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Chapter 3International Financial Markets

Specific Objectives

Describe the background and corporate use of the following international financial markets:- foreign exchange market- international money market- international credit market- international bond market, and- international stock markets

Outline

Motives for Using International Financial Markets• Basic reason: markets are imperfect (e.g., labor, taxes, etc.)• Motives for investing in foreign markets– economic conditions– exchange rate expectations– international diversification• Motives for providing credit in foreign markets– interest rates– exchange rate expectations– international diversification• Motives for borrowing in foreign markets– interest rates– exchange rate expectations

Foreign Exchange Market• Definition: the market where currencies are exchanged• History– gold standard (1876 – 1913)– instability (1914 – 1943)– Bretton Woods (1944 – 1973)– floating exchange rates (1973 – present)• Spot market

– allows for immediate exchange– average daily trading of $1.5 trillion– many foreign transactions do not require an exchange of currencies but allow a given currency to cross country borders• Spot market structure– hundreds of banks facilitate foreign exchange transactions– the top 20 banks handle about 50% of transactions– similar quotes facilitated by arbitrage opportunities• Spot market liquidity– the more willing buyers and sellers there are, the more liquid a market is– a currency’s liquidity reflects the ease with which an MNC can obtain or sell that currency

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• Forward rate - the rate at which currencies will be exchanged at a future point in time– a contract between a firm and a bank to exchange currencies at a specified rate in a specified number of days– used by MNCs to hedge exchange rate exposure– the forward market for euros is very liquid because many MNCs take forward positions to hedge their future payments in euros• Customers look for – competitive quote– relationship with bank– speed of execution– advice about current market conditions– forecasting advice• Bid/ask spread – bid/ask spread of banks represent the differential between the bid and ask quotes and covers the cost involved in accommodating requests to exchange currencies• example: assume bid of $0.65 per Canadian dollar and ask of $0.70 per Canadian dollar; you exchange $1,000 for Canadian dollar and immediately convert it back to U.S. dollars– comparison of bid/ask spread among currencies• the spread will look smaller for currencies that have a smaller value• small retail transactions have a spread between 3 and 7%• wholesale transactions request by MNCs have a spread between .01 and .03%– factors that affect the spread• order costs (positive)• inventory costs (positive)• competition (negative)• volume (negative)• currency risk (positive)• Quotations– direct - $/unit of foreign currency– indirect - units of foreign currency/$• Cross exchange rates - the exchange rate between two foreign currencies• Currency futures - standard volume of a particular currency to be exchanged on a specific settlement date• Currency options - right but not obligation to buy (call) or sell (put) a currency

International Money Market• Origins and development– includes large banks around the world, such as J.P. Morgan– European money market• Eurocurrency market developed in the ‘60s and ‘70s• dollar deposits in banks in other countries are Eurodollars• growth due to 1968 U.S. regulations limiting foreign lending by U.S. banks• “Petrodollars” - dollar deposits by OPEC countries– Asian money market• Originally known as the Asian dollar market• emerged to accommodate needs of businesses using dollars for international trade• centered in Hong Kong and Singapore

International Financial Markets 29

• Standardizing global bank regulations– Single European Act (1987) allows capital to move freely within EEC countries and allows banks to expand freely within other EEC countries– Basel Accord (1988) - made capital requirements standard for 12 major industrialized countries– Basel II Accord – corrects existing inconsistencies• banks in some countries have required better collateral to back loans• accounts for operational risk• plans to require banks to provide more information to existing and prospective shareholders

International Credit Market• Eurocredit loans are loans of one year or longer maturity extended to MNCs by banks– interest rate risk motivates floating rate loans tied to LIBOR– loans are provided in the Eurocredit market• Syndicated loans– each bank participates in lending of large-volume transactions– lead bank responsible for negotiating terms and organizing group of banks

International Bond Market• MNCs issue international bonds for three reasons– may be able to attract stronger demand– the foreign currency may be widely used– financing in a foreign currency may reduce financing costs• A foreign bond is issued by a borrower foreign to the country where the bond is placed• Parallel bonds are issued in various countries and denominated in various currencies• Eurobond market– Eurobonds are bonds that are sold in countries other than the country of the currency denominating the bond– U.S. investment in foreign bonds: Interest Equalization Tax in 1963– foreign Investment in U.S. Bonds: 30% withholding tax before 1984• Antilles-based subsidiaries– features• bearer form, convertibility, few protective covenants– denominations• commonly denominated in a number of currencies• the U.S. dollar denominates 70 to 75% of Eurobonds– underwriting process accomplished through a multinational syndicate of investment banks– secondary market facilitated by Euro-clear

