Correct Answer: A currency deposited outside its home country
Explanation:
A Eurocurrency is any currency held in a bank outside the country that issues it.
Incorrect! Try again.
2Which deposit is an example of a Eurodollar deposit?
Euro currency market
Easy
A.US dollars deposited in a bank in London
B.Euros deposited in a bank in Frankfurt
C.British pounds deposited in a bank in London
D.Japanese yen deposited in a bank in Tokyo
Correct Answer: US dollars deposited in a bank in London
Explanation:
A Eurodollar is a US dollar deposited in a bank outside the United States.
Incorrect! Try again.
3What is a primary function of the Eurocurrency market?
Euro currency market
Easy
A.Setting domestic income tax rates
B.Regulating local retail prices
C.Issuing national identity documents
D.Facilitating international borrowing and lending
Correct Answer: Facilitating international borrowing and lending
Explanation:
The Eurocurrency market connects international borrowers and lenders using currencies held outside their home countries.
Incorrect! Try again.
4The term "Eurocurrency" is best understood as referring to which factor?
Euro currency market
Easy
A.The location of a currency deposit
B.The value of a currency unit
C.The color of a currency note
D.The age of a currency system
Correct Answer: The location of a currency deposit
Explanation:
Eurocurrency status depends on a currency being deposited outside its country of issue, not on the currency's name or value.
Incorrect! Try again.
5What is an offshore financial centre?
Offshore financial centres
Easy
A.A bank serving only government agencies
B.A port used mainly for shipping goods
C.A jurisdiction serving many non-resident clients
D.A market trading only domestic products
Correct Answer: A jurisdiction serving many non-resident clients
Explanation:
An offshore financial centre provides financial services mainly to clients who reside outside its jurisdiction.
Incorrect! Try again.
6Which feature is commonly associated with offshore financial centres?
Offshore financial centres
Easy
A.Favorable tax and regulatory conditions
B.Exclusive financing of farming activities
C.Mandatory use of a single world currency
D.Complete prohibition of foreign investment
Correct Answer: Favorable tax and regulatory conditions
Explanation:
Offshore financial centres often attract international business through favorable tax rules and flexible regulation.
Incorrect! Try again.
7Who commonly uses services offered by offshore financial centres?
Offshore financial centres
Easy
A.Only charitable school associations
B.Only domestic retail customers
C.Only local municipal authorities
D.International firms and wealthy individuals
Correct Answer: International firms and wealthy individuals
Explanation:
International firms and individuals often use offshore centres for cross-border investment, banking, and asset management.
Incorrect! Try again.
8Why do offshore financial centres attract cross-border financial activity?
Offshore financial centres
Easy
A.They provide specialized international services
B.They guarantee profits on all investments
C.They manufacture all major world currencies
D.They eliminate every type of business risk
Correct Answer: They provide specialized international services
Explanation:
These centres attract cross-border activity by offering services such as international banking, fund administration, and asset management.
Incorrect! Try again.
9What distinguishes an international bank from a purely domestic bank?
International banks
Easy
A.It operates without using financial technology
B.It accepts deposits only from public agencies
C.It lends money only in its home currency
D.It conducts banking business across national borders
Correct Answer: It conducts banking business across national borders
Explanation:
An international bank provides banking services in more than one country or handles significant cross-border transactions.
Incorrect! Try again.
10Which service is commonly provided by international banks to exporting firms?
International banks
Easy
A.Trade finance
B.Product manufacturing
C.Employee recruitment
D.Weather forecasting
Correct Answer: Trade finance
Explanation:
Trade finance helps exporters and importers manage payment and credit needs in international transactions.
Incorrect! Try again.
11What is a letter of credit used for in international trade?
International banks
Easy
A.Calculating taxes on employee salaries
B.Registering patents in foreign markets
C.Fixing exchange rates for every currency
D.Reducing payment risk between trading parties
Correct Answer: Reducing payment risk between trading parties
Explanation:
A letter of credit is a bank's promise to pay the seller when specified trade documents and conditions are satisfied.
Incorrect! Try again.
12Why might a multinational company use an international bank?
