Unit 8: Global Debt and Equity Markets - Practice Quiz

1 What is a Eurocurrency?

2 What is a Eurodollar?

3 Which participants commonly borrow and lend in the Eurocurrency market?

4 What is the main activity of the Eurocurrency market?

5 What is an offshore financial centre?

6 Which feature is commonly associated with offshore financial centres?

7 Which jurisdiction is widely known as an offshore financial centre?

8 Why might an international company use an offshore financial centre?

9 What distinguishes an international bank from a purely domestic bank?

10 Which service is commonly provided by international banks?

11 What is the main purpose of a letter of credit in international trade?

12 What is correspondent banking?

13 Which organization is a non-banking financial service firm?

14 What is a basic function of an insurance company?

15 What does an investment fund generally do?

16 How do non-banking financial firms differ from commercial banks?

17 What does a share of common stock represent?

18 Where are newly issued shares sold to investors for the first time?

19 What happens in the secondary stock market?

20 What does a stock market index measure?

21 A Japanese company deposits US dollars with a bank in Singapore. How should this deposit be classified?

22 A firm borrows $5 million in the Eurocurrency market at an annual rate of 4.2% for 90 days. Using a 360-day year, how much interest must it pay?

23 Why can Eurocurrency banks sometimes offer higher deposit rates and lower lending rates than banks operating only in domestic markets?

24 A European exporter will receive US dollars in three months but expects the dollar to depreciate. Which action best reduces the currency risk while retaining the Eurodollar deposit until maturity?

25 A multinational routes financing through a jurisdiction that imposes minimal taxes on nonresident financial transactions. Which offshore-centre feature is it primarily using?

26 An offshore financial centre strengthens customer-identification and beneficial-ownership rules. What is the most direct likely effect?

27 A company establishes only a mailing address in an offshore centre while all management decisions occur elsewhere. What risk does this arrangement most clearly create?

28 Why might regulators closely monitor transactions routed through offshore financial centres?

29 A small domestic bank needs to process a payment in a country where it has no branch. Which arrangement is most suitable?

30 A corporation requires a $1.2 billion cross-border loan, but no single bank wants the entire exposure. Which financing structure best addresses this issue?

31 A floating-rate international loan is priced at SOFR plus 180 basis points. If SOFR is 3.8%, what is the current annual interest rate?

32 A bank enters a foreign market through a separately incorporated entity with its own capital. What form of international presence has it established?

33 An exporter sells its short-term customer invoices to a finance company to receive cash immediately. Which service is being used?

34 A manufacturer needs advanced equipment for three years but wants to avoid purchasing it and bearing its full residual-value risk. Which service is most appropriate?

35 A company planning an international bond issue needs a firm to structure, price, and distribute the securities. Which institution is best suited to this role?

36 A pension fund buys long-term foreign bonds to match retirement payments due many years from now. What function is the fund primarily performing?

37 A UK stock rises by 8% in pound terms while the pound depreciates by 5% against the US dollar. Ignoring dividends, what is the approximate return to a US investor?

38 A company sells newly issued shares to investors to finance a foreign factory. In which market does this transaction occur?

39 One American Depositary Receipt represents four ordinary shares of a foreign company. If each ordinary share trades at $18 after currency conversion, what should the ADR be worth before fees and market frictions?

40 A company cross-lists its shares on a major foreign exchange. Which outcome is most likely if the new listing attracts active investors?

41 A London bank grants a 91-day offshore dollar loan of $50 million at SOFR plus 180 basis points. SOFR is 5.20%, interest uses actual/360, and a 0.25% arrangement fee is deducted upfront. What is the borrower's approximate annualized simple financing cost relative to net proceeds?

42 A company needs $10 million for one year. It can borrow dollars at 6.00% or euros at 4.00%. The spot rate is $1.10 per euro and the one-year forward rate is $1.13 per euro. If exchange risk is fully covered, which funding choice is cheaper?

43 A domestic bank pays 5.00% on deposits but must hold a non-interest-bearing reserve equal to 10% of deposits. An offshore bank faces no reserve requirement and pays 5.40% on comparable Eurocurrency deposits. Ignoring other costs, which bank has the lower funding cost per dollar available to lend?

44 Which deposit is classified as a Eurocurrency deposit under the location-of-currency criterion, regardless of the bank owner's nationality?

45 A multinational establishes an offshore special-purpose vehicle for cross-border securitization. Which feature most strongly indicates a legitimate financial-centre function rather than concealment of beneficial ownership?

46 A bank books transactions through an offshore branch whose local regulator imposes lighter liquidity rules. The parent bank is subject to effective home-country consolidated supervision. Which conclusion is most defensible?

47 Residents send capital to an offshore entity they control, which reinvests it in their home economy to obtain incentives available to foreign investors. What is the most likely statistical consequence?

48 An offshore centre reports banking assets equal to 900% of GDP, but banks employ few local workers, transact mainly with nonresidents, and maintain nearly offsetting external positions. Which interpretation best fits the evidence?

49 A host regulator ring-fences a locally incorporated operation after its foreign banking parent becomes insolvent. Why would the outcome differ if the operation were a branch rather than a subsidiary?

50 A profitable Brazilian importer owes dollars to a London bank and has sufficient local-currency assets, but Brazil prohibits currency conversion and cross-border remittance. Which risk has materialized most directly?

51 A lead bank originates a $500 million syndicated loan, retains $50 million, and allocates the remainder to participating banks. Unless the contract states otherwise, which allocation of risk is most accurate?

52 Bank A holds an account denominated in country X's currency with correspondent Bank B in country X. How is the same account normally described by the two banks?

53 An exporter sells five-year promissory notes received from an importer to a specialist at a discount. The specialist has no recourse to the exporter and relies on an importing-country bank's guarantee. Which service is being used?

54 A finance company funds fixed-rate five-year consumer loans by repeatedly issuing 30-day commercial paper. Borrowers continue paying, but investors suddenly refuse to roll over the paper. What is the company's primary immediate vulnerability?

55 A securitization contains $70 million of senior notes, $20 million of mezzanine notes, and a $10 million equity tranche. If the collateral pool suffers $16 million of losses and no external protection exists, how are losses allocated under a standard sequential waterfall?

56 A euro-denominated defined-benefit pension fund matches the duration of its liabilities using unhedged US dollar bonds. Which material mismatch remains even if asset and liability durations are identical?

57 A US investor owns an unhedged depositary receipt representing shares whose home-market price rises 8%. Over the same period, the foreign currency depreciates 5% against the dollar. Ignoring fees and tracking differences, what is the investor's dollar return?

58 One depositary receipt represents two ordinary shares. The shares trade in London at £24 each, the spot rate is $1.25 per pound, and the receipt trades in New York at $63. Ignoring costs and settlement constraints, which arbitrage is appropriate?

59 A free-float-weighted international index contains three firms. Firm A has total market capitalization of $60 billion and a 50% free float; Firm B has $40 billion and a 75% free float; Firm C has $30 billion and a 100% free float. What is Firm A's index weight?

60 A company announces a one-for-four rights issue at $40 when its shares trade at $50. Assuming full subscription and no informational price effect, what are the theoretical ex-rights price and the value of one right attached to each old share?