International Finance Practice Exam
Course Introduction
International Finance explores the financial dynamics that operate between countries, focusing on foreign exchange markets, international monetary systems, and cross-border capital flows. The course examines topics such as exchange rate determination, international financial institutions, risk management in an international context, and the impact of global economic policies on corporate financial decisions. Students will analyze real-world case studies to understand challenges multinational firms face, including currency exposure, hedging strategies, and international investment considerations, equipping them with the tools to navigate the complex world of global finance.
Recommended Textbook
Money Banking and Financial Markets 3rd Edition by Stephen
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Page 2
G. Cecchetti
Chapter 1: An Introduction to Money and the Financial System
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Sample Questions
Q1) If the U.S.Supreme Court ruled that states could no longer require people to have auto insurance, do you think most people would cancel their policies? Explain.
Answer: Probably not.Auto insurance falls under the principle that risk requires compensation.For most people the additional risk they would face of driving without insurance exceeds the cost of the insurance, so they are better off purchasing auto insurance to reduce their risk.
Q2) The central bank of the United States is:
A)The Bank of America
B)The Federal Reserve System
C)The U.S.Treasury
D)Citibank
Answer: B
Q3) The primary function of central banks is to:
A)Increase risk and volatility to increase compensation
B)Control inflation and help reduce business cycle fluctuations
C)Increase the uncertainty that firms face in making investment decisions
D)Eliminate the need for banks to collect financial information
Answer: B
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Chapter 2: Money and the Payments System
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Sample Questions
Q1) Suppose that in a barter economy Tom bakes bread and Hans produces chocolates.Tom wants chocolates but Hans doesn't like bread, so Hans is unwilling to trade with Tom.Tom's problem is an example of which problem associated with a barter system?
A)Too much specialization
B)Not enough prices
C)The law of diminishing returns
D)The double coincidence of wants problem
Answer: D
Q2) Money as a means of payments refers only to:
A)Actual currency
B)Coins and currency
C)Coins, currency and credit cards
D)Anything that is generally accepted as payment for goods and services
Answer: D
Q3) What is included in M2 that is not included in M1?
Answer: Small denomination time deposits, plus Savings Deposits and Money Market Deposit Accounts and Retail Money Market Mutual Fund Shares.
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4
Chapter 3: Financial Instruments, Financial Markets, and Financial Institutions
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Sample Questions
Q1) Which of the following statements is most correct?
A)Financial intermediaries are banks
B)A bank is a financial intermediary
C)Financial intermediaries are insurance companies
D)Financial intermediaries are essential to direct finance
Answer: B
Q2) A futures contract is an example of:
A)A derivative instrument
B)An instrument used solely by financial institutions
C)A high-risk security that will only have value if certain events occur
D)A contract that is traded but is not a financial instrument
Answer: A
Q3) The primary use of derivative contracts is:
A)For IRA and other pension plans since they only have value well into the future
B)To shift risk among investors
C)For investors seeking a greater return by taking greater risk
D)To add to the profits an investor obtains through information asymmetry
Answer: B
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Chapter 4: Future Value, Present Value, and Interest Rates
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Sample Questions
Q1) Using the rule of 72, determine the approximate time it will take $1000 to double given the following interest rates.
a) 5.5%
b) 10.0%
c) 30.0%
d) 2.0%
e) 4.5%
Q2) What will be the amount owed at the end of one year if a borrower charges $100 on his/her credit card and doesn't make any payments during the year (assume the interest rate is 1.5% per month)?
Q3) A monthly growth rate of 0.5% is an annual growth rate of:
A)6.00%
B)5.00%
C)6.17%
D)6.50%
Q4) Higher savings usually requires higher interest rates because:
A)Everyone prefers to save more instead of consuming
B)Saving requires sacrifice and people must be compensated for this sacrifice
C)Higher savings means we expect interest rates to decrease
D)Of the rule of 72
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Chapter 5: Understanding Risk
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Sample Questions
Q1) If an investment will return $1,500 half of the time and $700 half of the time, the expected value of the investment is:
A)$1,250
B)$1,050
C)$1,100
D)$2,200
Q2) When the home construction industry does poorly due to a recession, this is an example of:
A)Systematic risk
B)Idiosyncratic risk
C)Risk premium
D)Unique risk
Q3) The fact that over the long run the return on common stocks has been higher than that on long-term U.S.Treasury bonds is partially explained by the fact that:
A)A lot more money is invested in common stocks than U.S.Treasury bonds
B)There are regulations on the interest rates U.S.Treasury bonds can offer
C)The risk premium is higher on common stocks
D)Risk-averse investors buy more common stock
Q4) Why isn't it correct to say that people who are risk averse avoid risk?