International banks
Easy
A.To determine national election results
B.To design packaging for new products
C.To manage payments in several currencies
D.To inspect goods at local factories
Correct Answer: To manage payments in several currencies
Explanation:
International banks help multinational companies make cross-border payments and manage accounts in different currencies.
Incorrect! Try again.
13What is a non-banking financial service firm?
Non-banking financial service firms
Easy
A.A firm setting monetary policy for a country
B.A firm producing currency notes for central banks
C.A firm selling consumer goods through retail stores
D.A firm offering financial services without being a bank
Correct Answer: A firm offering financial services without being a bank
Explanation:
These firms provide services such as insurance, investment management, or leasing without operating as traditional banks.
Incorrect! Try again.
14Which organization is a non-banking financial service firm?
Non-banking financial service firms
Easy
A.A manufacturing company
B.A central bank
C.A customs office
D.An insurance company
Correct Answer: An insurance company
Explanation:
An insurance company provides financial protection and risk-management services but is not a traditional bank.
Incorrect! Try again.
15Which service is commonly provided by an investment management firm?
Non-banking financial service firms
Easy
A.Issuing national passports
B.Managing investment portfolios
C.Producing industrial equipment
D.Collecting customs duties
Correct Answer: Managing investment portfolios
Explanation:
Investment management firms select and manage financial assets on behalf of individuals and institutions.
Incorrect! Try again.
16What does a leasing company typically provide to a business?
Non-banking financial service firms
Easy
A.Shares listed on every stock exchange
B.Insurance against every possible loss
C.Ownership of assets without any payment
D.Use of assets for periodic payments
Correct Answer: Use of assets for periodic payments
Explanation:
Leasing allows a business to use equipment or other assets in return for regular payments.
Incorrect! Try again.
17What is the main purpose of a stock market?
Stock markets
Easy
A.Facilitating the buying and selling of shares
B.Determining wages for government employees
C.Controlling the supply of consumer products
D.Setting interest rates for central banks
Correct Answer: Facilitating the buying and selling of shares
Explanation:
A stock market provides an organized system where investors can buy and sell company shares.
Incorrect! Try again.
18What does a share of common stock generally represent?
Stock markets
Easy
A.Partial ownership in a company
B.A fixed deposit at a bank
C.An insurance policy for property
D.A short-term loan to a government
Correct Answer: Partial ownership in a company
Explanation:
Common stock represents an ownership interest in the issuing company.
Incorrect! Try again.
19In which market are newly issued shares sold to investors for the first time?
Stock markets
Easy
A.Commodity market
B.Secondary market
C.Foreign exchange market
D.Primary market
Correct Answer: Primary market
Explanation:
The primary market is where companies sell newly issued shares and receive the funds raised.
Incorrect! Try again.
20What is a stock exchange?
Stock markets
Easy
A.A bank account holding foreign currencies
B.A factory that prints company certificates
C.An organized marketplace for trading securities
D.A government office for collecting income tax
Correct Answer: An organized marketplace for trading securities
Explanation:
A stock exchange is an organized venue where securities such as company shares are bought and sold.
Incorrect! Try again.
21A Japanese company deposits U.S. dollars with a bank located in London. This transaction is best described as activity in the:
Euro currency market
Medium
A.Eurobond market
B.Foreign exchange market
C.Euro currency market
D.Domestic dollar market
Correct Answer: Euro currency market
Explanation:
The Euro currency market involves deposits and loans in a currency outside the country that issued it. U.S. dollars held in London are Eurodollars.
Incorrect! Try again.
22A multinational firm chooses Euro currency borrowing mainly because it expects to obtain funds at a lower cost than in its domestic market. Which feature supports this decision?
B.Euro currency markets often face fewer reserve requirements
C.Euro currency markets eliminate all exchange-rate risk
D.Euro currency markets are controlled by one central bank
Correct Answer: Euro currency markets often face fewer reserve requirements
Explanation:
Euro currency markets generally operate outside the regulatory jurisdiction of the currency's home country, which may reduce reserve requirements and lower intermediation costs.
Incorrect! Try again.
