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Banking
Q:
Consider the case of a U.S. bank operating in the Cayman Islands and a U.S. bank operating in New York. If a business were to apply for a loan in U.S. dollars at the Cayman Island location, then it is probably the case that:
a. The interest rate on the loan is higher than the one in New York.
b. The interest rate on the loan is lower than the one in New York.
c. The interest rates are the same.
d. The interest rate on the loan is lower, but repaid in Cayman Island dollars.
Q:
A U.S. bank based in the Cayman Islands that accepts U.S. dollar deposits and makes loans in U.S. dollars is referred to as a(n):
a. Dollarbank
b. Eurobank
c. Cayman dollarbank
d. Offshore financial center
Q:
If an American company deposited dollars in a Belgian bank, the dollars would be considered:
a. Euros
b. Euroeuros
c. Belgian dollars
d. Eurocurrency
Q:
Which of the follow are not reasons for offshore banking?
I. Avoid interest rate controls
II. Avoid free entry of new banks
III. Avoid quotas on banking activity
IV. Access more competitive banking
a. II only
b. IV only
c. III and IV
d. All are reasons for offshore banking
Q:
Which of the follow are reasons for offshore banking?
I. Avoid high costs of domestic regulation
II. Avoid government mandated credit allocations
III. Avoid taxes on capital flows
IV. Avoid attempts to seize foreign deposits
a. II only
b. I and III
c. I,II, and III
d. I, II, III, and IV
Q:
An offshore financial center is:
a. A branch of a bank located in a foreign country.
b. The collection of domestic banks that deal primarily with non-residents.
c. A country with financial institutions that deal primarily in foreign currency.
d. A country where financial institutions are prohibited from operating with domestic currency.
Q:
Examining the currency composition of the Eurocurrency market shows that ________ is the most commonly used Eurocurrency.
a. Eurodollar
b. Euroeuro
c. Europound
d. Euroyen
Q:
In international finance, LIBOR stands for:
a. London Interbank Offered Rate
b. London International Banking Offshored Rate
c. London International Board of Retailers
d. London International Bill of Rights
Q:
Which of the following is correct about LIBOR?
a. There is no possible way that bankers can manipulate the LIBOR setting.
b. LIBOR is the second most important interest rate in the world, after the prime rate of the U.S.
c. Every morning the British Bankers Association averages the submitted interest rates from a group of large London banks.
d. LIBOR is the most active and most watched stock in London Stock Exchange.
Q:
Which of the following best describes LIBOR?a. LIBOR is the interest rate used in foreign exchange transactions among Eurobanks.b. LIBOR is the European Central Bank interest rate.c. LIBOR is used by the Federal Reserves to set interest rates in the U.S.d. LIBOR is a benchmark interest rate set by surveying a panel of top banks in London each day, asking what rate they have to pay to borrow for various loan periods.
Q:
In 1981, the Federal Reserves permitted U.S. banks to establish international banking facilities. International banking facilities (IBFs) are:
a. non-controlling ownership in foreign banks by U.S. banks.
b. branches of U.S. banks in foreign countries.
c. records of transactions involving banks and their international customers are kept separate from the rest of the domestic accounts.
d. import-export specialized companies operated by U.S. banks.
Q:
General Motors, a U.S. firm, withdraws $100 million from Bank of America in New York and deposits $100 million with Eurobank X in the Bahamas. Then, Eurobank X deposits $100 million in Eurobank Y in Switzerland. A Swiss Chocolate, Inc. borrows $100 million from Eurobank Y to finance a new plant construction.At the end, the net deposits of the Eurodollar market would be ________.a. $100 millionb. $200 millionc. $300 milliond. $400 million
Q:
Eurodollars CANNOT be created in _____.
a. the United States of America
b. China
c. Middle Eastern countries
d. Africa
Q:
Interest rates on Eurodollar loans may be lower than those on loans in the U.S. because:
a. Eurobanks only lend to government agencies.
b. Eurobanks have no regulatory expenses.
c. Eurobanks have to hold a larger percentage of their deposits to prevent bank runs.
d. Eurobanks only lend to Americans outside the U.S.
