Global Banking and Finance Exam Practice Tests
Course Introduction
Global Banking and Finance explores the dynamic and interconnected world of international financial systems, institutions, and markets. The course provides an in-depth examination of the structure and function of global banking, including commercial and investment banks, central banks, and regulatory bodies. Key topics include international financial instruments, cross-border capital flows, risk management, global financial crises, and the impact of technological innovations such as fintech on banking practices. Students will also evaluate the role of global governance, regulatory frameworks, and ethical considerations in shaping banking operations and financial stability across diverse economies. Through case studies and real-world examples, the course equips students with the analytical tools necessary to understand and navigate the complexities of contemporary global finance.
Recommended Textbook
International Finance Global 6th Edition by von Cheol Eun
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Page 2
Chapter 1: Globalization and the Multinational Firm
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Q1) If one country is twice the size of another country and is better at making almost everything than the benighted citizens of the smaller county,
A)the bigger country enjoys an absolute advantage.
B)the bigger country enjoys a relative advantage.
C)the bigger country enjoys a comparative advantage.
D)there is not enough information to make a determination.
Answer: A
Q2) Which is growing at a faster rate,foreign direct investment by MNCs or international trade?
A)FDI by MNCs.
B)International trade.
C)Since they are linked, they grow at the same rate.
D)None of the above.
Answer: A
Q3) Which state has a comparative advantage in wheat production in Case II?
A)South Dakota
B)North Dakota
C)Neither state
Answer: A
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Page 3
Chapter 2: International Monetary System
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Q1) On January 1,1999,an epochal event took place in the arena of international finance when
A)all EU countries adopted a common currency called the euro.
B)eight of 15 EU countries adopted a common currency called the euro.
C)nine of 15 EU countries adopted a common currency called the euro.
D)eleven of 15 EU countries adopted a common currency called the euro.
Answer: D
Q2) With regard to the current exchange rate arrangement between the U.S.and the U.K.,it is best characterized as
A)independent floating (market determined).
B)managed float.
C)currency board.
D)pegged exchange rate within a horizontal band.
Answer: A
Q3) Advantages of a fixed exchange rate include
A)reduction in exchange rate risk for businesses.
B)reduction in transactions costs.
C)reduction in trading frictions.
D)all of the above
Answer: D
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Chapter 3: Balance of Payments
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Sample Questions
Q1) The United States is considered
A)a net creditor nation.
B)a net debtor nation.
Answer: B
Q2) Current account includes
A)(i), (ii), and (iii) B)(ii), (iii), and (vii) C)(iv), (v), and (vii)
D)(i), (v), and (vi)
Answer: B
Q3) The U.S.Trade Deficit
A)is a capital account surplus.
B)is a current account deficit.
C)is both a capital account surplus and a current account deficit.
D)none of the above
Answer: C
Q4) A country that gives foreign aid to another country can be viewed as
A)importing goodwill from the latter.
B)exporting goodwill to the latter.
Answer: A
Page 5
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Chapter 4: Corporate Governance Around the World
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Q1) The major components of the Sarbanes-Oxley Act are:
A)accounting regulation-The creation of a public accounting oversight board charged with overseeing the auditing of public companies, and restricting the consulting services that auditors can provide to clients.
B)audit committee-The company should appoint independent "financial experts" to its audit committee.
C)internal control assessment-Public companies and their auditors should assess the effectiveness of internal control of financial record keeping and fraud prevention.
D)executive responsibility-Chief executive and finance officers (CEO and CFO) must sign off on the company's quarterly and annual financial statements.If fraud causes an overstatement of earnings, these officers must return any bonuses.
E)all of the above
Q2) In the United States,it is well documented that
A)boards dominated by their chief executives are prone to trouble.
B)public scrutiny can help improve corporate governance.
C)as public firms improve their corporate governance, the stock price goes up.
D)all of the above
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Page 6
Chapter 5: The Market for Foreign Exchange
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Q1) The AUD/$ spot exchange rate is AUD1.60/$ and the SF/$ is SF1.25/$.The AUD/SF cross exchange rate is _____.
A)0.7813
B)2.0000
C)1.2800
D)0.3500
Q2) At the wholesale level
A)most trading takes place OTC between individuals on the floor of the exchange. B)most trading takes place over the phone.
C)most trading flows over Reuters and EBS platforms.
D)most trading flows through specialized "broking" firms.
Q3) Suppose a bank customer with 1,000,000 wishes to trade out of euro and into Japanese yen.The dollar-euro exchange rate is quoted as $1.60 = 1.00 and the dollar-yen exchange rate is quoted at $1.00 = ¥120.How many yen will the customer get?
