hold less than ten percent (10%) of their portfolios in foreign securities.
Q:
U.S. pension funds invest approximately one percent (1%) of their portfolios in foreign securities.
Q:
The greater the volatility of foreign exchange rates given any net exposure position, the greater the fluctuations in value of the foreign exchange portfolio.
Q:
Forward contracts in FX are typically written for periods exceeding 6 months.
Q:
The market in which foreign currency is traded for future delivery is the forward foreign exchange market.
Q:
The spot foreign exchange market is where forward and futures contracts and swap agreements are transacted.
Q:
The exposure to foreign exchange risk by U.S. FIs has decreased with the growth of the various derivative markets.
Q:
As the U.S. dollar appreciates against the Japanese yen, Japanese goods sold in the U.S. become less expensive to the U.S. consumer.
Q:
As the U.S. dollar appreciates against the Japanese yen, U.S. goods become less expensive to Japanese consumers.
Q:
To a U.S. trader of foreign currencies, a direct quote indicates U.S. dollars received for each one unit of the foreign currency.
Q:
An FI can eliminate its currency risk exposure by matching its foreign currency assets to its foreign currency liabilities.
Q:
What must be the spot exchange rate to eliminate the preference for the yen loans if the forward rate remains $0.62/? A. $0.6416/x.B. $0.5798/x.C. $0.6118/x.D. $0.5991/x.E. Insufficient information.
Q:
What must be the forward exchange rate to eliminate the preference for the yen loans? A. $0.6416/x.B. $0.5798/x.C. $0.6118/x.D. $0.5991/x.E. Insufficient information.
Q:
Assume that instead of investing in Euro bonds at a fixed rate of 6.5 percent, the FI invests them in variable rates of LIBOR + 1.5 percent, reset every six months. The current LIBOR rate is 5 percent. LIBOR at the end of six months is 5.5 percent. Assume both interest and principal will be reinvested in six months. Assume the spot exchange rate is 1.75/$. What should be the one-year forward rate in order for the bank to earn a spread of 1 percent? A. €1.7344/$.B. €1.7418/$.C. €1.7478/$.D. €1.7750/$.E. €1.7842/$.
Q:
An FI has purchased (borrowed) a one-year $10 million Eurodollar deposit at an annual interest rate of 6 percent. It has invested these proceeds in one-year Euro () bonds at an annual rate of 6.5 percent after converting them at the current spot rate of 1.75/$. Both interest and principal are paid at the end of the year.What is the spread earned if the bank can sell one-year forward Euros at 1.755/$? A. -0.70 percent.B. -0.25 percent.C. 0.00 percent.D. 0.20 percent.E. 0.50 percent.
Q:
An FI has purchased (borrowed) a one-year $10 million Eurodollar deposit at an annual interest rate of 6 percent. It has invested these proceeds in one-year Euro () bonds at an annual rate of 6.5 percent after converting them at the current spot rate of 1.75/$. Both interest and principal are paid at the end of the year.What is the spread earned by the bank if the end-of-year exchange rate is 1.77/$? A. -1.00 percent.B. -0.70 percent.C. -0.25 percent.D. 0.00 percent.E. 0.20 percent.
Q:
An FI has purchased (borrowed) a one-year $10 million Eurodollar deposit at an annual interest rate of 6 percent. It has invested these proceeds in one-year Euro () bonds at an annual rate of 6.5 percent after converting them at the current spot rate of 1.75/$. Both interest and principal are paid at the end of the year.What is the spread earned by the bank at the end of the year if the exchange rate remains at 1.75/$? A. 0.50 percent.B. 1.00 percent.C. 1.5 percent.D. 2.0 percent.E. 2.5 percent.
Q:
Suppose that the current spot exchange rate of U.S. dollars for Russian rubles is $0.15/1ruble. The price of Russian-produced goods increases by 8 percent, and the U.S. price index increases by 3 percent.According to PPP, the new exchange rate of Russian rubles to U.S. dollars is A. 0.15.B. 0.1425.C. 0.141.D. 0.1605.E. 0.159.
Q:
Assume that instead of investing in Euro bonds at a fixed rate of 6.5 percent, the FI invests them in variable rates of LIBOR + 1.5 percent, reset every six months. The current LIBOR rate is 5 percent. Assume both interest and principal will be reinvested in six months. Assume the exchange rate remains at 1.75/$ at the end of the year. What should be the LIBOR rates in six months in order for the bank to earn a 1 percent spread? A. 5.25 percent.B. 5.48 percent.C. 5.76 percent.D. 5.86 percent.E. 5.94 percent.