International Stock Markets• Yankee Stock - foreign stock issued in the U.S.– liquidity of U.S. market– size of U.S. market– American Depository Receipts (ADRs) - receipts representing a number of foreign shares that are deposited in a U.S. bank• Issuance of stock in foreign markets– listing on multiple exchanges - greater exposure and liquidity of stock• e.g., Coke is traded in U.S., Frankfurt, and Switzerland• U.S., Japan, and U.K. combined allow for around-the-clock trading

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– more U.S. firms are willing to list their stock in Europe because of the euro


Appendix 3Investing in International Financial Markets• Background on international stock exchanges– reduction in transaction costs has been facilitated by an increase in efficiency and ECNs– alliances between stock exchanges have facilitated cross-listing– reduction in information costs has been facilitated by the Internet– exchange rate risk can be measured by considering the return on the stock and the percentage change in the exchange rate• International stock diversification– investors can benefit by diversifying internationally– limitations of international diversification• correlations between stock indexes have increased• conversion to the euro• market movements during the market crash of 1987 and the Asian Crisis illustrate increased correlations between currencies– valuation of foreign stocks• use the dividend discount model and adjust for expected exchange rate movements• use the price-earnings method and also consider exchange rate effects– methods used to invest internationally• direct purchases of foreign stocks• investment in MNC stocks• ADRs• WEBS• international mutual funds– exchange rate risk of foreign stocks• can be reduced by taking short positions• hedging is difficult because the future amount of foreign currency is unknown, because investors may extend their initially planned investment horizon, and because forward rates for currencies that are less widely used may not exist– why perceptions of stock valuation differ among countries• required rate of return• exchange rate risk• taxes

Key Terms Matching

In the following two exercises, place a letter from the right column with the correct number in the left column.

Part I:

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Key Term Definition1. American Depository

Receipts (ADRs)____ a. a 1944 agreement between countries calling for fixed

exchange rates between currencies; used from 1944 through 1971

2. Arbitrage____ b. a 1988 accord between 12 countries to standardize banks’ capital requirements across countries; the resulting capital ratios are computed using risk-weighted assets

3. Ask Quote____ c. a contract specifying a standard volume of a particular currency to be exchanged on a specific future date

4. Basel Accord____ d. an international bond sold in countries other than the country represented by the currency denominating it

5. Bid Quote____ e. certificates representing bundles of stock6. Bretton Woods

Agreement____ f. loans of one year or longer extended by banks to MNCs

7. Cross Exchange Rate____

g. the act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making a riskless profit

8. Currency Call Option____

h. financial institutions in this market serve MNCs by accepting deposits and offering loans in a variety of currencies

9. Currency Forward Contract____

i. the exchange rate between two foreign currencies

10. Currency Put Option____

j. the market in which Eurocredit loans are extended

11. International Money Market____

k. the price for which a bank offers to buy a currency

12. Eurobond____ l. the price for which a bank offers to sell a currency13. Eurocredit Loans____ m. the right to buy a specific currency at a specific price within a

specified period of time14. Eurocredit Market____ n. the right to sell a specific currency at a specific price within a

specified time period

Part II:

Key Term Definition1. Eurocurrency

Market____ a. a 1971 agreement between major nations to devalue the U.S.

dollar relative to the major currencies 2. Eurodollars____ b. a group of banks providing the necessary funding for large

loans in the international credit market3. Floating Rate Notes

(FRNs)____ c. a stock offering by a non-U.S. corporation or government in

the United States4. Foreign Bond____ d. a tax imposed by the U.S. government in 1963 in order to

discourage U.S. investors from investing in foreign securities5. Gold Standard____ e. an exchange rate system under which each currency is

convertible into gold at a specified rate; used from 1876 through 1913

6. Interbank Market____ f. an international bond issued by a borrower foreign to the country where the bond is placed

7. Interest Equalization Act (IET)____

g. dollar deposits by Organization of Petroleum Exporting Countries (OPEC) member countries


