Microsoft Word - Money, Banking, and Int Finance(scribd).docx

Kenneth R. Szulczyk

12. Free trade is one country specializes in production of a good and then exports it to its trading
    partner. Trading partner does the opposite; so free trade is the mutual exchange of products.
    Outsourcing is one firm sends part of its production outside the country to reduce costs.
    However, the firm sells the cheaper product in its home country. A mutual exchange of
    products does not occur, and thus, outsourcing is not free trade.


13. Bosnia would produce 500 units of tobacco, and 250 units of coffee. Colombia grows 250
    units of tobacco and 500 units of coffee. Thus, total coffee and tobacco production are 750
    units each. If they engage in trade, Bosnia produces 1,000 units of tobacco while Colombia
    produces 1,000 units of coffee. Consequently, both countries gain 250 units in production
    for both commodities after trade.

Answers to Chapter 4 Questions

1. Banks can structure their business to circumvent regulations or lower taxes. Furthermore,
   banks can accept deposits in one country and lend to borrowers in another country.


2. An offshore market is banks are located in countries with lax regulations, low taxes, and
   strict consumer confidentiality.


3. A U.S. bank can open a branch bank or forms a holding company with another bank in
   another country. A U.S. bank can become an Edge Act corporation or international banking
   facility.


4. A foreign bank forms an agency office, opens a foreign bank branch in the U.S., or acquires
   an existing U.S. bank, converting it into a subsidiary.


5. Exchange rate risk is the change in the asset's value that is denominated in another currency.
   When the exchange rate changes, investors can gain or lose.


6. Value of the loan is $100,000 or one million pesos. However, the loan drops in value to
   $66,666.67. Remember, the dollar appreciated while the peso depreciated. Thus, the
   investors come out ahead for investments denominated in appreciating currencies.


7. Spot market is when the buyer and seller immediately exchange a commodity for money,
   while a derivative market is the buyer and sell agree upon a price today, but exchange the
   commodity for the money on a future date.


8. A forward contract is a tailor-made contract that a bank usually issues. Buyer and seller
   agree to a price and quantity today, and they exchange the commodity and money on a
   future date.