Chapter 20

International Banking and the Future of Banking and Financial-Services

Fill in the Blank Questions

1. A(n)___________________________________________ is the simplest organizational form for

an international bank. This is a limited service office that markets the services provided by the
home office and identifies new customers but does not take deposits or book loans.
Answer: representative office

2. A(n)______________________ is a more complete organizational form for international banks

than a representative office which does not generally take deposits from the public but does take
commitments to make or purchase loans among other things.
Answer: agency office

3. A(n)______________________ is the most common organizational form for an international

bank. It offers the bank's full range of services but is not a separate legal entity.
Answer: branch office

4. When an international bank acquires majority ownership of a separate, legally incorporated

foreign bank, this foreign bank is called a(n)______________________ of the international bank.
Answer: subsidiary

5. ____________________________________________ are separate domestic U.S. companies

owned by U.S. or foreign banks located outside the home state of the bank that owns them.
These organizations are limited primarily to international or foreign business transactions.
Answer: Edge Act Corporations

6. A(n)______________________ branch is a special foreign office which merely records the

receipt of deposits and other international transactions. Often these are little more than a desk
and a telephone and are used as a way around regulations.
Answer: shell

7. A(n)___________________________________________ is an organization which has over half

its income from activities associated with exporting goods and services from the U.S. They can
offer export insurance coverage, transportation, warehousing and other services for exporting
goods and services.
Answer: Export Trading Company (ETC)

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 8. The____________________________________________ is the first major federal law
regulating foreign bank activity in the U.S. It required foreign banks accepting deposits to meet
reserve requirements and allowed foreign banks to be eligible for federal deposit insurance.
Answer: International Banking Act of 1978

9. A(n)____________________________________________ is a receipt issued by a U.S. bank

which makes it easier for a foreign business borrower to sell securities in the U.S.
Answer: American Depository Receipt

10. A(n)______________________ is where a customer anticipating a future need for a foreign

currency will negotiate with another party, with the help of their bank, a contract for the delivery
of the currency at a set price on a set date.
Answer: forward contract

11. A(n)_________________________________________________________________ is where

computerized records of transactions involving banks and their international customers are kept
separate from the rest of the domestic accounts. These are more lightly regulated than regular
bank offices.
Answer: international banking facility (IBF)

12. The__________________________________________________________________ requires

regulators to determine if foreign banks selling their services in the U.S. are adequately regulated
by their home governments and to close those not adequately supervised or in violation of U.S.
law.
Answer: Foreign Bank Supervision Enhancement Act

13. The___________________________________________ is an agreement between the U.S.,

Japan, Canada and several other nations of Western Europe to adopt common capital
requirements for all of their banks.
Answer: Basel Agreement

14. ____________________________________________ refers to the market for foreign currency

or trading one currency for another.
Answer: FOREX

15. ____________________________________________ is the risk that has to do with the

fluctuations in currency prices.
Answer: Currency risk

16. A(n)____________________________________________ grants the buyer the right to deliver

or take delivery of a specified currency at a specified price until it expires.
Answer: currency option

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 17. A(n)____________________________________________ is the exchange of different national
currencies between two parties who need foreign currencies to repay loans or cover other
expenses.
Answer: currency swap

18. The____________________________________________ is an international market for long-

term debt denominated in foreign currency units.
Answer: Eurobond market

19. A(n)_________________________________________________________________ is a
contractual agreement between two parties to exchange interest payments in order to hedge
against interest rate risk.
Answer: interest rate swap

20. A(n)____________________________________________ is a device used to satisfy creditors

by giving them stock in place of paying off any remaining debt.
Answer: debt for equity swap

21. A device which aids customers in selling goods abroad is known by the acronym _________ and
which was originally developed by the Japanese.
Answer: ETC

22. When dealers speculate on trends in the price of selected currencies it is called .
Answer: proprietary trading

23. are primarily medium term credit agreements between international banks and
their larger corporate an government customers. The customer is authorized to periodically offer
short term notes that come due in 90 to 180 days over a stipulated period.
Answer: Note issuance facilities (NIFs)

