MODULE 2

Question 1

is a financial institution that has been
established (or chartered) by more than one country and hence is subject to international law.

Answer 1

international financial institution (IFI)

Question 2

The best-known IFIs were established after ___ to assist in the reconstruction of Europe and provide mechanisms for international cooperation in managing the global
financial system.

Answer 2

World War II

Question 3

Types of International Financial Institutions

Answer 3

• Multilateral Development Banks
• Bretton Woods Institutions
• Regional Development Banks
• Bilateral Development Banks and Agencies
• Other Regional Financial Institutions

Question 4

Beginning in the ___, the international bond market grew aggressively. It today constitutes a large share in the total outstanding of the global bond market.

Answer 4

1980s

Question 5

is a market for bonds that are traded beyond national boundaries. They pull together investors from different countries.

Answer 5

international bond market

Question 6

The bonds which are traded in international bond markets are called ____

Answer 6

international bonds.

Question 7

Classifications of International Bond Markets

Answer 7

1. FOREIGN BONDS
2. EURO BOND
3. GLOBAL BONDS

Question 8

are the markets in which shares are issued and traded, either through exchanges or over-the-counter markets. Also known as the stock market,

it is one of the most vital areas of a market economy because it gives companies access
to capital and investors a slice of ownership in a company with the potential to realize
gains based on its future performance.

Answer 8

International Equity Markets

Question 9

permits the shareholders to reduce
the ownership of unwanted shares and lets the purchasers to buy the stock.

Answer 9

The secondary market

Question 10

The secondary market consists of brokers who represent the public buyers and sellers.

There are two kinds of orders.

Answer 10

MARKET ORDER AND LIMIT ORDER

Question 11

is traded at the best price available in the market, which is the market price.

Answer 11

MARKET ORDER

Question 12

is held in a limit order book until the desired price is obtained.

Answer 12

LIMIT ORDER

Question 13

the broker takes the trade through the dealer. Public traders do not directly trade with one another

The over-the-counter (OTC)
market is a ____

Answer 13

dealer market

Question 14

the broker gets client’s orders via an agent.

Answer 14

agency market

Question 15

is a form of non-continuous trade. In crowd trading, in a trading ring, an
agent periodically announces the issue. The traders then announce their bid and ask prices, and look for counterparts to a trade.

Answer 15

Crowd trading

Question 16

which has a common
price for all trades, several trades may occur at different prices.

Answer 16

call market

Question 17

is a receipt that has a number of foreign shares remaining on deposit with the U.S. depository’s custodian in the issuer’s home market.

Answer 17

American Depository Receipts (ADR)

Question 18

There are two types of ADRs:

Answer 18

sponsored and unsponsored.

Question 19

are created by a bank after a request of the foreign company. The sponsoring bank offers lots of services, including investment information and the annual report translation.

are listed on the US stock markets. New ADR issues must be sponsored.

Answer 19

Sponsored ADRs

Question 20

are generally created on request of US investment banking
firms without any direct participation of the foreign issuing firm.

Answer 20

Unsponsored ADRs

Question 21

are a share that are traded globally, unlike the ADRs that are receipts of the bank deposits of home-market shares and are traded on foreign markets.

are fully transferrable — purchased on one exchange can be sold on another. They usually trade in both US dollars and euros.

Answer 21

Global Registered Shares (GRS)

Question 22

Factors Affecting International Equity Returns

Answer 22

Macroeconomic factors, exchange rates, and industrial structures

Question 22

are derivative contracts between two parties that involve the exchange of cash flows. One counterparty agrees to receive one set of cash flows while paying the other another set of cash flows.

Answer 22

SWAPS

Question 23

involve exchanging interest payments, while currency swaps involve exchanging an amount of cash in one currency for the same amount in another.

Answer 23

Interest rate swaps

Question 23

is a financial derivative contract in which two parties agree to exchange their interest rate cash flows. The interest rate swap generally involves exchanges between predetermined notional amounts with fixed and floating rates.

Answer 23

Interest Rate Swaps

Question 24

are a foreign exchange agreement between two parties to exchange cash flow streams in one currency to another.

Answer 24

Currency Swaps

Question 26

involves an investor purchasing foreign financial assets. The transaction of foreign securities generally occurs at an organized formal securities exchange or through an over-the-counter market transaction.

Answer 26

International foreign investments (IFF) or Foreign portfolio investment (FPI)

Question 26

Foreign portfolio investing is popular among several different types of investors. Common transactors of foreign portfolio investment include:

Answer 26

* Individuals * Companies * Foreign governments

Question 27

Benefits of Foreign Portfolio Investment

Answer 27

1. Portfolio diversification 2. International credit 3. Access to markets with different risk-return characteristics 4. Increases the liquidity of domestic capital markets 5. Promotes the development of equity markets

Question 28

Foreign portfolio investment provides investors with an easy opportunity to diversify their portfolio internationally. An investor would diversify their investment portfolio to achieve a higher risk-adjusted return, which is ultimately done to help generate alpha.

Answer 28

1. Portfolio diversification

Question 29

Investors may be able to access an increased amount of credit in foreign countries, allowing the investor to utilize more leverage and generate a higher return on their equity investment.

Answer 29

2. International credit

Question 30

If investors are seeking out greater returns, they must be willing to take on greater risk. Emerging markets can offer investors a different risk-return profile.

Answer 30

3. Access to markets with different risk-return characteristics

Question 31

As markets become more liquid, they become deeper and broader, and a wider range of investments can be financed. Savers can invest with the assurance that they will be able to manage their portfolio or sell their financial securities quickly if they need access to their savings.

Answer 31

4. Increases the liquidity of domestic capital markets

Question 32

Increased competition for financing will lead to the market rewarding superior performance, prospects, and corporate governance. As the market’s liquidity and functionality develop, equity prices will become value-relevant for investors, ultimately driving market efficiency

Answer 32

5. Promotes the development of equity markets

Question 33

Risks of Foreign Portfolio Investment (FPI)

Answer 33

1. VOLATILE ASSET PRICING 2. JURISDICTIONAL RISK

Question 34

Across international financial markets, some are riskier than others. For example, consider the Deutscher Aktienindex (DAX). The DAX is a stock market index of 30 major German companies trading on the Frankfurt Stock Exchange. The DAX is historically more volatile than the S&P 500 Index.

Answer 34

1. VOLATILE ASSET PRICING

Question 35

can result from investing in a foreign country. For example, if a foreign country that you were invested in drastically changes its laws, it could result in a material impact on the investment’s returns. Moreover, many countries struggle with financial crime, such as money laundering. Investing in countries where money laundering is prevalent increases the jurisdictional risk faced by the investor.

Answer 35

2. JURISDICTIONAL RISK

Question 35

is positively influenced by high rates of return and reduction of risk through geographic diversification.

Answer 35

foreign portfolio investment

Question 36

are enabled by successful financial intermediation and the efficient allocation of credit.

Answer 36

Economic growth and development

Question 37

is inherently volatile, and rigorously regulated financial markets are needed to manage the risk effectively. Furthermore, the financial system must be capable of identifying and mitigating risks for prudent and efficient allocation of foreign or domestic capital flows.

Answer 37

Foreign portfolio investment