23A European exporter receives payment in U.S. dollars and wants to keep the funds in dollars while earning interest. It deposits the money with a bank in Singapore. The exporter is using the Euro currency market to:
Euro currency market
Medium
A.Borrow Singapore dollars from the central bank
B.Convert dollars into Singapore dollars
C.Hold dollar deposits outside the United States
D.Purchase shares listed in Singapore
Correct Answer: Hold dollar deposits outside the United States
Explanation:
A dollar deposit maintained outside the United States qualifies as a Eurodollar deposit and is part of the Euro currency market.
Incorrect! Try again.
24An international borrower obtains a floating-rate Eurodollar loan. If the reference interest rate rises sharply, what is the most likely immediate effect?
Euro currency market
Medium
A.The borrower's principal is automatically reduced
B.The loan becomes an equity investment
C.The lender's currency changes to euros
D.The borrower's interest expense increases
Correct Answer: The borrower's interest expense increases
Explanation:
Floating-rate loans adjust with the reference rate. When that rate rises, the borrower usually pays more interest on the outstanding balance.
Incorrect! Try again.
25A company establishes a financing subsidiary in a jurisdiction with low taxes, limited disclosure requirements, and access to international banking services. This jurisdiction is most likely an:
Offshore financial centres
Medium
A.Central bank reserve system
B.Domestic securities exchange
C.Export processing zone
D.Offshore financial centre
Correct Answer: Offshore financial centre
Explanation:
Offshore financial centres attract international financial transactions through favorable tax, regulatory, and confidentiality conditions.
Incorrect! Try again.
26A major concern about offshore financial centres is that they may:
Offshore financial centres
Medium
A.Encourage regulatory arbitrage and secrecy
B.Increase the transparency of every transaction
C.Require all deposits to be held in local currency
D.Prevent firms from accessing foreign capital
Correct Answer: Encourage regulatory arbitrage and secrecy
Explanation:
Businesses may move activities offshore to avoid stricter rules or taxes elsewhere, while limited disclosure can make supervision more difficult.
Incorrect! Try again.
27A bank moves a booking operation to an offshore centre to reduce compliance costs. Which risk should management assess most carefully?
Offshore financial centres
Medium
A.Risk that local consumers will increase spending
B.Reputational risk from weak transparency
C.Risk that domestic wages will rise
D.Risk that exports will become more competitive
Correct Answer: Reputational risk from weak transparency
Explanation:
Using an offshore centre can create reputational and regulatory concerns if stakeholders associate the arrangement with secrecy, tax avoidance, or weak controls.
Incorrect! Try again.
28A government introduces stricter international rules requiring beneficial ownership information from offshore entities. The most direct expected outcome is:
Offshore financial centres
Medium
A.Automatic elimination of exchange-rate risk
B.Greater transparency of entity ownership
C.Conversion of all offshore loans into bonds
D.Higher stock prices in every market
Correct Answer: Greater transparency of entity ownership
Explanation:
Beneficial ownership rules identify the individuals who ultimately control or benefit from entities, making offshore structures more transparent.
Incorrect! Try again.
29A firm wants one bank to provide trade finance, foreign-exchange services, and loans in several countries. Which institution is best suited to meet this need?
International banks
Medium
A.An international commercial bank
B.A domestic pension fund
C.A local savings cooperative
D.A national securities regulator
Correct Answer: An international commercial bank
Explanation:
International commercial banks operate across borders and can combine lending, trade finance, foreign exchange, and payment services.
Incorrect! Try again.
30An international bank funds a loan in one country using deposits raised in another country. This activity primarily demonstrates the bank's ability to:
International banks
Medium
A.Set monetary policy for host countries
B.Guarantee profits for its depositors
C.Remove all credit risk from lending
D.Transfer capital across national markets
Correct Answer: Transfer capital across national markets
Explanation:
International banks connect savers and borrowers in different countries, allowing capital to move between markets.
Incorrect! Try again.
31A bank provides a loan in euros to a company whose revenues are mainly in pesos. If the peso depreciates significantly, the company may face:
International banks
Medium
A.Lower euro obligations without refinancing
B.A guaranteed increase in operating profits
C.Automatic protection from currency fluctuations
D.Higher repayment costs in its revenue currency
Correct Answer: Higher repayment costs in its revenue currency
Explanation:
A weaker peso means the company needs more pesos to purchase the euros required for interest and principal payments.