Q:
Suppose that the current spot exchange rate of U.S. dollars for Russian rubles is $0.15/1ruble. The price of Russian-produced goods increases by 8 percent, and the U.S. price index increases by 3 percent.According to PPP, the 8 percent rise in the price of Russian goods relative to the 3 percent rise in the price of U.S. goods results in a(n) A. depreciation of the Russian ruble by 5 percent.B. depreciation of the Russian ruble by 6 percent.C. appreciation of the Russian ruble by 5 percent.D. appreciation of the Russian ruble by 6 percent.E. depreciation of the Russian ruble by 7 percent.
Q:
Assume that instead of investing in Euro bonds at a fixed rate of 6.5 percent, it invests them in variable rates of LIBOR + 1.5 percent, reset every six months. The current LIBOR rate is 5 percent. What is the annual spread earned by the bank if LIBOR at the end of six months is 5.5 percent? Assume both interest and principal will be reinvested in six months. Assume the exchange rate remains at 1.75/$ at the end of the year. A. 0.50 percent.B. 0.68 percent.C. 0.86 percent.D. 0.90 percent.E. 0.95 percent.
Q:
The one-year CD rates for financial institutions with AA ratings are 5 percent in the U.S. and 8 percent in France. An AA-rated U.S. financial institution can borrow by issuing CDs or lend by purchasing CDs at these rates in either market. The current spot rate is $0.20/Euro.What should be the spot rate in order for no arbitrage to take place, assuming the one-year forward rate is $0.1975/€? A. $0.1944/€.B. $0.1975/€.C. $0.2000/€.D. $0.2025/€.E. $0.2031/€.
Q:
An FI has purchased (borrowed) a one-year $10 million Eurodollar deposit at an annual interest rate of 6 percent. It has invested these proceeds in one-year Euro () bonds at an annual rate of 6.5 percent after converting them at the current spot rate of 1.75/$. Both interest and principal are paid at the end of the year.At what one-year forward rate will the bank earn a 1 percent spread? A. €1.7344/$.B. €1.7418/$.C. €1.7478/$.D. €1.7750/$.E. €1.7842/$.
Q:
The one-year CD rates for financial institutions with AA ratings are 5 percent in the U.S. and 8 percent in France. An AA-rated U.S. financial institution can borrow by issuing CDs or lend by purchasing CDs at these rates in either market. The current spot rate is $0.20/Euro.What should be the one-year forward rate in order to prevent any arbitrage? A. $0.1944/€.B. $0.1975/€.C. $0.2000/€.D. $0.2025/€.E. $0.2031/€.
Q:
The one-year CD rates for financial institutions with AA ratings are 5 percent in the U.S. and 8 percent in France. An AA-rated U.S. financial institution can borrow by issuing CDs or lend by purchasing CDs at these rates in either market. The current spot rate is $0.20/Euro.If the bank receives a quote of $0.1975/ for one-year forward rates for the Euro (to buy and to sell), what is the arbitrage profit for the bank if it uses $1,000,000 as the notional amount? A. $5,000.B. $16,500.C. $19,350.D. $22,000.E. $25,675.
Q:
Your U.S. bank issues a one-year U.S. CD at 5 percent annual interest to finance a C $1.274 million (Canadian dollar) investment in two-year, fixed rate Canadian bonds selling at par and paying 7 percent annually. You expect to liquidate your position in one year. Currently, spot exchange rates are US $0.78493 per Canadian dollar.What is the end of year profit or loss on the bank's cash position if in one year both Canadian bond rates increase to 7.538 percent and the exchange rate falls to US $0.765 per Canadian dollar? (Assume no change in U.S. interest rates.) A. Loss of US $12,000.B. Loss of US $75,000.C. Profit of C $9,000.D. Profit of US $50,000.E. Loss of C $119,800.
Q:
Your U.S. bank issues a one-year U.S. CD at 5 percent annual interest to finance a C $1.274 million (Canadian dollar) investment in two-year, fixed rate Canadian bonds selling at par and paying 7 percent annually. You expect to liquidate your position in one year. Currently, spot exchange rates are US $0.78493 per Canadian dollar.What is the end-of-year profit or loss to the bank if in one year Canadian bond rates increase to 7.538 percent? (Assume no change in either current U.S. interest rates or current exchange rates, US $0.78493/C $1.) A. Loss of US $5,000.B. Profit of US $15,000.C. Loss of C $119,000.D. Profit of C $50,000.E. Loss of C $50,000.
Q:
Your U.S. bank issues a one-year U.S. CD at 5 percent annual interest to finance a C $1.274 million (Canadian dollar) investment in two-year, fixed rate Canadian bonds selling at par and paying 7 percent annually. You expect to liquidate your position in one year. Currently, spot exchange rates are US $0.78493 per Canadian dollar.What is the end-of-year profit or loss to the bank if in one year the exchange rate falls to US $0.765 per Canadian dollar? (Assume that there is no change in interest rates.) A. Loss of US $75,000.B. Profit of C $274,000.C. Loss of US $7,000.D. Profit of C $9,000.E. Loss of US $5,000.