Exam 17: International Banking: Reserves, Debt, and Risk

With floating exchange rates, countries require sizable amounts of international reserves for the stabilization of exchange rates.

The purpose of international reserves is to finance:

IMF drawings, swap arrangements, buffer stock facility, and compensatory financing for exports are classified as owned reserves rather than borrowed reserves.

Concerning international lending risk, currency risk is the risk of asset losses due to changing currency values.

International reserves allow a country to finance disequilibria in its balance-of-payments position.

Which of the following is a main central bank function of the International Monetary Fund?

With floating exchange rates, payments imbalances tend to be corrected by market-induced fluctuations in the exchange rate, and the need for exchange-rate stabilization and international reserves disappears.

A debt-equity swap results in a trade surplus nation forgiving the loans made to a trade-deficit nation.

When a deficit nation borrows from the International Monetary Fund, it purchases with its currency the foreign currency required to help finance the payments deficit.

Which of the following does $\underline { \text { not } }$ represent a form of international liquidity?

Eurocurrencies are deposits, denominated and payable in dollars and other foreign currencies, in banks outside the United States, primarily in London, the market's center.

Which international reserve asset was officially phased out of the international monetary system by the United States in the early 1970s?

All of the following exchange-rate systems require international reserves to finance balance-of-payments disequilibriums $\underline { \text { except: } }$ :

Under a debt-for-debt swap, a commercial bank sells its loans at a discount to a developing country government for local currency which it then uses to finance an equity investment in the debtor country.

Concerning international lending risk of commercial banks, ____ is associated with possible changes in the exchange value of a nation's currency.

When exchange rates are fixed by central bankers, the need for international reserves disappears.

The main purpose of the International Monetary Fund is to grant long-term loans to developing nations to help them finance the development of infrastructure such as roads, dams, and bridges.

Which of the following constitute(s) the $\underline { \text { largest } }$ component of the world's international reserves?

The U.S. dollar, Japanese yen, British pound, and Mexican peso are the major reserve currencies of the international monetary system.

The diagram below represents the exchange market position of the United States in trade with the United Kingdom. Starting at the equilibrium exchange rate of $3 per pound, suppose the demand for pounds rises from D₀ to D₁. Figure 17.1 Foreign Exchange Market -In the market for British Pounds the demand is represented by D₀ and supply by S₀. If the exchange rate is flexible and the demand for pounds increases to D1, US monetary authorities will need to