A)¥192,000,000
B)¥5,208,333
C)¥75,000,000
D)¥5,208.33
Q4) Using the table,what is the 6-month forward pound-yen cross-exchange rate?
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Chapter 6: International Parity Relationships and Forecasting Foreign Exchange Rates
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Q1) If you had 1,000,000 and traded it for USD at the spot rate,how many USD will you get?
Q2) If you had 1,000,000 and traded it for USD at the spot rate,how many USD will you get?
Q3) USING YOUR PREVIOUS ANSWERS and a bit more work,find the 1-year forward ASK exchange rate in $ per that that satisfies IRP from the perspective of a customer.
Q4) Generating exchange rate forecasts with the fundamental approach involves
A)looking at charts of the exchange rate and extrapolating the patterns into the future
B)estimation of a structural model
C)substituting the estimated values of the independent variables into the estimated structural model to generate the forecast
D)both b and c
Q5) USING YOUR PREVIOUS ANSWERS and a bit more work,find the 1-year forward BID exchange rate in $ per that that satisfies IRP from the perspective of a customer.
Q6) If you had 1,000,000 and traded it for USD at the spot rate,how many USD will you get?
Q7) There is (at least)one profitable arbitrage at these prices.What is it?
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Chapter 7: Futures and Options on Foreign Exchange
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Q1) Find the hedge ratio for a put option on $15,000 with a strike price of 10,000.In one period the exchange rate (currently S($/ )= $1.50/ )can increase by 60% or decrease by 37.5% .
A)-15/49
B)5/13
C)3/2
D)15/49
Q2) If the call finishes out-of-the-money what is your portfolio cash flow?
Q3) Calculate the current /£ spot exchange rate.
Q4) Which of the following is correct?
A)European options can be exercised early.
B)American options can be exercised early.
C)Asian options can be exercised early.
D)All of the above
Q5) USING RISK NEUTRAL VALUATION find the value of the call (in pounds).
Q6) Find the dollar value today of a 1-period at-the-money call option on ¥300,000.The spot exchange rate is ¥100 = $1.00.In the next period,the yen can increase in dollar value by 15 percent or decrease by 15 percent.The risk free rate in dollars is i<sub>$</sub> = 5%; The risk free rate in yen is i<sub>¥</sub> = 1%.
Page 9
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Chapter 8: Management of Transaction Exposure
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Q1) A minor currency is
A)anything other than the "big six": U.S.dollar, British pound, Japanese yen, euro, Canadian dollar, and Swiss franc.
B)any currency that trades at less than one U.S.dollar.
C)any currency that is less than a $20 denomination.
D)none of the above
Q2) The current exchange rate is 1.25 = £1.00 and a British firm offers a French customer the choice of paying a £10,000 bill due in 90 days with either £10,000 or 12,500.
A)The seller has given the buyer an at-the-money put option on euro with a strike in pounds.
B)The seller has given the buyer an at-the-money put option on pounds with a strike in euro.
C)The seller has given the buyer an at-the-money call option on euro with a strike in pounds.
D)None of the above
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Chapter 9: Management of Economic Exposure
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Q1) Developing multiple production sites in a variety of countries,
A)can create an excess capacity problem.
B)can lead to underutilization of domestic plants.
C)can lead to domestic job losses.
D)all of the above
Q2) When exchange rates change,
A)this can alter the operating cash flow of a domestic firm.
B)this can alter the competitive position of a domestic firm.
C)this can alter the home currency values of a multinational firm's assets and liabilities.
D)all of the above
Q3) The exposure coefficient \(b = \frac { \operatorname { Cov } ( P , S ) } { \operatorname { Var } ( S ) }\) in the regression \(P = a + b \times S + e\) informs
A)how much of a foreign currency to sell forward.
B)the part of the variability of the dollar value of the asset that is related to random changes in the exchange rate.
C)captures the residual part of the dollar value variability that is independent of exchange rate movements.
D)how many call options to write.
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Chapter 10: Management of Translation Exposure
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Q1) When determining the functional currency,
A)if the sales prices for the foreign entity's products are generally not responsive on a short-term basis to exchange rate changes, but are determined more by local competition and government regulation, the local currency should be the functional currency.
B)if there is an active local market for the foreign entity's products the local currency should be the functional currency.
C)if factor of production costs for the foreign entity are primarily, and on a continuing basis, costs for components obtained from the parent's country the functional currency should be the home currency.
D)all of the above
Q2) The "functional currency" is defined in FASB 52 as
A)the currency of the primary economic environment in which the entity operates.
B)the currency in which the MNC prepares its consolidated financial statements.