Incorrect! Try again.
32During a financial crisis, an international bank reduces lending simultaneously in several countries because its capital position has weakened. This illustrates:
International banks
Medium
A.A shift from banking to insurance
B.Cross-border transmission of financial shocks
C.The elimination of liquidity risk
D.Complete independence of national markets
Correct Answer: Cross-border transmission of financial shocks
Explanation:
International banks can spread financial stress across countries when problems in one part of their operations affect lending elsewhere.
Incorrect! Try again.
33A host-country regulator requires a foreign bank branch to maintain additional local liquidity. The main purpose of this requirement is to:
International banks
Medium
A.Prevent the branch from serving local borrowers
B.Replace all international banking supervision
C.Increase the bank's exposure to currency losses
D.Strengthen the branch's ability to meet withdrawals
Correct Answer: Strengthen the branch's ability to meet withdrawals
Explanation:
Local liquidity requirements help ensure that a foreign bank branch can meet short-term obligations during periods of market stress.
Incorrect! Try again.
34A company needs equipment but prefers predictable monthly payments rather than purchasing the equipment immediately. Which non-banking financial service is most appropriate?
Non-banking financial service firms
Medium
A.Leasing
B.Underwriting
C.Foreign exchange dealing
D.Factoring
Correct Answer: Leasing
Explanation:
Leasing allows a firm to use an asset in exchange for periodic payments, preserving cash and avoiding an immediate purchase.
Incorrect! Try again.
35A manufacturer sells its credit invoices to a financial services firm for immediate cash. This arrangement is known as:
Non-banking financial service firms
Medium
A.Equity underwriting
B.Factoring
C.Syndicated lending
D.Currency swapping
Correct Answer: Factoring
Explanation:
Factoring involves selling accounts receivable to a financial firm, usually at a discount, in exchange for faster access to cash.
Incorrect! Try again.
36An investment bank helps a corporation issue new shares to the public and agrees to purchase any unsold shares. In this case, the investment bank is acting as:
Non-banking financial service firms
Medium
A.A foreign exchange broker
B.A pension trustee
C.An underwriter
D.A leasing company
Correct Answer: An underwriter
Explanation:
An underwriter helps issue securities and may assume the risk of purchasing securities that investors do not buy.
Incorrect! Try again.
37A multinational uses an insurance company to protect its overseas project against political violence and government expropriation. The insurance primarily helps manage:
Non-banking financial service firms
Medium
A.Interest-rate spread risk
B.Political risk
C.Settlement risk
D.Inventory turnover risk
Correct Answer: Political risk
Explanation:
Insurance against expropriation and political violence protects the firm from losses caused by government actions or political instability.
Incorrect! Try again.
38A company lists its shares on a foreign stock exchange to access investors in another region. The most direct benefit is:
Stock markets
Medium
A.A broader potential investor base
B.An automatic reduction in production costs
C.A guaranteed increase in share value
D.Elimination of all reporting requirements
Correct Answer: A broader potential investor base
Explanation:
A foreign listing can expose the company to additional investors and may improve access to international equity capital.
Incorrect! Try again.
39An investor buys shares in a foreign company, but the investor's home currency appreciates against the company's currency. Even if the share price is unchanged locally, the investor may experience:
Stock markets
Medium
A.A guaranteed gain from the exchange-rate movement
B.An automatic dividend increase from the foreign exchange
C.A currency-related decline in home-currency returns
D.No change because currencies do not affect equity returns
Correct Answer: A currency-related decline in home-currency returns
Explanation:
When the investor's home currency appreciates, foreign-currency assets convert into fewer units of the home currency, reducing the investor's return.
Incorrect! Try again.
40A firm issues shares in a foreign market but must comply with that market's disclosure rules and accounting standards. This requirement mainly reflects:
Stock markets
Medium
A.The regulatory cost of cross-border listing
B.The conversion of equity into debt
C.The absence of investor protection
D.The elimination of information requirements
Correct Answer: The regulatory cost of cross-border listing
Explanation:
Foreign listings often require additional reporting, legal compliance, and accounting adjustments, which increase the firm's regulatory costs.