24. A(n) is a draft for payment due and payable upon presentation to the bank.
Answer: sight draft

25. A(n) is a draft for payment due and payable only on a specific future date.
Answer: time draft

26. When a loan is made thousands of miles away and where the court system and bankruptcy laws
needed to support the enforcement of contracts and loans is missing, it causes a special type of
risk called .
Answer: country risk

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 27. When a foreign government takes actions that interfere with the repayment of an international
loan, it causes a special type of risk called .
Answer: sovereign risk

28. An international loan risk evaluation system that lists economic and political factors believed to
be correlated with loan risk is called the . It may apply comparative weights to
each factor or consider each factor equally.
Answer: checklist approach

29. An international loan risk evaluation system that uses expert opinion is the .
Answer: Delphi Method

30. One of the most comprehensive country-risk indicators is provided by . This guide
supplies political, economic and financial risk ratings and an overall composite rating for about
140 countries monthly.
Answer: International Country Risk Guide (ICRG)

True/False Questions

T F 31. The barriers between securities dealers and international banks are falling in many
countries, making it harder for the public to see real differences between financial
institutions.
Answer: True

T F 32. Under U.S. regulations no one U.S. bank can invest more than 50 percent of its
consolidated capital and surplus in an export trading company.
Answer: False

T F 33. Under U.S. regulations Edge Act subsidiaries must devote at least 50 percent of their
business to assisting customers with export-import trade and international credit.
Answer: False

T F 34. The International Banking Act of 1978 prohibited foreign-owned banks from crossing
state lines unless the state or states involved allow cross-border entry.
Answer: True

T F 35. Foreign banks taking retail deposits in the U.S. can qualify for federal deposit insurance.
Answer: True

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 T F 36. The International Lending and Supervision Act requires federal regulators to supervise
the U.S. banks under their jurisdiction more closely but to give banks and the private
marketplace more freedom in deciding what their capital requirements should be.
Answer: False

T F 37. The Basel Agreement on international capital standards does not cover Japanese banks
but does cover major banks in the U.S. and Western Europe.
Answer: False

T F 38. Long hedges in currency futures are designed to protect a bank or its customer from
increases in the price of the currency it must eventually acquire.
Answer: True

T F 39. Currency options give their buyer the right, but not the obligation, to deliver or take
delivery of a foreign currency or currency futures contract.
Answer: True

T F 40. ADRs are issued by foreign banks operating outside the U.S. and sold to investors in the
Eurodollar market.
Answer: False

T F 41. The Federal Reserve Board can terminate the operations of a foreign bank in the United
States if it finds the bank is not being operated in a manner consistent with the public
interest.
Answer: True

T F 42. Under the terms of the International Lending and Supervision Act the loan rescheduling
fees U.S. banks can charge international borrowers are restricted.
Answer: True

T F 43. An international bank with a positive net exposure in a given foreign currency is said to
be in a net short position in that particular currency.
Answer: False

T F 44. An international bank's net position in a foreign currency is measured by the difference
between the volume of that currency purchased less the volume of that currency sold.
Answer: True

T F 45. If an international bank has gone net long in a particular currency it will score a positive
gain if the value of that currency declines.
Answer: False

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 T F 46. If an international bank has adopted a net short position in a particular currency and that
currency's exchange value increases the bank will achieve a profit from trading the
currency.
Answer: False

T F 47. A bank's net foreign currency-denominated assets in a given currency are equal to the
volume of its assets denominated in that currency less any liabilities the bank has taken
on that are denominated in the same currency.
Answer: True

T F 48. Short hedges in currency futures contracts are used to protect a bank or bank customer
against rising currency prices.
Answer: False

T F 49. A put option on currency futures is often used to protect against a rise in currency prices.
Answer: False

T F 50. A call option is often employed to protect a bank or bank customer against losses from
falling currency prices.
Answer: False

T F 51. A foreign currency swap does not fully hedge the borrower against exchange risk.
Answer: False

T F 52. In a foreign currency swap a customer who needs to borrow a foreign currency receives
the domestic currency today and swaps it back for the foreign currency just in time to
repay the loan in the foreign currency.
Answer: True