8. London Interbank Offer Rate (LIBOR)____

h. Eurobonds with a variable interest rate provision that adjusts the coupon rate over time according to prevailing market rates

9. Petrodollars____ i. the exchange rate used for immediate exchange of currencies10. Smithsonian

Agreement____ j. the market for Eurodollars; this term is not used as often as in

the past 11. Spot Rate____ k. the interest rate commonly charged for loans between banks12. Syndicate____ l. the market in which banks trade currencies among each other13. Yankee Stock

Offering____ m. U.S. dollar deposits placed in banks located in other countries

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Answers to Key Terms Matching

Part I:

1. e2. g3. l4. b5. k6. a7. i

8. m9. g10. n11. h12. d13. f14. j

Part II:

1. j2. m3. h4. f5. e6. l7. d

8. k9. m10. a11. i12. b13. c

Summary of Formulas

1) Bid/ask spread

(Ask rate – Bid rate)/Ask rate

2) Calculating the price of an ADR (ADRs are convertible into one share of stock)

3) Calculating the price of an ADR (ADRs are convertible into more than one share of stock)

4) Factors affecting the bid/ask spread

Spread = f(Order costs, Inventory costs, Competition, Volume, Currency risk) + + - - +

5) Foreign currency received when converting home currency

Amount in home currency to be Converted/Price charged by bank per unit of foreign currency

6) Indirect quotation

Indirect quotation = 1/Direct quotations


7) Home currency received when converting foreign currency

Amount in foreign currency to be converted × Price paid by bank per unit of foreign currency

8) Return to a U.S. investor from investing in a foreign stock:

9) Sensitivity of MNC returns to specific international stock markets

10) Value of 1 unit of Currency A in units of Currency B (cross exchange rate)

Value of Currency A in $Value of Currency B in $

11) Variance of a stock portfolio

Definitional Problems

1. The existence of ______________ is a primary reason for the internationalization of financial markets.

2. Among the motives for investing in foreign markets are foreign economic conditions, ______________, and international diversification.

3. The level of foreign _____________ and exchange rate expectations are both motives for lending and/or borrowing in foreign markets.

4. The market in which currencies are exchanged is generally known as the _________________.

5. The market in which the immediate exchange of currencies takes place is known as the ____________ market.

6. The market in which the future exchange of currencies takes place is known as the ____________ market.

7. An arrangement between countries known as the ____________ Agreement called for fixed exchange rates between currencies in 1944.

8. In 1971, the dollar appeared to be overvalued; thus, as laid out in the Smithsonian Agreement, the major nations decided to __________ the dollar relative to the major currencies.

9. The purchase and sale of currencies between banks takes place in the ____________ market.

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10. The ____________ is intended to cover a bank’s cost in accommodating requests to exchange currencies.

11. A bank will buy a foreign currency at the _________ quote and will sell a foreign currency at the ___________ quote.

12. The exchange rate at which currencies will be exchanged at a future point in time is known as the _________________.

13. The increase in international business has resulted in the development of a(n) _______________, in which financial institutions accept deposits from MNCs and offer loans in a variety of currencies.

14. The _________ Accord is intended to correct some inconsistencies still existing as a result of Basel Accord.

15. A stock offering of non-U.S. stock in the U.S. is known as a(n) ___________ stock offering.

16. Rather than directly issuing stock in the U.S. to obtain equity funds, foreign corporations can issue _________________, which are certificates representing underlying bundles of stock.

17. The value of a foreign currency expressed in dollars is known as a(n) __________ quotation, while the value of a foreign currency expressed in units of foreign currency per dollar is known as a(n) _______________ quotation.

18. A _____________________ expresses the amount of one foreign currency per unit of another foreign currency.

19. A ________________ contract is similar to a _______________ contract, but the former specifies a standard volume of a particular currency to be exchanged on a specific settlement date, while the latter may be tailor-made.

20. A currency ___________ option provides the right, but not the obligation, to buy a specific currency at a specific price within a specific period of time.

21. A currency put option provides the right, but not the obligation, to __________ a specific currency at a specific price within a specific period of time.

22. The strike price is also known as the ____________ price.

23. U.S. dollar deposits placed in banks located in Europe and other continents are known as ___________________.

24. _____________ loans are loans of one year or longer extended by banks in the Eurocredit market.