C)a currency that is not the parent firm's home country currency.
D)both b and c
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12
Chapter 11: International Banking and Money Market
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Q1) Banking tends to be
A)a low marginal cost industry.
B)a high marginal cost industry.
C)a constant average cost industry.
D)none of the above
Q2) 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.
D)none of the above
Q3) 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
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Page 13
Chapter 12: International Bond Market
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Sample Questions
Q1) A global bond issue denominated in U.S.dollars and issued by U.S.corporations
A)trade as Eurobonds overseas.
B)trade as domestic bonds in the U.S.domestic market.
C)both a and b
D)none of the above
Q2) A 1-year,4 percent pound denominated bond sells at par.A comparable risk 1-year,5.5 percent pound/dollar dual-currency bond pays $2,000 at maturity per £1,000 of face value.It sells for £900.What is the implied direct $/£ exchange rate at maturity?
A)£0.4405/$1.00
B)$1.2048/£1.00
C)$2.2701/£1.00
D)$2.0000/£1.00
Q3) In terms of the types of instruments offered,
A)the Yankee bond market has been more innovative than the international bond market.
B)the international bond market has been much more innovative than the U.S.market.
C)the most innovations have come from Milan, just like any other fashion.
D)none of the above
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Chapter 13: International Equity Markets
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Q1) In general if an investment
A)has poor liquidity it should offer investors a liquidity premium.
B)can be sold fairly quickly at a fair price, it has good liquidity.
C)both a and b
D)none of the above
Q2) As a measure of "liquidity",
A)generally, the lower the turnover, the greater the liquidity of a secondary stock market.
B)generally, the higher the turnover, the greater the liquidity of a secondary stock market.
C)the more a financial asset gurgles when shook the greater the liquidity.
D)none of the above
Q3) The advantages of a market order include the fact that
A)you are pretty much guaranteed that your order will be executed (assuming that there are willing buyers and sellers).
B)a market order typically has lower commissions than a limit order.
C)market orders increase your liquidity.
D)both a and b
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15
Chapter 14: Interest Rate and Currency Swaps
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Q1) Explain how firm A could use the forward exchange markets to redenominate a 2-year $60m 6% USD loan into a 2-year pound denominated loan.
Q2) Consider the borrowing rates for Parties A and B.A wants to finance a $100,000,000 project at a FIXED rate.B wants to finance a $100,000,000 project at a FLOATING rate.Both firms want the same maturity,in 5 years.
\[\begin{array} { | c | c | l | }
\hline \text { Firm } & \text { Fixed Rate } & \text { Floating } \\
\hline \mathrm { A } & \$ 10.3 \% & \text { Prime } + 1 \% \\
\hline \mathrm { B } & \$ 8.9 \% & \text { Prime } + 1 / 2 \% \\
\hline
\end{array}\] Construct a mutually beneficial INTEREST ONLY swap that makes money for A,B,and the swap bank IN EQUAL MEASURE.
Q3) Explain how firm A could use the forward exchange markets to redenominate a 2-year $60m 6% USD loan into a 2-year pound denominated loan.
Q4) Explain how firm A could use the forward exchange markets to redenominate a 2-year $60m 7% USD loan into a 2-year euro denominated loan.
Q5) What would be the interest rate?
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Page 16
Chapter 15: International Portfolio Investment
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Q1) Hedge fund advisors typically receive a management fee,often __________ of the fund asset value as compensation,plus performance fee that can be 20-25 percent of capital appreciation.
A)1 to 2 percent
B)10 to 20 basis points
C)10 percent
D)None of the above
Q2) Is it reasonable to conclude that your portfolio is on the efficient frontier? If not,then prove your point by finding just one portfolio weighting between A and B that offers more return with less risk.If you think it is on the efficient frontier,why do you think this? No points for guessing.
Q3) Calculate the euro-based return an Italian investor would have realized by investing 10,000 into a £50 British stock.One year after investment,the stock pays a £1 dividend,and sells for £54 the exchange rate has changed from 1.25 per pound to 1.30 per pound,although he sold £10,000 forward at the forward rate of 1.28 per pound.
Q4) Find the expected return of a portfolio with half invested in A and half invested in B.
Q5) Find the Global Minimum Variance Portfolio.
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Page 17
Chapter 16: Foreign Direct Investment and Cross-Border Acquisitions
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Q1) In 1992,the Enron Development Corporation,a subsidiary of the Houston-based energy company,signed a contract to build the largest-ever power plant in India,requiring a total investment of $2.8 billion.After Enron had spent nearly $300 million,the project was canceled by Hindu nationalist politicians in the Maharashtra state where the plant was to be built.Which of the following is true?