Incorrect! Try again.
41A German bank accepts a U.S.-dollar deposit at its London branch and lends the funds to a Brazilian company. Which feature makes the deposit part of the Eurocurrency market?
Euro currency market
Hard
A.The deposit is denominated in dollars outside the United States
B.The loan proceeds are converted into Brazilian reais
C.The depositor and borrower are residents of different countries
D.The transaction is recorded by a European-headquartered bank
Correct Answer: The deposit is denominated in dollars outside the United States
Explanation:
A Eurocurrency deposit is denominated in a currency outside the jurisdiction that issues that currency. The bank's nationality and the parties' residences are not decisive.
Incorrect! Try again.
42A U.S. bank pays 5.0% on domestic dollar deposits, incurs deposit-insurance costs of 0.2% of deposits, and must hold a non-interest-bearing reserve equal to 10% of deposits. Ignoring other costs, what is its approximate annual funding cost per usable dollar?
Euro currency market
Hard
A.5.56%
B.6.00%
C.5.78%
D.5.20%
Correct Answer: 5.78%
Explanation:
Each dollar of deposits supplies only of usable funds. The cost is , or approximately 5.78%.
Incorrect! Try again.
43A U.S. firm can borrow million for one year at 4%. The spot rate is USD/EUR, and the one-year forward rate is USD/EUR. If it converts the principal into dollars immediately and buys euros forward for repayment, what is the covered dollar borrowing cost?
Euro currency market
Hard
A.2.00%
B.6.08%
C.1.92%
D.4.00%
Correct Answer: 1.92%
Explanation:
The firm initially receives million. Its covered repayment is million, giving .
Incorrect! Try again.
44During a liquidity shock, the three-month Eurodollar rate rises sharply above the comparable U.S. Treasury bill yield while expected exchange rates remain unchanged. Which interpretation is most defensible?
Euro currency market
Hard
A.The spread arises because Treasury bills carry reserve requirements
B.The spread proves covered interest parity has permanently failed
C.The spread reflects greater bank credit and liquidity risk
D.The spread reflects anticipated appreciation of the U.S. dollar
Correct Answer: The spread reflects greater bank credit and liquidity risk
Explanation:
Eurodollar deposits are unsecured bank liabilities, whereas Treasury bills are sovereign obligations with high liquidity. Their yield spread can widen because of bank credit and funding-liquidity risk.
Incorrect! Try again.
45An offshore centre reports banking assets equal to 1,500% of its GDP. Most claims and liabilities involve nonresidents, and transactions are conducted in foreign currencies. Which conclusion follows most directly?
Offshore financial centres
Hard
A.The centre must maintain reserves equal to its external banking assets
B.The centre necessarily bears the ultimate credit risk of every claim
C.The centre primarily intermediates funds between foreign counterparties
D.The centre necessarily finances unusually high domestic investment
Correct Answer: The centre primarily intermediates funds between foreign counterparties
Explanation:
A very large, nonresident-focused balance sheet indicates offshore intermediation or booking activity. It does not by itself establish domestic investment, full reserve backing, or local ownership of ultimate risk.
Incorrect! Try again.
46A multinational routes interest payments through an offshore subsidiary located in a zero-tax jurisdiction. The subsidiary has no employees, assumes no meaningful risk, and immediately transfers the receipts to its parent. Which policy is most likely to defeat the intended tax benefit?
Offshore financial centres
Hard
A.A securities listing rule and minimum trading-lot requirement
B.A substance requirement and beneficial-ownership test
C.A deposit guarantee and lender-of-last-resort facility
D.A fixed exchange rate and unrestricted capital account
Correct Answer: A substance requirement and beneficial-ownership test
Explanation:
Substance and beneficial-ownership rules can deny treaty or tax benefits to a conduit that lacks genuine activity and does not control or economically own the income.
Incorrect! Try again.
47A bank books a loan through an offshore branch, but credit approval, borrower monitoring, and loss absorption remain with its head office. Which statement best describes the resulting risk allocation?