25. The interest rate commonly charged for loans between banks is called the _________________.


26. There is a fine difference between a ____________ bond, which is issued by a borrower foreign to the country where the bond is placed, and a _____________, which is sold in countries other than the country represented by the currency denominating it.

27. To protect themselves against interest rate risk, issuers of Eurobonds have come to issue a special type of Eurobond, known as ________________.

28. _________ help to inform all traders about outstanding Eurobond issues for sale, thus allowing a more active secondary market.

29. _______________ are portfolios of stocks from various countries.

Answers to Definitional Problems

1. imperfect markets2. exchange rate expectations3. interest rates4. foreign exchange market5. spot6. forward7. Bretton Woods8. devalue9. interbank10. bid/ask spread11. bid; ask12. forward rate13. international money market14. Basel II15. Yankee

16. American Depository Receipts (ADRs)17. direct; indirect18. cross exchange rate19. futures; forward20. call21. sell22. exercise23. Eurodollars24. Eurocredit loans25. London Interbank Offer Rate (LIBOR)26. foreign; Eurobond27. floating rate notes (FRNs)28. Euro-clear29. International mutual funds

True/False Problems

1. The existence of imperfect markets has prevented the internationalization of financial markets.

2. Economic conditions, exchange rate expectations, and international diversification are all motives for investing in foreign markets.

3. It can be argued that a country’s currency may depreciate with high inflationary expectations, but the relationship between expected inflation and currency movements is not precise.

4. When lending in foreign markets, international diversification increases the probability of simultaneous bankruptcy across borrowers.

5. International diversification is a good risk-reduction technique for investment, but it may be less effective if the countries of concern tend to experience somewhat similar business cycles.

6. When extending credit in foreign markets, investors probably anticipate that the local currency will depreciate against their own; when borrowing in foreign markets, borrowers probably anticipate that the local currency will appreciate against their own currency.

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7. In 1914, when World War I began, the gold standard was implemented; it lasted until 1944, when exchange rates were fixed under the Bretton Woods Agreement.

8. Under the gold standard, each currency was convertible into gold at a specified rate, and the exchange rate between two currencies was determined by their relative convertibility rates per ounce of gold.

9. From 1944 until 1971, the Bretton Woods agreement called for exchange rates to remain within 1% of their previously established levels. However, the Smithsonian Agreement of 1973 allowed exchange rates to fluctuate within 5% of their previously established levels.

10. An investor engaging in a transaction whereby he or she contracts to purchase British pounds one year from now is an example of a spot market transaction.

11. The immediate exchange of currencies takes place in the spot market.

12. Besides considering the competitiveness of a bank’s quote, an investor frequently engaging in currency conversions and international trade will also consider the bank’s advice regarding foreign market conditions and exchange rate forecasts.

13. At any given point in time, a bank’s bid quote will be greater than its ask quote.

14. A forward contract is an agreement between a firm and a bank to exchange currencies at a specified rate (the forward rate) in a specified number of days.

15. An MNC with receivables in Japanese Yen purchases yen forward to hedge its exposure to exchange rate fluctuations. This is an example of how MNCs can use forward contracts to hedge their exposure.

16. Many MNCs use forward contracts.

17. If the forward rate were the same as the spot rate, and interest rates between two countries differed, it would be possible for astute investors to engage in arbitrage to earn virtually riskless profits.

18. An advantage of a forward contract for an MNC is that it can be tailored to accommodate the needs of the MNC.

19. The value of the IMF’s special drawing right (SDR) is based on the value of MNCs’ stock.

20. A cross exchange rate between two foreign currencies can easily be obtained with the two currencies’ exchange rates relative to the dollar.

21. An MNC frequently uses either forward or futures contracts to hedge its exposure to foreign receivables. To do so, the MNC can either sell the foreign currency forward or sell futures contracts.

22. A currency put option provides the right, but not the obligation, to buy a specific currency at a specific price within a specific period of time.


23. The price at which a currency may be bought or sold according to an option is known as the strike (or exercise) price.

24. U.S. dollar deposits in Europe are known as Eurodollars; U.S. dollar deposits in Latin America are known as Latinodollars.

25. The Asian money market is centered in Hong Kong and Singapore and consists of banks that accept deposits and make loans in various foreign currencies.

26. All loans in the international credit market are so large that they require the use of bank syndicates.

27. The Single European Act, which allowed banks established in an EEC country to expand into any other EEC country, and the Basel Accord, which called for risk-weighted bank capital ratios, prevented a trend toward increased globalization in the banking industry.