Q:
Eurobanks operate on a narrower spread (in comparison to US banks), but still make profit because:
a. Eurobanks have no reserve requirements, so they can lend a larger percentage of their deposits.
b. Eurobanks have very little or no regulatory expense.
c. Eurobanks have low operating expenses.
d. All of the above are correct.
Q:
Bank of America in Chicago offers _________ Bank of America in the Cayman Islands.
a. narrower spread on dollar banking than
b. wider spread on dollar banking than
c. same spread on dollar banking as
d. lower dollar borrowing rate than
Q:
Eurobanks can offer ________ rate of interest on dollar-denominated loans and ________ rate of interest on dollar-denominated deposits than banks in the U.S.
a. Lower; lower
b. Lower; higher
c. Higher; lower
d. Higher; higher
Q:
Eurobanks are referred to as offshore banks because:
a. They are subject to foreign countries rules of banking.
b. They operate on international waters in order to avoid national regulations.
c. They accept deposits and make loans in domestic currency outside the domestic country.
d. They accept deposits and make loans issued in U.S. dollars within Europe.
Q:
A Eurocurrency is:
a. a bank deposit of non-European currency held in Europe.
b. the currency of the European Union.
c. a bank deposit held in a country that does not issue that currency in which the deposit is denominated.
d. a bank deposit in a European currency held outside of Europe.
Q:
Eurocurrency market is attractive for multinational firms because:
a. it provides cheap Eurocurrency loans as alternative payment form for importers.
b. it serves as a place to store excess liquidity because of higher returns on deposits.
c. it offers lower cost working capital due to no taxes, no regulations, and no required reserves.
d. All of the above are correct.
Q:
In 2010, which currency dominated the Eurocurrency market?
a. Eurodollar
b. Euroeuro
c. Euroyen
d. Eurosterling
Q:
_________ is the dollar bank accounts outside the U.S.
a. Banking outsource
b. Eurodollar
c. Dollardollar
d. Black market
Q:
When a Japanese company deposits 1 million yen in a Canadian bank, the yen deposit is:
a. Canayen
b. Euroyen
c. Japandollar
d. Dollaryen
Q:
Which of the following is an example of Eurocurrency?
a. Eurodollar
b. Euroyen
c. Euroeuro
d. All of the above are examples of Eurocurrency.
Q:
The Eurocurrency market is a market which:
a. trades euro outside the Eurozone countries.
b. trades dollars in European countries.
c. trade loans and deposits in any currency other than the domestic currency.
d. trade loans and deposits in euro outside Eurozone countries.
Q:
Which of the following statements is NOT true about the Eurocurrency market?
a. It is a market for any currency held in a short-term deposit outside the country of origin.
b. It has no reserve requirements or deposit insurance.
c. It is a large, unregulated market for any currency traded in Europe.
d. It is a market that accepts deposits and makes loans in foreign currencies outside the country of issue.
Q:
The London Interbank Offered Rate or LIBOR is used as a benchmark to set loan interest rates.
Q:
The prefix Euro was added after the creation of the Euro.
Q:
The Eurocurrency market is a market in which international credit, deposits, and loans are exchanged in a currency other than the domestic currency.
Q:
International banking facilities may make loans and deposits to only:
a. U.S. residents and other IBFs
b. IBFs only
c. Both U.S. residents and non-residents
d. Non-residents and other IBFs
Q:
Divisions in U.S. banks that are permitted to engage in Eurocurrency type banking in dollars with foreign residents are called ________.
a. Foreign advisories
b. Offshore banking centers
c. International banking facilities
d. Foreign currency specialists
Q:
U.S. banks created shell branches by
a. Having a bank branch located in offshore banking center.
b. Created a branch to deal only with non-residents.
c. Setting up an international banking facility in a domestic branch.
d. Merging with foreign banks to create offshore banks.
Q:
Efficiency in the eurocurrency market comes from all of the following except
a. Higher profits for Eurobanks.
b. Low cost borrowing.
c. Free entry of new banks.
d. Lack of government regulation.
Q:
Compared to domestic banks, Eurobanks have:
a. Wider spreads.
b. Lower operating costs.
c. Limits on deposits.
d. Higher interest rates for loans.