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Chapter 6: Bonds, Bond Prices, and the Determination of Interest Rates
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Sample Questions
Q1) The yield on a discount basis:
A)Will overstate the return on a Treasury bill versus using yield to maturity since they are sold at discounts
B)Will understate the return on Treasury bills versus yield to maturity since they are sold at premiums
C)Will understate the return on Treasury bills versus yield to maturity since they are sold at discounts
D)Is the same as yield to maturity
Q2) If the annual interest rate is 5% (.05), the price of a one-year Treasury bill per $100 of face value would be:
A)$95.00
B)$97.50
C)$95.24
D)$96.10
Q3) Many people are worried that, with the growing number of people that will be retiring in the U.S.over the next 40 years, the Social Security System will need to borrow large amounts of money.If we assume that Social Security taxes and the current eligibility age remain constant, explain the likely impact this will have on bond markets.
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Chapter 7: The Risk and Term Structure of Interest Rates
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Sample Questions
Q1) Which of the following assigns widely followed bond ratings?
A) The Federal Reserve
B) The U.S. Treasury
C) The New York Stock Exchange
D) Standard & Poor's
Q2) The yield curve for U.S. Treasury securities allows us to draw the following conclusions, except that:
A) Long-term yields tend to higher than short term yields
B) Interest rates of different maturities tend to move together
C) Long-term rates tend to equal short-term rates
D) Yields on short-term securities are more volatile than yields on long-term bonds
Q3) When the growth rate of the economy slows we would expect:
A) The risk to increase for U.S. Treasury securities
B) The risk spread to increase more between U.S. Treasury Securities and Aaa securities than between Aaa and Baa securities
C) The risk spread to increase more between Aaa and Baa securities than U.S. Treasuries and Aaa securities
D) Investors to purchase more junk bonds in search of a higher yield
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Chapter 8: Stocks, Stock Markets, and Market Efficiency
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Sample Questions
Q1) The stock market bubble of the late 1990's and early 2000:
A)Saw Internet and computer technology companies over-invest.
B)Saw an efficient allocation of resources toward the high-growth computer/Internet sector.
C)Was a good example of the theory of efficient markets.
D)Was an example that not all bubbles burst.
Q2) What price would an individual be willing to pay today for a stock that is expected to sell for $100 two years from now and which pays an annual dividend that is $6.00? Assume the individual has a discount rate of 8% (0.08).
Q3) Explain why the willingness to purchase stocks is influenced heavily by shareholders' legal rights.
Q4) Consider the effect of business cycles on bondholders versus stockholders.We expect that business cycles will affect:
A)Bondholders and stockholders about the same
B)Bondholders more since the amount they receive depends on profits
C)Stockholders more since they are residual claimants
D)Bondholders more since they do not have any claim to property
Q5) Is the Efficient Markets Hypothesis (EMH) responsible for the financial crisis of 2007-2009?
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Chapter 9: Derivatives: Futures, Options, and Swaps
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Sample Questions
Q1) On the settlement date of a futures contract:
A)The future's price is always above the price of the underlying asset.
B)The future's price is always below the price of the underlying asset.
C)The future's price is equal to the price of the underlying asset.
D)The future's price may be above or below the price of the underlying asset but not equal to it.
Q2) Marking to market is a process that:
A)Involves a transfer of risk.
B)Ensures that the buyers and sellers receive what the contract promises.
C)Always requires the sellers of contracts to transfer funds to the buyers of contracts.
D)Buyers and sellers can request for an additional fee when the contract is created.
Q3) A put option described as out of the money would find:
A)The strike price is below the market price of the stock.
B)The market price of the stock and the strike price are equal.
C)The market price of the stock is below the strike price.
D)The option has expired.
Q4) Explain the popularity of options in the sense of the potential gains and losses they offer.
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11
Chapter 10: Foreign Exchange
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Sample Questions
Q1) The same laptop computer cost $2,000 in the United States, 220,000 Japanese yen, \(\le\) 1,300 British pounds, and 1900 in Germany.If the law of one price holds, what are the yen/$; \(\le\)/$ and /$ exchange rates?
