Question 1

When the FI has sold more foreign currency than it has purchased, a positive net exposure position has transpired, also known as a net long in currency.

Accepted Answer

A) True 
 B)False  False

Question 2

Most profits and losses in foreign currency markets come from taking an open position or speculating in currencies.

Accepted Answer

A) True 
 B)False  True

Question 3

The foreign exchange market in Tokyo is the largest FX trading market.

Accepted Answer

A) True 
 B)False  False

Question 4

U.S.life insurance companies generally hold less than ten percent (10%) of their portfolios in foreign securities.

Accepted Answer

A) True 
 B)False

Question 5

A positive net exposure position in FX implies an FI has more foreign currency assets than foreign currency liabilities.

Accepted Answer

A) True 
 B)False

Question 6

On January 1, 2016, the exchange rate of U.S.dollars for Australian dollars was 0.730 USD/AUD.On January 15, 2016, the exchange rate was 0.6863 USD/AUD.If a mining company had a net exposure to Australian dollars of 9,750,000 AUD, what is the company's U.S.dollar gain or loss during this two week period?

Accepted Answer

A) Gain of 620,829 USD 
B) Loss of 620,829 USD 
C) Loss of 426,075 AUD 
D) Gain of 426,075 AUD 
E) Loss of 426,075 USD 
A) Gain of 620,829 USD 
B) Loss of 620,829 USD 
C) Loss of 426,075 AUD 
D) Gain of 426,075 AUD 
E) Loss of 426,075 USD

Question 7

Yen Bank wishes to invest in Yen loans at a rate of 10 percent.The bank will fund the loans in the domestic CD market at a rate of 6.3 percent.This on-balance-sheet FX risk will be hedged in the spot market at a forward rate of $0.62/×.The spot rate on yen is $0.60/×. What must be the spot exchange rate to eliminate the preference for the yen loans if the forward rate remains $0.62/×?

Accepted Answer

A) $0.6416/×. 
B) $0.5798/×. 
C) $0.6118/×. 
D) $0.5991/×. 
E) Insufficient information. 
A) $0.6416/×. 
B) $0.5798/×. 
C) $0.6118/×. 
D) $0.5991/×. 
E) Insufficient information.

Question 8

The law of one price is an economic rule which states that in an efficient market, identical goods and services produced in different countries should have a single price.

Accepted Answer

A) True 
 B)False

Question 9

A forward exchange rate is the exchange rate agreed to today for future (forward) deliver of a currency.

Accepted Answer

A) True 
 B)False

Question 10

An indirect quote of a foreign currency indicates the amount of foreign currency received for one unit of the domestic currency.

Accepted Answer

A) True 
 B)False

Question 11

As of June 2015, U.S.banks were net short British pounds.

Accepted Answer

A) True 
 B)False

Question 12

Directly matching foreign asset and liability books in the same FX currency will allow an FI to hedge or lock in a profit spread regardless of future changes in exchange rates.

Accepted Answer

A) True 
 B)False

Question 13

Most nonbank FIs have foreign exchange risk exposure that is smaller than the exposure of the large U.S.money-center banks.

Accepted Answer

A) True 
 B)False

Question 14

To transact all cross-currency trades, one must first convert both currencies into U.S.dollars.

Accepted Answer

A) True 
 B)False

Question 15

The following are the net currency positions of a U.S.FI (stated in U.S.dollars). $$\begin{array} { | l | l | r | r | r | } 
\hline \text { Currency } & \text { Assets } & \text { Liabilities } & \text { FX Bought } & \text { FX Sold } \
\hline \text { British pound } & 24,600 & 70,000 & 170,400 & 321,000 \
\hline \text { Yen } & 31,000 & 20,400 & 250,000 & 220,000 \
\hline \text { Swiss franc } & 10,200 & 9,800 & 8,000 & 10,800 \
\hline
\end{array}$$ What is the FI's net exposure in British pounds?

Accepted Answer

A) -45,400. 
B) -150,600. 
C) -196,000. 
D) +105,200. 
E) +196,000. 
A) -45,400. 
B) -150,600. 
C) -196,000. 
D) +105,200. 
E) +196,000.

Question 16

Historically, to exchange Swiss francs into Chinese yuan, a trader had to first exchange the francs into U.S.dollars.