T F 53. A sight draft is a payment for purchase of goods and services across national borders
which is payable only on a future date.
Answer: False

T F 54. A time draft is a payment for purchase of goods and services across national borders
which is payable upon presentation to the bank.
Answer: False

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 T F 55. One way to determine the soundness of an international loan is to use the Delphi method
which uses the consensus opinion of a panel of experts to develop a measure of a
country's risk exposure.
Answer: True

T F 56. The top trading firms in the global currency markets are all banks.
Answer: False

T F 57. Internet banks are not allowed in some countries such as Japan.
Answer: False

T F 58. The currency swap market is in decline following the introduction of the euro.
Answer: False

T F 59. China is an attractive market for banks because there is limited domestic competition and
a general lack of expertise in banking.
Answer: True

T F 60. An ETC is a device which aids customers in selling goods abroad.

Answer: True

T F 61. The Eurobond market provides a firm with access to funds outside its home country.
Answer: True

Multiple Choice Questions

62. A limited service facility that can market services supplied by the home office of an international
bank and identify new customers is known as a:
A) Branch office
B) Agency office
C) Subsidiary
D) Representative office
E) None of the above
Answer: D

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 63. Separate corporate entities affiliated either with a U.S. bank or with a foreign bank operating in
the U.S. that can cross state lines, but must devote the majority of their accounts to international
activities are known as:
A) Joint ventures
B) Representative offices
C) Subsidiaries
D) Edge Act Corporations
E) None of the above
Answer: D

64. An organizational form used by international banks that was created by U.S. regulations enforced
by the Federal Reserve Board and consists of computerized account records is known as:
A) International Banking Facility (IBF)
B) Export Trading Company (ETC)
C) Edge Acts
D) Agencies
E) None of the above
Answer: A

65. These specialized firms can be operated by U.S. banking companies and Edge Act Corporations
and must receive over half their income from their roles in assisting exporting activities from the
U.S. are called:
A) International Banking Facility (IBF)
B) Export Trading Company (ETC)
C) Shell Branches
D) Subsidiaries
E) None of the above
Answer: B

66. Organizational devices used by international banks to take deposits offshore and avoid
regulations (such as deposit insurance assessments) are known as:
A) International Banking Facility (IBF)
B) Export Trading Company (ETC)
C) Shell branches
D) Subsidiaries
E) None of the above
Answer: C

67. International banking activities are regulated for many of the same reasons that shape domestic
banking regulation. These common reasons for regulation include:
A) Restricting bank risk exposure.
B) Limiting non-banking business activity.
C) Promoting stable growth in money and credit.
D) Specifying minimum amounts of owners' equity capital.
E) All of the above.
Answer: E

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 68. International banking regulations that do not apply to most domestic banking activity include:
A) Foreign exchange controls.
B) Restricting the outflow of scarce capital.
C) Protecting domestic financial institutions and markets from foreign competition.
D) All of the above.
E) B and C only.
Answer: D

69. The key components of the International Banking Act (IBA) of 1978 include which of the
following:
A) Required foreign banks to follow the same branching laws as U.S. banks.
B) Required legal reserves against deposits accepted at U.S. branch or agency offices of foreign
banks with consolidated assets of $1 billion or more.
C) Required U.S. branches of foreign banks to obtain deposit insurance.
D) All of the above.
E) A and B only.
Answer: E

70. The Foreign Bank Supervision Enhancement Act of 1991 places the responsibility for supervising
U.S. branches of foreign banks with the:
A) Office of the Comptroller of the Currency.
B) Federal Reserve Board.
C) Federal Deposit Insurance Corporation.
D) Secretary of Commerce.
E) None of the above.
Answer: B

71. A call currency option:

A) Obligates the holder to purchase currency or currency futures contracts at a fixed price any
time before the option expires.
B) Gives the holder the right to purchase currency or currency futures contracts at a fixed price
any time before the option expires.
C) Obligates the holder to sell currency or currency futures contracts at a fixed price any time
before the option expires.
D) Gives the holder the right to sell currency or currency futures contracts at a fixed price any
time before the option expires.
E) None of the above.
Answer: B