Q:
Eurocurrency deposits are like certificates of deposit because both:
a. Are guaranteed by deposit insurance.
b. Have fixed terms.
c. Are stated in terms of LIBOR.
d. Are adjusted every three months.
Q:
The value of LIBOR is determined by
a. The British Bankers Associtation
b. The eurocurrency market
c. The International Monetary Fund
d. The financial exchange in New York
Q:
Interest rates on ________ are higher at Eurobanks than domestic banks.
a. Loans
b. Deposits
c. Currency exchanges
d. None of the above
Q:
Fewer regulations allow _______ to offer narrower spreads than ________.
a. Domestic banks, state owned banks
b. Eurobanks, domestic banks
c. Domestic banks, offshore banks
d. Offshore banks, eurobanks
Q:
What is a spread?
a. The average of the deposit and loan interest rates.
b. The quarterly increase of earnings for Eurobanks.
c. The difference between the deposit and loan interest rates.
d. The tool used by regulators to monitor deposit and loan interest rates.
Q:
If a country was host to several Eurobanks, then it may be reasonable to find:
a. Strict quota enforcement on all capital leaving for the Eurozone.
b. One set of rules for banking in domestic currency and a different one for foreign currency.
c. Interest rate controls on deposits, but not loans.
d. Standards on required reserves for all banks in the country.
Q:
Which of the following would not be considered eurocurrency?
a. Yen bank accounts inside the Eurozone.
b. Dollar bank accounts outside the U.S.
c. Euro bank accounts inside the Eurozone.
d. Pound bank accounts inside Japan.
Q:
Which of the follow are examples of characteristics of offshore financial centers?
I. Different regulations for domestic and foreign currencies
II. Low (or no) taxes
III. Banks work confidential interaction with clients
IV. Strict rules on deposit insurance
a. I only
b. I and IV
c. I, II, and III
d. I, II, III, and IV
Q:
The Euro prefix in eurocurrency market was developed:
a. Because all transactions are in Euros.
b. Because the eurocurrency market was initially started in Europe.
c. Because the European Union regulates the Eurocurrency market.
d. Because each currency market has a physical location in the Eurozone.
Q:
What is the eurocurrency market?
a. A market in which the domestic currency is exchanged for international deposits and loans.
b. A currency exchange for the purchasing and selling of Euros.
c. A market in which the loans are purchased in the domestic currency and repaid in the future with Euros.
d. A market in which international deposits and loans are exchanged in a currency other than the domestic currency.
Q:
Divisions in U.S. banks that are permitted to engage in Eurocurrency type banking in dollars with U.S. citizens are called international banking facilities.
Q:
The spread is the average of deposit and loan interest rates.
Q:
Due to fewer regulations domestic banks are able to offer a narrower spread than Eurobanks.
Q:
The currency in a Euro bank account outside the Eurozone would be referred to as Euroeuro.
Q:
Swiss francs deposited in a U.S. bank would be considered Eurocurrency.
Q:
International banking facilities enable U.S. institutions to
a. Be more competitive for business dealing with foreign-source deposits and loan.
b. Combine Eurobank and domestic activity into one operation and eliminate separate accounting practices.
c. Cut interest rates for U.S. residents on loans.
d. Avoid banking requirements when dealing with domestic businesses.
Q:
For U.S. bank to set up an international banking facility (IBF), the bank must:
a. Construct a separate branch for all IBF activity.
b. Keep a separate record of any loans or deposits done by the IBF.
c. Obtain annual permission from the Federal Deposit Insurance Corporation for all IBF activity.
d. Set up a bank in an offshore banking center.
Q:
Bank syndicates are used to
a. Create shell branches for U.S. banks.
b. Approve new Eurobanks.
c. Conduct offshore banking in domestic offices.
d. Make large eurocurrency loans.
Q:
LIBOR is set daily by the British Bankers Association for:
a. Domestic banks in London only
b. Use by Eurobanks only
c. The British Pound only
d. Ten major currencies
Q:
The exchange market has seen the rise of new contracts combines features of forward contracts and option contracts.
Q:
A foreign currency option gives the purchaser the right to buy or sell a given amount of currency only after the maturity date.
Q:
An option contract requires an up-front premium payment.
Q:
Standardized contracts traded on established exchanges for delivery of currencies at a specified future date are called foreign currency futures.