A)Upon the news release of the project cancellation, Enron's share price fell immediately by about 10 percent.
B)In the process of structuring the deal, Enron made a profound political miscalculation: Instead of waiting for the next election results, Enron rushed to close the deal and began construction, apparently believing that a new government would find it difficult to unwind the deal when construction was already under way.
C)Enron had the last laugh, however when they went bankrupt and left the power plant unfinished.
D)All of the above
Q2) Cross-border acquisitions are generally found to be synergy-generating corporate activities.
A)True
B)False
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Chapter 17: International Capital Structure and the Cost of Capital
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Q1) Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 5.
A)3/4
B)7/9
C)4/5
D)9/11
E)5/6
Q2) Solve for the weighted average cost of capital: \(14.20 \% \quad K _ { l } =\) cost of equity capital for a leveraged firm
\(7 / 9 \quad \lambda =\) debt-to-total-market-value ratio
\(8.0 \% \quad i =\) before-tax borrowing cost
\(40.0 \% \tau =\) marginal corporate income tax rate
A)7.00%
B)6.89%
C)6.73%
D)6.67%
E)6.57%
Q3) In the real world,does the cost of capital differ among countries?
A)Yes
B)No
C)None of the above
Page 19
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Chapter 18: International Capital Budgeting
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Q1) The "incremental" cash flows of a capital project is calculated by using:
A)(i), (ii), and (iii)
B)(ii), (iv), and (vi)
C)(i), (iii), (v), and (vii)
D)(iv), (v), (vi), and (vii)
Q2) What should Strik-it-Rich's management do?
Q3) When using the APV methodology,what is the NPV of the depreciation tax shield?
A)$32,051.52
B)$25,777.35
C)$22,794.65
D)$97,152.98
E)None of the above
Q4) Compute the NPV at the current price of gold.Hint: think of the gold mine as a perpetuity.
Q5) What is CF5 in dollars?
Q6) Using your results to the last question,make a recommendation vis-à-vis when to buy the bond.
Q7) Your banker quotes the euro-zone risk-free rate at i<sub> </sub> = 6% and the British risk free rate at i<sub>£</sub> = 6%.Find the value of the option and thereby the project.
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Chapter 19: Multinational Cash Management
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Q1) Simplify the following set of intra company cash flows for this Swiss Firm. Consider the following exchange rates.
Q2) Find the net cash flow in (out of)the German affiliate.
A)$55,000 in
B)$15,000 out
C)$0 in or out
D)$40,000 out
E)None of the above
Q3) The U.S.IRS allows transfer prices to be set using the resale price method.This method requires
A)finding the price that an unrelated willing seller would accept from an unrelated willing buyer.
B)the price at which the good is resold by the distribution affiliate is reduced by an amount sufficient to cover overhead costs and a reasonable profit.
C)an appropriate profit is added to the cost of the manufacturing affiliate.
D)financial models and econometric techniques.
Q4) Using your results to the last question,use bilateral netting to simplify.
Q5) Using your results to the last question,use bilateral netting to simplify.
Q6) Using your results to the last question,use bilateral netting to simplify.
Page 21
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Chapter 20: International Trade Finance
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Q1) Determine the amount the exporter will receive if he holds the B/A until maturity.
Q2) 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.
D)none of the above
Q3) Determine the amount the exporter will receive if he holds the B/A until maturity.
Q4) Determine the amount the exporter will receive if he holds the B/A until maturity.
Q5) Assume the time from acceptance to maturity on a $5,000,000 banker's acceptance is 90 days.Further assume that the importing bank's acceptance commission is 1.5 percent and that the market rate for 90-day B/As is 6.0 percent.Calculate the amount the exporter will receive if he holds it to maturity.
A)$4,981,750
B)$4,906,250
C)$4,009,375
D)none of the above
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Chapter 21: International Tax Environment and Transfer
Pricing
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Q1) Capital import neutrality
A)is the criterion that an ideal tax should be effective in raising revenue of the government and not have any negative effects on the economic decision-making process of the taxpayer.
B)requires that taxable income is taxed in the same manner by the taxpayer's national tax authority regardless of where in the world it is earned.
C)implies that the tax burden a host country imposes on the foreign subsidiary of the MNC should be the same regardless of which country the MNC is incorporated and the same as that placed on domestic firms.
D)none of the above
Q2) Many countries have tax treaties with one another.These generally specify
A)the withholding tax rate applied to various types of passive income.
B)that withholding tax rates imposed through tax treaties are bilateral.
C)the two countries agree to impose the same tax rate on the same category of income.
D)all of the above
Q3) An income tax is a direct tax
A)True
B)False
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