28. The LIBOR varies among currencies because the market supply of and demand for funds vary among currencies.

29. To avoid interest rate risk resulting from a mismatch of assets and liabilities, a bank may float its Eurocredit loan rate in accordance with the London Interbank Offer Rate (LIBOR).

30. Some institutional investors prefer to invest in international bond markets rather than their respective local markets when they can earn a higher return on bonds denominated in foreign currencies.

31. A foreign bond is a bond sold in countries other than the country represented by the currency denominating it; a Eurobond is issued by a borrower foreign to the country where the bond is placed.

32. If an MNC issues a variety of foreign bonds in various countries, these foreign bonds are specifically called parallel bonds.

33. Eurobond ratings are available for most issues, but there has been a tendency of the purchasers to ignore ratings in favor of a well-known name.

34. An American Depository Receipt (ADR) is a drawing right, and it is available only for U.S. stocks.

35. Foreign firms that issue stock in the U.S. through a Yankee stock offering are generally required to satisfy more stringent disclosure rules on their financial condition than domestic firms.

36. Most of the largest firms based in Europe have listed their stock on the Euronext market, which was created by the Amsterdam, Brussels, and Paris stock exchanges in 2000.

37. The international money market is frequently accessed by MNCs for short-term investment and financing decisions, while longer term financing decisions are made in the international credit market or the international bond market and in international stock markets.

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38. With an ECN, investors can place orders on their computers that are then executed by the computer system and confirmed through the Internet to the investor.

39. Alliances between stock exchanges have resulted in monopolies and have resulted in market segmentation.

40. Since stock market correlations become more pronounced during favorable market conditions, international diversification will be more effective during a downturn.

41. When using the price-earnings method to value foreign stocks, investors should still consider exchange rate effects.

42. ADRs in the U.S. are primarily traded on the over-the-counter (OTC) market.

43. One limitations of hedging exchange rate risk is that investors may decide to retain the foreign stock beyond the initially planned investment horizon.

44. Typically, a given stock will appear undervalued to investors from all countries at the same time.

45. Other things being equal, investors based in low-tax countries should value stocks lower.

Answers to True/False Problems

1. F2. T3. T4. F5. T6. F7. F8. T9. F10. F11. T12. T13. F14. T15. F16. T17. T18. T19. F20. T21. T22. F23. T

24. F25. T26. F27. F28. T29. T30. T31. F32. T33. T34. F35. T36. T37. T38. T39. F40. F41. T42. T43. T44. F45. F


Multiple Choice Problems

1. Which of the following is not mentioned in the text as a motive for investing in foreign markets?

a. Economic conditionsb. Interest rate levelsc. International diversificationd. Exchange rate expectationse. All of the above are mentioned in the text as motives.

2. Which of the following is not true regarding the decision to provide credit in foreign markets?

a. Creditors may consider supplying capital to countries whose currencies are expected to depreciate against their own.

b. Creditors may consider supplying capital to countries whose interest rates are expected to rise above their own (everything else constant).

c. Creditors can benefit from international diversification, which may reduce the probability of simultaneous bankruptcy across borrowers.

d. If the foreign countries targeted for the provision of credit tend to experience somewhat similar business cycles, diversification across countries will be less effective.

e. To the extent that inflation can cause depreciation of the local currency against others, high interest rates in the foreign country may be somewhat offset by a weakening of the local currency over the time period of concern.

3. Investors expecting the level of foreign interest rates to be __________ relative to their own would probably provide credit in foreign markets; borrowers expecting the level of foreign interest rates to be ___________ relative to their own would probably borrow in foreign markets.

a. High; highb. Low; lowc. Low; highd. High; lowe. None of the above

4. Investors expecting the foreign currency to __________ relative to their own would probably provide credit in foreign markets; borrowers expecting the foreign currency to ___________ relative to their own would probably borrow in foreign markets.

a. Appreciate; appreciateb. Depreciate; depreciatec. Appreciate; depreciated. Depreciate; appreciate

5. Which of the following is not true regarding the Bretton Woods Agreement?a. It called for fixed exchange rates between currencies.b. Governments intervened to prevent exchange rates from moving more than 1% above or

below their initially established levels.c. The agreement lasted from 1944 until 1971.d. Each country used gold to back its currency.e. All of the above are true regarding the Bretton Woods Agreement.