Q2) The theory of purchasing power parity says:
A)The real exchange rate is always greater than one
B)A dollar should buy the same goods no matter where in the world you go
C)The dollar price of a basket of goods in the U.S.should equal the yen price of a basket of goods in Japan
D)The real exchange rate is always less than one
Q3) Considering the foreign exchange market, identify at least four causes for a decrease in the demand for dollars.
Q4) Assuming the law of one price, explain what the exchange rate between U.S.dollars and yen has to be if the price of steel in Japan is 15,000 yen per ton and the price in the U.S.is $125 per ton (assume no transaction costs).
Q5) Using a model of supply and demand for the dollar-pound market, where the horizontal axis is labeled quantity of British pounds, explain what happens when Americans have an increased demand for British automobiles.
Q6) Briefly describe the foreign exchange market.
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Chapter 11: The Economics of Financial Intermediation
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Sample Questions
Q1) A borrower who obtains funds from a lender to purchase additional inventory but uses the funds to finance a trip to Las Vegas for a weekend of gambling at the opening of a new casino is an example of:
A)The problem of adverse selection
B)The free-rider
C)The moral hazard problem
D)Lax government regulation
Q2) One reason financial intermediaries earn profits is because:
A)Individuals are not aware of the true cost of using an intermediary
B)Financial intermediaries are charging for services people do not value
C)Individuals are willing to pay for the reduction in transaction costs financial intermediaries provide
D)They raise the cost of transactions and pass these higher costs on to customers
Q3) What is the difference between economies of scale and economies of scope? Provide an example of each that pertains to financial institutions.
Q4) Please explain how Federal Deposit Insurance (FDIC) could potentially create a moral hazard for the managers of deposit institutions.
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Chapter 12: Depository Institutions: Banks and Bank Management
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Sample Questions
Q1) Banks tend not to hold a lot of excess reserves because:
A)Regulators penalize banks that have too much in excess reserves
B)Reserves present a large opportunity cost in the form of foregone interest
C)Holding excess reserves will increase a bank's leverage
D)They can always use the funds to buy stock
Q2) A bank's reserves include:
A)U.S.Treasury bills
B)Currency in the bank but not currency in the ATM machines
C)The bank's deposits at the Federal Reserve
D)U.S.Treasury bills and currency in the bank
Q3) If a bank's return on equity remains constant, but the ratio of bank assets to bank capital decreases:
A)The bank's return on assets must have increased
B)The bank's return on assets must have decreased
C)The bank's assets and capital must have increased by the same percent
D)The bank must be unprofitable
Q4) One of the cash items included on the asset side of banks' balance sheets is reserves.What makes up reserves and what is their purpose?
Q5) What is the equation that reflects a bank's balance sheet?
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Chapter 13: Financial Industry Structure
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Sample Questions
Q1) Lloyd's of London has a reputation for insuring:
A)Only low risk stable enterprises
B)Unique and sometimes very odd situations
C)Only physical structures to minimize the risks to their underwriters
D)Only marine-related risks
Q2) With the U.S.Social Security System, the risk of funding the system rests on:
A)The current workers
B)The retirees
C)The federal government
D)The Social Security Administration
Q3) The gap between LIBOR and the expected Federal Reserve policy interest rate provides a key measure of which of the following:
A)the direction of movement of the Euro relative to the US dollar on the foreign exchange market
B)the persistence and intensity of the liquidity crisis
C)the expected length of a coming global recession
D)the movement of the US stock market
Q4) In what way(s) can a pension plan be seen as the opposite of life insurance?
Q5) Explain why anti-branching laws often created credit crunches that slowed economic growth.
Page 15
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Chapter 14: Regulating the Financial System
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Sample Questions
Q1) Explain how bank regulators seem to face a bit of a paradox regarding preventing monopoly power by banks and spurring competition.
Q2) Explain why depository institutions receive a disproportionate amount of attention from government regulators (compared to most other industries).
Q3) What potential problems are created by regulatory competition?