Offshore financial centres
Hard
A.Booking location eliminates consolidated capital requirements automatically
B.Booking location changes the legal record but may not relocate economic risk
C.Booking location converts the loan into a risk-free cross-border asset
D.Booking location transfers all credit risk to the offshore government
Correct Answer: Booking location changes the legal record but may not relocate economic risk
Explanation:
An offshore booking centre may record the claim without performing the core risk functions. Consolidated supervision generally looks through the booking location to the entity controlling and absorbing the risk.
Incorrect! Try again.
48An offshore centre strengthens secrecy laws while leaving prudential standards unchanged. Foreign deposits rise, but correspondent banks face higher compliance costs. Which systemic trade-off is most likely?
Offshore financial centres
Hard
A.Greater inflows accompanied by higher opacity and de-risking pressure
B.Lower inflows accompanied by stronger monetary-policy transmission abroad
C.Greater inflows accompanied by lower information asymmetry for creditors
D.Lower inflows accompanied by automatic elimination of illicit finance
Correct Answer: Greater inflows accompanied by higher opacity and de-risking pressure
Explanation:
Secrecy may attract funds, but it makes beneficial ownership and transaction risk harder to assess. Correspondent banks may respond by increasing compliance expenditure or terminating relationships.
Incorrect! Try again.
49A bank funds a five-year fixed-rate dollar loan with rolling three-month euro deposits and uses currency forwards to hedge the principal. Which major risk remains most directly unhedged?
International banks
Hard
A.Spot currency risk on the loan principal
B.Commodity basis risk on the borrower's output
C.Rollover and repricing risk on short-term funding
D.Equity dilution risk from issuing additional shares
Correct Answer: Rollover and repricing risk on short-term funding
Explanation:
Currency forwards can hedge the principal's exchange-rate exposure, but they do not ensure that short-term deposits can be renewed or that their future rates will remain below the fixed loan yield.
Incorrect! Try again.
50Bank A in Country X has no branch in Country Y but must make payments in Country Y's currency. It holds an account with Bank B in Country Y, which settles the payments locally. From Bank A's perspective, that account is best described as:
International banks
Hard
A.A vostro account
B.A suspense account
C.A margin account
D.A nostro account
Correct Answer: A nostro account
Explanation:
A nostro account means "our account with you": Bank A's foreign-currency account held at Bank B. Bank B would refer to the same balance as a vostro account.
Incorrect! Try again.
51A million syndicated loan has commitments of million from the lead arranger and million from each of five participant banks. Before drawdown, one participant defaults on its commitment, and the agreement contains no underwriting obligation for the arranger. How much can the borrower draw from the remaining commitments?
International banks
Hard
A. million
B. million
C. million
D. million
Correct Answer: million
Explanation:
The surviving commitments are million. Without an underwriting or reallocation obligation, the arranger does not automatically fund the defaulting participant's million share.
Incorrect! Try again.
52An international bank has million of euro assets and million of euro liabilities. It enters a forward contract to sell million. Ignoring off-balance-sheet valuation effects, what is its net euro exposure?
International banks
Hard
A.Short million
B.Short million
C.Long million
D.Long million
Correct Answer: Long million
Explanation:
The balance-sheet position is long million euros. Selling million euros forward reduces the net position to a long exposure of million euros.
Incorrect! Try again.
53A money market fund offers same-day redemptions while investing in longer-maturity, thinly traded commercial paper. During stress, investors redeem because they expect later sellers to bear larger liquidation losses. Which mechanism is central to this vulnerability?
Non-banking financial service firms
Hard
A.Currency transformation combined with covered interest arbitrage
B.Risk retention combined with fully collateralized settlement
C.Liquidity transformation combined with a first-mover advantage
D.Maturity matching combined with a lender-of-last-resort guarantee
Correct Answer: Liquidity transformation combined with a first-mover advantage
Explanation:
The fund promises liquid claims against less-liquid assets. If liquidation costs are imposed mainly on remaining investors, redeeming early becomes advantageous and can amplify a run.
Incorrect! Try again.
54An insurer has long-duration fixed-rate liabilities and invests in bonds with materially shorter duration. If market interest rates fall sharply and remain low, which balance-sheet effect is most likely?