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 72. Business Corporations that are subsidiaries of a bank organized under Section 25 of the Federal
Reserve Act and that must devote the bulk of their activities to serving international customers
and carrying out international transactions are known as:
A) IBFs
B) Shell Branches
C) ITCs
D) Agreement Corporations
E) None of the above
Answer: D

73. Often used to protect a nation against loss of its foreign currency reserves, which might damage
its prospects for repaying international loans and purchasing goods and services abroad, are:
A) Export loan rate restrictions
B) Foreign exchange reserves
C) Minimum capitalization requirements for domestic banks
D) Examination and supervision regulations for local branch offices
E) None of the above.
Answer: B

74. Which U.S. federal law required branches and agency offices of foreign banks to secure federal
licenses for their U.S. operations for the first time?
A) The International Banking Act
B) International Lending and Supervision Act
C) Bank Holding Company Act
D) International Bank Supervision and Examination Procedures Act
E) None of the above.
Answer: A

75. Under current U.S. law the Federal Reserve Board must be notified a minimum of __________
days in advance if a foreign bank wishes to close any of its U.S. offices.
A) 30
B) 60
C) 90
D) 180
E) None of the above
Answer: A

76. A foreign currency contract that obligates the holder of the contract to take delivery of a foreign
currency some time in the future is called a(n):
A) Call currency option
B) Put currency option
C) Long hedge currency futures contract
D) Short hedge currency futures contract
E) None of the above
Answer: C

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 77. A foreign currency contract that obligates the holder of the contract to make delivery of a foreign
currency some time in the future is called a(n):
A) Call currency option
B) Put currency option
C) Long hedge currency futures contract
D) Short hedge currency futures contract
E) None of the above
Answer: D

78. A foreign currency contract that gives the holder of the contract the right to purchase a foreign
currency is called a(n):
A) Call currency option
B) Put currency option
C) Long hedge currency futures contract
D) Short hedge currency futures contract
E) None of the above
Answer: A

79. A foreign currency contract that give the holder of the contract the right to sell a foreign currency
is called a(n):
A) Call currency option
B) Put currency option
C) Long hedge currency futures contract
D) Short hedge currency futures contract
E) None of the above
Answer: B

80. A foreign currency contract where one party trades currencies with another and trades it back at
the end of the contract is called a(n):
A) Currency option contract
B) Currency forward contract
C) Currency swap contract
D) Currency futures contract
E) None of the above
Answer: C

81. Banks have been heavily involved in selling their services across national boundaries since:
A) The industry's very beginnings
B) The 1950s
C) The 1980s
D) The turn of the century
E) None of the above
Answer: A

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 82. A full-service facility operated by a bank away from its home office but offering many of the
same services as the home office is known as a(n):
A) Branch office
B) Agency office
C) Subsidiary
D) Representative office
E) None of the above
Answer: A

83. Which of the following is one of the customer services supplied by banks in international
markets?
A) Underwriting notes and bond issues in the U.S. bond market
B) Helping customer market their products in the domestic market
C) Helping customers hedge against foreign currency risk
D) Making loans to domestic customers
E) All of the above are customer services offered by banks in the international market
Answer: C

84. Which of the following is a risk evaluation system in international lending today?
A) The Seat of the Pants Method
B) The Discrimination Method
C) The Delphi Method
D) The State-Risk Indicator Method
E) None of the above
Answer: C

85. The Hagard Mercantile Company has made a $30 million investment in a mill in Germany and
fears a substantial decline in the mark's current spot rate from $0.63 to $0.56 lowering the value
of the company's investment in the mill. Which of the following currency contracts can help
Hagard solve this problem?
A) Call currency option
B) Put currency option
C) Long currency futures contract
D) Currency swap contract
E) None of the above
Answer: B

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 86. The Goudge Grilling Company has just ordered a shipment of grills from Frankfurt. Payment for
the grills must be in euros when the grills are delivered. Euros have changed in value in the last
30 days. They have gone from $1.42 to $1.40. If this trend continues which of the following
currency contracts can help the Goudge Grilling Company hedge their currency risk?
A) Put currency option
B) Short currency futures contract
C) Long currency futures contract
D) Currency swap contract
E) None of the above
Answer: C