Accepted Answer

A) True 
 B)False

Question 17

A positive net exposure position in FX implies that the FI is

Accepted Answer

A) net long in a currency and exposed to depreciation of the foreign currency. 
B) net short in a currency and exposed to depreciation of the foreign currency. 
C) net long in a currency and exposed to appreciation of the foreign currency. 
D) net short in a currency and exposed to appreciation of the foreign currency. 
E) neither long nor short in a currency. 
A) net long in a currency and exposed to depreciation of the foreign currency. 
B) net short in a currency and exposed to depreciation of the foreign currency. 
C) net long in a currency and exposed to appreciation of the foreign currency. 
D) net short in a currency and exposed to appreciation of the foreign currency. 
E) neither long nor short in a currency.

Question 18

To a U.S.trader of foreign currencies, a direct quote indicates U.S.dollars received for each one unit of the foreign currency.

Accepted Answer

A) True 
 B)False

Question 19

Your U.S.bank issues a one-year U.S.CD at 5 percent annual interest to finance a C $1.274 million (Canadian dollar) investment in two-year, fixed rate Canadian bonds selling at par and paying 7 percent annually.You expect to liquidate your position in one year.Currently, spot exchange rates are US $0.78493 per Canadian dollar. Your position is exposed to

Accepted Answer

A) interest rate risk only. 
B) credit risk only. 
C) exchange rate risk only. 
D) interest rate and exchange rate risk only. 
E) interest rate risk, exchange rate risk, and credit risk. 
A) interest rate risk only. 
B) credit risk only. 
C) exchange rate risk only. 
D) interest rate and exchange rate risk only. 
E) interest rate risk, exchange rate risk, and credit risk.

Question 20

Suppose that the current spot exchange rate of U.S.dollars for Russian rubles is $0.15/1ruble.The price of Russian-produced goods increases by 8 percent, and the U.S.price index increases by 3 percent. According to PPP, the 8 percent rise in the price of Russian goods relative to the 3 percent rise in the price of U.S.goods results in a(n)

Accepted Answer

A) depreciation of the Russian ruble by 5 percent. 
B) depreciation of the Russian ruble by 6 percent. 
C) appreciation of the Russian ruble by 5 percent. 
D) appreciation of the Russian ruble by 6 percent. 
E) depreciation of the Russian ruble by 7 percent. 
A) depreciation of the Russian ruble by 5 percent. 
B) depreciation of the Russian ruble by 6 percent. 
C) appreciation of the Russian ruble by 5 percent. 
D) appreciation of the Russian ruble by 6 percent. 
E) depreciation of the Russian ruble by 7 percent.

Exam 13: Foreign Exchange Risk

When the FI has sold more foreign currency than it has purchased, a positive net exposure position has transpired, also known as a net long in currency.

Most profits and losses in foreign currency markets come from taking an open position or speculating in currencies.

The foreign exchange market in Tokyo is the largest FX trading market.

U.S.life insurance companies generally hold less than ten percent (10%) of their portfolios in foreign securities.

A positive net exposure position in FX implies an FI has more foreign currency assets than foreign currency liabilities.

The law of one price is an economic rule which states that in an efficient market, identical goods and services produced in different countries should have a single price.

A forward exchange rate is the exchange rate agreed to today for future (forward) deliver of a currency.

An indirect quote of a foreign currency indicates the amount of foreign currency received for one unit of the domestic currency.

As of June 2015, U.S.banks were net short British pounds.

Directly matching foreign asset and liability books in the same FX currency will allow an FI to hedge or lock in a profit spread regardless of future changes in exchange rates.

Most nonbank FIs have foreign exchange risk exposure that is smaller than the exposure of the large U.S.money-center banks.

To transact all cross-currency trades, one must first convert both currencies into U.S.dollars.

The following are the net currency positions of a U.S.FI (stated in U.S.dollars). Currency Assets Liabilities FX Bought FX Sold British pound 24,600 70,000 170,400 321,000 Yen 31,000 20,400 250,000 220,000 Swiss franc 10,200 9,800 8,000 10,800 What is the FI's net exposure in British pounds?

Historically, to exchange Swiss francs into Chinese yuan, a trader had to first exchange the francs into U.S.dollars.

A positive net exposure position in FX implies that the FI is

To a U.S.trader of foreign currencies, a direct quote indicates U.S.dollars received for each one unit of the foreign currency.

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Fintech Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization

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