Q4) In today's world, the goal of financial stability means:
A)No institution should fail
B)Competition should be eliminated
C)Preventing large-scale financial catastrophes
D)Creating one mega regulatory agency
Q5) The first test of the Federal Reserve as lender of last resort occurred with the: A)Attack on Pearl Harbor by the Japanese
B)Widespread failures of Savings and Loans in the 1980's
C)Introduction of flexible exchange rates in the U.S.in 1971
D)Stock market crash in 1929
Q6) The FDIC used to charge all banks the same rate for insurance on deposits.From what you have learned, what problems did this create for not only the FDIC but for well run banks?
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Chapter 15: Central Banks in the World Today
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Q1) Many governments give their central bank control over issuing currency because:
A)Printing currency can be profitable for a government so government officials may have a strong incentive to print too much
B)Having large amounts of currency can lead to lower rates of inflation
C)Central banks use the profits from issuing currency to finance their operations
D)The only way to distribute currency to banks is through the central bank
Q2) One use of a monetary policy framework is to clarify all of the following except:
A)The likely response when policy goals are in conflict with one another
B)The goal that is currently receiving the most attention
C)How goals will be measured
D)Why zero inflation is not desirable
Q3) The rationale for the existence of central banks is mainly that:
A)Financial systems are inherently stable
B)They are needed for the supervision of banks
C)Financial intermediation cannot occur without a central bank
D)Financial markets are prone to periods of extreme volatility
Q4) What are the three main functions a central bank performs in its role as a banker's bank?
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Chapter 16: The Structure of Central Banks: the Federal
Reserve and the European Central Bank
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Q1) Criteria used to judge a central bank's independence include each of the following, except:
A)Budgetary independence
B)Long terms for members
C)Cabinet or ministry level of authority
D)Irreversible decisions
Q2) Considering state chartered banks:
A)Most elect to join the Federal Reserve System
B)Those with assets exceeding $100 million must join the Federal Reserve System
C)Most elect not to join the system
D)Only those that join the system must abide by reserve requirements
Q3) Which of the books used at the FOMC meetings the Board staff's economic forecast for the next few years?
A)The blue book
B)The beige book
C)The green book
D)Both the beige and blue books
Q4) Why can't two Governors of the Fed come from the same district and does this limitation make sense today?
Q5) What are the three branches that make up the Federal Reserve System?
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Chapter 17: The Central Bank Balance Sheet and the Money Supply Process
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Q1) Which of the following statements is most correct?
A)During the 1990s Americans held more cash than Europeans but the amount of cash Americans held per resident decreased
B)During the 1990s the amount of cash held by Americans increased and we hold more cash per resident than Europeans
C)Americans hold less cash per resident than Europeans and the amount of cash held by American increased during the 1990s
D)Americans hold less cash than Europeans and the amount of cash held by American per resident decreased during the 1990s
Q2) If the central banks of most countries do not set the exchange rates, why do they hold foreign exchange as one of their assets?
Q3) Compared to the Federal Reserve, the European Central Bank (ECB) has:
A)A smaller percentage of its liabilities in currency
B)A larger percentage of its liabilities in currency
C)About the same percentage of its liabilities in currency
D)Fewer total liabilities because the ECB does not issue currency
Q4) What was the main reason the Fed stopped announcing growth targets for money aggregates in the early 2000s?
Page 19
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Chapter 18: Monetary Policy: Stabilizing the Domestic Economy
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Q1) For the European Central Bank (ECB), the equivalent of the FOMC's target federal funds rate is the:
A)European target discount rate
B)European target federal funds rate
C)Target refinancing rate
D)London Inter-Bank Offer Rate
Q2) Consider the objective of flying a jet form New York to Paris.After takeoff, a pilot would certainly check a few times to see if he or she is on course.Using this example, discuss why, at least in theory, intermediate monetary policy targets may be useful.
Q3) During the financial crisis of 2007 - 2009 it became difficult for the Fed to hit their target federal funds rate because:
A)of the number of bank failures
B)of the Federal government stimulus package
C)of the loss of liquidity in the interbank lending market
D)of the instability in the stock market
Q4) In 2001, the FOMC lowered the target federal funds rate eleven times, cutting the rate from 6½ percent to 1¾ percent.Why didn't the Fed just cut the rate by larger amounts early on?