Non-banking financial service firms
Hard
A.Liabilities remain fixed while assets decline by the coupon rate
B.Assets rise more than liabilities, strengthening economic solvency
C.Both sides fall equally, leaving economic solvency unchanged
D.Liabilities rise more than assets, weakening economic solvency
Correct Answer: Liabilities rise more than assets, weakening economic solvency
Explanation:
A rate decline increases the present value of fixed cash flows. Because the liabilities have longer duration, their value is more rate-sensitive and rises more than the value of the shorter-duration assets.
Incorrect! Try again.
55A finance company securitizes receivables but provides a contractual guarantee covering the first 10% of pool losses. Which conclusion is most accurate?
Non-banking financial service firms
Hard
A.Liquidity risk is eliminated because the receivables become tradable claims
B.No credit risk is transferred because investors purchase issued securities
C.All credit risk is transferred when the receivables leave the balance sheet
D.Credit risk is transferred only after losses exceed the retained layer
Correct Answer: Credit risk is transferred only after losses exceed the retained layer
Explanation:
The first-loss guarantee retains the most junior credit exposure. Investors bear credit losses only after the guaranteed 10% layer has been exhausted.
Incorrect! Try again.
56A non-bank dealer finances a million securities portfolio entirely through overnight repurchase agreements at a 2% haircut. If lenders increase the haircut to 8% and the portfolio value is unchanged, how much additional equity financing is required to maintain the portfolio?
Non-banking financial service firms
Hard
A. million
B. million
C. million
D. million
Correct Answer: million
Explanation:
Equity funding rises from million to million when the haircut increases from 2% to 8%. The dealer must therefore obtain an additional million.
Incorrect! Try again.
57One ADR represents two ordinary shares of a British company. Each ordinary share trades at , the spot rate is USD/GBP, and conversion costs are negligible. What ADR price is consistent with no-arbitrage?
Stock markets
Hard
A.$50
B.$80
C.$100
D.$64
Correct Answer: $100
Explanation:
The two underlying shares are worth . Converting at USD/GBP gives an ADR value of .
Incorrect! Try again.
58A U.S. investor buys a foreign share for 100 units of local currency when the exchange rate is USD per local-currency unit. One year later, the share is worth 112 local units and the exchange rate is USD per local unit. Ignoring dividends and taxes, what is the investor's dollar return?
Stock markets
Hard
A.18.9%
B.3.6%
C.4.8%
D.12.0%
Correct Answer: 3.6%
Explanation:
The initial dollar value is , and the final value is . The dollar return is .
Incorrect! Try again.
59A capitalization-weighted global index contains only Stock A and Stock B. Their initial market values are million and million. In a common currency, A rises by 20% and B falls by 5%. Assuming no constituent changes or cash distributions, what is the index return?
Stock markets
Hard
A.2.5%
B.15.0%
C.0.5%
D.7.5%
Correct Answer: 2.5%
Explanation:
The capitalization weights are 30% and 70%. The index return is .
Incorrect! Try again.
60A firm's shares trade simultaneously in two countries. After adjusting for exchange rates, taxes, settlement timing, and conversion fees, the foreign listing persistently trades at a premium. Which explanation is most consistent with market segmentation?
Stock markets
Hard
A.The premium must disappear immediately whenever both exchanges are open
B.Some investors face binding barriers to purchasing the home-market shares
C.Identical shares have different fundamental cash flows in each market
D.Covered interest parity forces the foreign listing to remain more expensive
Correct Answer: Some investors face binding barriers to purchasing the home-market shares
Explanation:
Ownership restrictions, capital controls, mandate constraints, or market-access barriers can prevent effective arbitrage and allow equivalent claims to trade at persistent price differences.
Incorrect! Try again.
Did this save you a night before the exam?
LPU Notes is free, and it stays free. Ads cover part of the server bill.
The rest comes out of a student's own pocket: the domain, the storage,
and keeping the site up through the weeks everyone needs it at once.
The payment button didn't load. An ad blocker or a filtered network is the usual reason.
to try again.
Nothing here is ever locked, and nothing unlocks. Chip in only if it was worth it.
What it pays for →