87. As the text suggests all of the following areas of the world have significant opportunities for
foreign banks except:
A) Asia
B) China
C) Russia
D) Japan
E) South Korea
Answer: D

88. The primary source for international bank statistics is:

A) The FDIC
B) The OCC
C) The BIS
D) The World Bank
E) The United Nations
Answer: C

89. The market for banking in China exhibits all of the following except:
A) Limited domestic competition
B) Lack of expertise
C) A large percentage of troubled loans
D) A general lack of access from outside the country
E) A growing economy
Answer: D

90. The biggest problem for international banks at the beginning of the 21st century is:
A) The internet
B) Interest rate risk
C) Foreign exchange risk
D) Nonperforming loans
E) None of the above
Answer: D

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 91. The First National Bank of Summerville has opened an office in Turkey. This is
a limited service office that can market services of the home office to Turkey
and can identify Turkish customers but does not take deposits or book loans.
What type of office did the First National Bank of Summerville open in Turkey?
A) A Representative Office
B) An Agency Office
C) A Branch Office
D) A Subsidiary
E) An Export Trading Company
Answer: A

92. The Third State Bank of Laramie has opened an office in Morocco. This office
does not take deposits but makes commitments to make loans, issues letters
of credit and provides technical assistance to companies in Morocco. What
type of office did the Third State Bank of Laramie open in Morocco?
A) A Representative Office
B) An Agency Office
C) A Branch Office
D) A Subsidiary
E) An Export Trading Company
Answer: B

93. The Second National Bank of Guthrie has opened an office in Chile. This
office offers a full line of services and is not a separate legal entity from the
Second National Bank of Guthrie. What type of office did the Second National
Bank of Guthrie open in Chile?
A) A Representative Office
B) An Agency Office
C) A Branch Office
D) A Subsidiary
E) An Export Trading Company
Answer: C

94. The State Bank of Virginia owns 55% of the shares of the Bank of Budapest.
What type of arrangement is this?
A) A Representative Office
B) An Agency Office
C) A Branch Office
D) A Subsidiary
E) An Export Trading Company
Answer: D

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 95. The State Bank of Nebraska owns a company that has more than half of its
income from activities associated with exporting goods and services from the
U.S. This company offers export insurance, transportation and warehousing
in Europe, trade financing and other services. What type of company does
the State Bank of Nebraska own?
A) A Representative Office
B) An Agency Office
C) A Branch Office
D) A Subsidiary
E) An Export Trading Company
Answer: E

96. If Denmark requires that all foreign banks operating in Denmark have at least
ten percent capital, what reason for regulating international banks is this
most likely in support of?
A) Protecting the safety of depositor funds
B) Promoting stable growth in money and credit
C) Providing foreign currency controls
D) Protecting domestic financial institutions
E) Restricting the outflow of scarce capital
Answer: A

97. Suppose banks operating in Venezuela have to meet the same legal reserve
requirements as domestic banks. This would be in support of which reason
for regulating international banks?
A) Protecting the safety of depositor funds
B) Promoting stable growth in money and credit
C) Providing foreign currency controls
D) Protecting domestic financial institutions
E) Restricting the outflow of scarce capital
Answer: B

98. Suppose Brazil decides to restrict the export of the real by international banks
so that the real does not leave the country and reduce currency reserves for
repayment of Brazilian debt. This would be in support of which reason for
regulating international banks?
A) Protecting the safety of depositor funds
B) Promoting stable growth in money and credit
C) Providing foreign currency controls
D) Protecting domestic financial institutions
E) Restricting the outflow of scarce capital
Answer: C

99. Suppose India restricts entry into India by foreign banks until the end of the

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15
 decade. This would be in support of which reason for regulating international
banks?
A) Protecting the safety of depositor funds
B) Promoting stable growth in money and credit
C) Providing foreign currency controls
D) Protecting domestic financial institutions
E) Restricting the outflow of scarce capital
Answer: D
100. Suppose South Korea limits the amount of deposits made in South
Korea that can be used to make loans in other countries. This would be in
support of which reason for regulating international banks?
A) Protecting the safety of depositor funds
B) Promoting stable growth in money and credit
C) Providing foreign currency controls
D) Protecting domestic financial institutions
E) Restricting the outflow of scarce capital
Answer: E