Page 20
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Chapter 19: Exchange-Rate Policy and the Central Bank
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Q1) The benefits to a country from dollarization include each of the following, except:
A)A lower risk premium since inflationary finance is no longer a possibility
B)Greater and faster integration into world markets, increasing trade and investment
C)No risk of an exchange rate crisis
D)Increased revenue from seignorage
Q2) A lesson that policymakers should learn from the Argentinean experience with currency boards is:
A)Irresponsible politicians can undermine any monetary policy regime
B)A flexible exchange rate is always preferred to a pegged exchange rate
C)The only fixed exchange rate that works is the gold standard
D)They never work
Q3) The Bretton Woods System failed in 1971 due to:
A)High rates of inflation in the U.S
B)Greater mobility of capital across international borders
C)The desire on the part of participating countries to have an independent monetary policy
D)All of the reasons given are correct
Q4) Is the European Monetary Union a form of dollarization? Explain.
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Page 21
Chapter 20: Money Growth, Money Demand, and Modern Monetary Policy
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Q1) Equilibrium in the money market would be expressed by which of the following?
A)Ms = (1/V)Y
B)Ms =Md
C)Ms = (1/V)P
D)Md = (1/V)P
Q2) For many of the countries that made up the Soviet Union, the period immediately following the collapse of the Soviet Union in 1990 found these countries experiencing:
A)Rapid economic growth
B)Severe deflation
C)Rapid development of financial intermediaries
D)Extremely high rates of inflation
Q3) The velocity of money increases if:
A)Each unit of money is used more frequently
B)Each unit of money is used less frequently
C)More purchases are made
D)None of the above answers is correct; the velocity of money is constant
Q4) Professor Milton Friedman stated that "inflation is a monetary phenomenon." What did he mean by this statement and what is the basis for this assertion?
Q5) What factors can cause the portfolio demand for money to increase?
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Chapter 21: Output, Inflation, and Monetary Policy
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Q1) Which of the following would cause an increase in the potential output of a country?
A)An increase in the capital stock
B)A temporary decrease in exports
C)An increase in the money supply
D)A decrease in the labor force
Q2) If the monetary policy reaction curve were drawn with the nominal interest rate instead of the real interest rate on the vertical axis, would the slope be the same or how would it differ?
Q3) Output and inflation movements can arise from either demand or supply shifts.How can we tell them apart?
Q4) Businesses successfully lobby Congress into passing legislation that eliminates the minimum wage law.The impact of this change would:
A)Shift the short-run aggregate supply curve to the left
B)Make the long-run aggregate supply curve less vertical
C)Shift the short-run aggregate supply curve to the right
D)Make the short-run aggregate supply curve horizontal
Q5) What are the determinants of the potential output for an economy?
Q6) What are the conditions for long-run equilibrium?
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Chapter 22: Understanding Business Cycle Fluctuations
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Q1) Monetary policymakers can take advantage of the impact that positive inflation shocks have on output by shifting the:
A)Monetary policy reaction curve left
B)Monetary policy reaction curve right
C)Short-run aggregate supply curve to the left
D)Short-run aggregate supply curve to the right
Q2) Neutralizing demand shocks is easier in theory than in practice.Why?
Q3) Monetary policymakers face a tradeoff between:
A)The level of output and the rate of inflation
B)The volatility in output and the volatility in inflation
C)Low unemployment and high inflation
D)High unemployment and low inflation
Q4) Why can monetary policymakers neutralize demand shocks but not supply shocks?
Q5) An inflation shock that shifts the short-run aggregate supply curve upward means the economy's potential level of output will:
A)Increase
B)Not change
C)Decrease
D)Decrease only if monetary policymakers do not respond
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Chapter 23: Modern Monetary Policy and the Challenges
Facing Central Bankers
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Q1) If the target federal funds rate reaches zero:
A)The FOMC would run out of policy options
B)Monetary policy would no longer be of use
C)The FOMC would turn to unconventional measures, such as purchasing long-term securities
D)The FOMC would simply reset the target
Q2) How does adverse selection factor into explaining the reduced supply of loans when interest rates increase?
Q3) One of the limiting factors for using monetary policy is:
A)The central banks are limited in their ability to print money
B)Central banks are limited in their ability to make loans
C)There is a lower nominal-interest-rate bound of zero
D)The real interest rate cannot fall below zero
Q4) If the target federal funds rate reaches zero the FOMC:
A)Must stop purchasing securities since they cannot lower nominal rates below zero
B)Would likely shift their focus to purchasing longer-term securities
C)Would likely raise the required reserve rate
D)Would likely raise the discount rate
Q5) How did financial regulation affect bank lending in the 1980s?
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