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6. The Smithsonian Agreementa. Devalued the U.S. dollar relative to the major currencies.b. Widened the boundaries within which exchange rates were allowed to fluctuate.c. Was a first step in letting market forces determine the appropriate price of a currency.d. a and b onlye. a, b, and c

7. The market in which the immediate exchange of currencies takes place is known as the _________ market.

a. Spotb. Forwardc. Futuresd. Eurocurrencye. Eurocredit

8. The market in which financial intermediaries transfer short-term funds from surplus units to deficit units is known as the _________ market.

a. Spotb. Forwardc. Futuresd. International moneye. International credit

9. The average daily foreign exchange trading by banks around the world is closest to $____________.

a. 600 billionb. 700 billionc. 1 trilliond. 1.3 trillione. 1.5 trillion

10. Which of the following is not a bank attribute important to customers in need for foreign exchange?

a. Number of foreign branchesb. Competitiveness of quotec. Speed of executiond. Advice about current market conditionse. Forecasting advice

11. Which of the following is not a possible bid/ask quotation for the Barbados dollar?a. $.50/$.51b. $.49/$.50c. $.52/$.51d. $.51/$.52e. All of the above are possible bid/ask quotations


The following information refers to questions 12 through 14.

Assume a bank’s bid rate for the Danish kroner (DKK) is $0.1875, while its ask rate is $0.1895. Assume you convert $1,000 to Danish kroner to take on your trip to Denmark. Immediately after conversion, a family emergency arises, and you are unable to go on your trip. Thus, you convert the Danish kroner back to dollars.

12. How many dollars will you have left after the two conversions?a. $1,000b. $998.37c. $989.45d. $500e. $998

13. How many Danish kroner will you receive when converting the dollars initially?a. 189.50b. 187.50c. 5,333.33d. 5,277.04e. 5,000

14. What is the bank’s bid/ask percentage spread?a. 1.06%b. 1%c. 2%d. 1.07%e. 0%

15. Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 60 days to be $.0090. How many dollars will you receive for the 5,000,000 yen 60 days from now if you sell yen forward?

a. $44,500b. $45,000c. $526 milliond. $47,500e. $556 million

16. Which of the following is probably not an example of the use of forward contracts by an MNC?

a. Hedging pound payables by selling pounds forwardb. Hedging peso receivables by selling pesos forwardc. Hedging yen payables by purchasing yen forwardd. Hedging peso payables by purchasing pesos forwarde. All of the above are examples of using forward contracts

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17. A quotation representing the value of a foreign currency in dollars is referred to as a(n) ___________ quotation; a quotation representing the number of units of a foreign currency per dollar is referred to as a(n) ______________ quotation.

a. Direct; indirectb. Indirect; directc. Direct; directd. Indirect; indirecte. Cannot be answered without more information

18. You observe a quotation of the Japanese yen (¥) of $0.007. You are, however, interested in the number of yen per dollar. Thus, you calculate the __________ quotation of ___________ ¥/$.

a. Direct; 142.86b. Indirect; 142.86c. Indirect; 150d. Direct; 150e. Indirect; 0

19. A Japanese Yen is worth $0.0080, and a Fijian dollar (F$) is worth $0.5900. What is the value of the yen in Fijian dollars (i.e., how many Fijian dollars do you need to buy a yen)?

a. 73.75b. 125c. 1.69d. 0.014e. None of the above

20. Which of the following is probably not an option for an MNC wishing to reduce its exposure to British pound payables?

a. Purchase pounds forwardb. Buy a pound futures contractc. Buy a pound put optiond. Buy a pound call optione. Remain unhedged if the British pound is expected to depreciate

21. Which of the following was not a reason for the emergence of the Eurocurrency market?a. The growth of MNCs in the ‘60s and ‘70s.b. U.S. regulations encouraging foreign lending by U.S. banks.c. Interest rate ceilings on dollar deposits in the U.S.d. Absence of reserve requirements for Eurodollar depositse. All of the above are reasons for the emergency of the Eurocurrency market.