101. Suppose Bank of America holds assets denominated in yen of 150

million and liabilities denominated in yen of 90 million. They also have yen
purchases of 70 million and yen sales of 50 million. What is Bank of
America’s net exposure to currency risk?
A) +150 million yen
B) +60 million yen
C) +80 million yen
D) -80 million yen
E) -60 million yen
Answer: C

102. Suppose Bank of America holds assets denominated in yen of 150

million and liabilities denominated in yen of 90 million. They also have yen
purchases of 70 million and yen sales of 50 million. When would Bank of
America experience a loss in the currency market?
A) When the yen declines in value relative to U.S. dollars
B) When the yen increases in value relative to U.S. dollars
C) When U.S. dollar declines in value relative to the yen
D) When the euro declines in value
E) None of the above
Answer: A

103. Suppose Citibank holds assets denominated in euros of 120 million and
liabilities denominated in euros of 180 million. They also have euro
purchases of 40 million and euro sales of 70 million. What is Citibank’s net
exposure to currency risk?
A) +120 million euros
B) -90 million euros
C) +90 million euros

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 D) -60 million euros
E) +60 million euros
Answer: B

104. Suppose Citibank holds assets denominated in euros of 120 million and
liabilities denominated in euros of 180 million. They also have euro
purchases of 40 million and euro sales of 70 million. When would Citibank
experience a loss in the currency market?
A) When the euro declines in value relative to the dollar
B) When the dollar increases in value relative to the euro
C) When the yen increases in value
D) When the euro increases in value relative to the dollar
E) None of the above
Answer: D

105. Suppose a U.S. bank borrows money in London while a British company
borrows money in New York. At the end of the loan period the U.S. company
needs pounds to repay their loan and the British company needs dollars to
repay their loan. Which of the following might be a good tool for these
companies to reduce their currency risk?
A) Currency futures contract
B) Currency option contract
C) Interest rate futures contract
D) Interest rate swap contract
E) Currency swap contract
Answer: E

106. Which of the following is a reason for the growth of the currency swap
market in recent years?
A) It has helped thousands of businesses and governments hedge currency
risk
B) It has provided central banks with a new instrument to trade
C) It has helped shape money and credit conditions in various countries
D) It has helped strengthen home nations’ economies
E) All of the above are reasons for the growth of the currency swap market in
recent years
Answer: E

107. A multinational company issues short-term credit through London’s

financial district. They are most likely using:

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 A) Eurrocommercial paper (ECP)
B) Depository receipt (DR)
C) Note Issuance Facility
D) Currency Swap
E) None of the above
Answer: A

108. Suppose Bank of America provides a 5 year credit guarantee for

Dillard’s Department Stores. Dillard’s Department Stores periodically issues
short term notes with due dates 90 days after they are issued in the
international market. Bank of American has most likely provided a(n):
A) Eurrocommercial paper (ECP)
B) Depository receipt (DR)
C) Note Issuance Facility
D) Currency Swap
E) None of the above
Answer: C

109. A broker has purchased stock in Sony Corporation and has asked to
Citibank act as a custodian of this stock. Citibank has issued a negotiable
instrument representing ownership interest in the stock. These negotiable
instruments are denominated in dollars and not in yen. This is an example of
a(n):
A) Eurrocommercial paper (ECP)
B) Depository receipt (DR)
C) Note Issuance Facility
D) Currency Swap
E) None of the above
Answer: B

110. Which of the following is a way a bank can deal with a troubled
international loan?
A) The loan can be restructured generally with a lower interest rate and
longer time to repay
B) The loan can be sold in the secondary market
C) The bank can write off all or part of the loan
D) The bank can accept exit bonds in lieu of loan repayment
E) All of the above are ways to deal with a troubled international loan
Answer: E

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