Q:
Forward-looking market instruments are used to reduce traders currency risk.
Q:
Foreign currency options contracts that give the buyer the right to buy are called:
a. Call options.
b. Purchase rights.
c. Put options.
d. Strike rights.
Q:
Assume that the annualized forward premium is 1 percent and that the spot rate is 2.00 ($/pound). What would the one-year forward rate have to be?
a. 1.76
b. 1.98
c. 2.02
d. 2.24
Q:
In what market are currency prices sometimes referred to as a strike price?
a. Forward market
b. Swap market
c. Futures market
d. Options market
Q:
A contract that provides the right, but not the obligation, to buy or sell a given amount of currency at a fixed exchange rate on or before the maturity date is called a(n) ______.
a. Excise option
b. Foreign currency option
c. Foreign currency swap
d. Hedge contract
Q:
Assume that the one-month forward rate is 2.02 dollars per pound and the spot rate is 2.00 dollars per pound. Calculate the annualized percentage forward premium (or discount) for the pound.
a. 12 percent discount
b. 12 percent premium
c. 144 percent discount
d. 144 percent premium
Q:
Which of the following features describe the forward market for foreign exchange?
I. Fixed contracts
II. Tailored size contracts
III. Fixed maturities
IV. Can be resold
a. I only
b. II only
c. II and IV
d. I, II, and IV
Q:
If the owner of the option exercises the right to buy or sell, the seller of the option must ________.
a. Find a broker for the buyer.
b. Set the strike price and find a new buyer.
c. Calculate the new strike price based upon the days left on the contract.
d. Buy or sell the financial instrument to the buyer.
Q:
The following are benefits of a currency swap except:
a. Swaps avoid dealing with any interest payments.
b. Swaps lower transaction costs of cross-currency cash management.
c. Swaps reduce foreign exchange risk for financing transactions.
d. Swaps allow firms to acquire financing for which it has a comparative advantage.
Q:
Forward premiums and discounts are quoted in annualized form because:
a. The IMF mandates this practice.
b. Unlike options contracts, forward contracts are always one year in length.
c. Purchases are balanced every fiscal year.
d. Comparisons to interest rate returns are easier.
Q:
The fixed rate of currencies that will be delivered at an agreed upon future date is called the:
a. Swap price.
b. Future rate.
c. Forward rate.
d. Strike price.
Q:
The swap market is available to:
a. Commercial banks.
b. Governments.
c. Multinational firms.
d. Tourists.
Q:
What financial instruments allow firms to obtain long-term foreign currency financing at lower cost than they can by borrowing directly?
a. Currency swaps
b. Forward rates
c. Foreign currency options
d. Future contracts
Q:
When the forward price of a currency ________ the spot price, the currency is said to sell at a ________.
a. Greater than, flat
b. Greater than, discount
c. Less than, discount
d. Less than, premium
Q:
The foreign exchange swap is a combination of spot and forward transactions of the same amount of the currency delivered in two different dates and is ________.
a. Completed when both parties pay a deposit.
b. Adjusted at the midpoint of the contract.
c. No longer used in financial markets.
d. Executed in a single step.
Q:
Forward-looking market instruments are used to:
a. Reduce traders exchange rate risk.
b. Manage the flow of imports and exports.
c. Adjust the price of tariffs.
d. Assist central banks in managing floating currencies.
Q:
In the options market, a put option gives the right to sell and a call option gives the right to buy currency.
Q:
The forward exchange swap is a process involving the same amount of three currencies.
Q:
Currency is sold at a forward discount when the spot price of a currency is less than the forward price.
Q:
When the forward price of a currency is equal to the spot price, it is sold at a forward premium.
Q:
The market where commercial banks buy and sell foreign currencies to be delivered at a future date is called the projection currency market.
Q:
Foreign currency options contracts that give the buyer the right to sell are called:
a. Call options.
b. Selling rights.
c. Put options.
d. Strike rights.
Q:
Which financial instrument provides a buyer the right (but not the obligation) to purchase or sell a fixed amount of currency at a prearranged price, within a few days to a couple of years?
a. Futures contract
b. Foreign currency option
c. Currency swap
d. Forward contract