22. All of the following are provisions of the Single European Act regarding bank regulation, except

a. Capital can flow freely throughout Europe.b. Banks can offer a wide variety of lending, leasing, and securities activities in the EEC.c. The regulations regarding competition, mergers, and taxes will be similar throughout the

EEC.d. A bank established in any one of the EEC countries will have the right to expand into any or

all of the other EEC countries.e. Capital requirements of EEC banks will be based on the bank’s risk-weighted assets.


23. The Basel II Accord would nota. Account for differences among countries with respect to loan collateral.b. Account for operational risk, which is the risk of losses resulting from financing

activities.c. Encourage banks to improve their techniques for controlling operational risk.d. Require banks to provide more information to existing and prospective shareholders

about their exposure to different types of risk.e. The Basel II Accord would do all of the above.

24. MNCs may choose to issue bonds in the international bond market becausea. They may be able to attract stronger demand by issuing their bonds in a particular foreign

country rather than in their home country.b. They may prefer to finance a specific foreign project in a particular currency and

therefore may attempt to obtain funds where that currency is widely used.c. Financing in a foreign currency with a lower interest rate may enable an MNC to reduce

its financing costs. d. All of the above

25. A bond sold in countries other than the country represented by the currency denominating it is known as a

a. Eurobond.b. Foreign bond.c. Parallel bond.d. Eurocredit loan.e. Floating rate note.

26. A bond issued by a borrower foreign to the country where the bond is placed is called a a. Eurobond.b. Foreign bond.c. Parallel bond.d. Eurocredit loan.e. Floating rate note.

27. Futures contracts are sold on exchanges and are consequently _____________ than forward contracts, which can be _____________ to satisfy an MNCs needs.

a. More standardized; standardizedb. More standardized; custom-tailoredc. More custom-tailored; standardizedd. More custom-tailored; custom-tailorede. Less standardized; custom-tailored

28. Which of the following is not a reason why an MNC may decide to issue stock in a foreign country?

a. The market in which the stock is to be issued is highly liquid.b. The market in which the stock is to be issued is very large, contributing to the market’s

liquidity.c. Regulations in the market in which the stock is to be issued are more stringent than

regulations in the home market.d. The MNC wishes to establish a global image. e. All of the above are reasons why an MNC may decide to issue stock in a foreign country.

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The following information refers to questions 29 and 30.

A share of the ADR of the German firm Bergerschnus represents one share of this firm’s stock that is traded on the Frankfurt Stock Exchange. The share price of Bergerschnus was 30 euros when the Frankfurt exchange closed. When the U.S. market opens, the euro is worth $1.15.

29. The price of the ADR should bea. $30.00.b. $34.50.c. $26.09.d. $31.15.e. None of the above

30. If the Bergerschnus ADR is convertible into three shares of stock, the ADR price would bea. $34.50.b. $78.27.c. $103.50.d. $93.45.e. None of the above

31. An MNC’s short-term financing decisions are probably satisfied in the __________ market, while its medium financing decisions are probably satisfied in the _________________ market.

a. International money; international creditb. International money; international bondc. International credit; international moneyd. International bond; international credite. International money; international stock

32. An MNC’s long-term financing decisions are satisfied in the _________________ market and the ___________.

a. International money; international creditb. International money; international bondc. International credit; international moneyd. International bond; international credite. International bond; international stock

33. Which of the following is not true regarding electronic communications networks (ECNs)?a. They have a visible trading floor.b. Trades are executed by a computer network.c. They have been created in many countries to match orders between buyers and sellers.d. They allow investors to place orders on their computers.e. All of the above are true


34. A year ago, Peter Allan invested in the stock of Jober, a German company. Over the last year, the stock declined in value by 20%. However, the euro appreciated over the year by 10 percent. If Peter sold the stock today, his return would be _________.

a. –10%b. 32%c. –12%d. 30%e. None of the above

35. Which of the following is not a method that can be used to invest internationally?a. Investment in MNC stocksb. American depository receipts (ADRs)c. World Equity benchmark Shares (WEBS)d. International mutual fundse. All of the above are methods that can be used to invest internationally.

Answers to Multiple Choice Problems

1. b2. a3. d4. c5. d6. e7. a8. d9. e10. a11. c12. c

13. d

14. a

15. d

16. a17. a

18. b

19. d

20. c21. b22. e23. b24. d25. a26. b27. b28. c29. b

30. c

31. a32. e33. a34. c

35. e

chapter 1 - cengage · web viewthere is a fine difference between a _____ bond, which is issued by...

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