Question 1

The nominal interest rate is equal to the

Accepted Answer

A) real interest rate minus the inflation premium. 
B) real interest rate minus the trailing inflation rate. 
C) real interest rate plus the expected interest rate increase. 
D) real interest rate plus the expected inflation rate. 
E) real interest rate plus the interest rate volatility. 
A) real interest rate minus the inflation premium. 
B) real interest rate minus the trailing inflation rate. 
C) real interest rate plus the expected interest rate increase. 
D) real interest rate plus the expected inflation rate. 
E) real interest rate plus the interest rate volatility.

Question 2

The following are the net currency positions of a U.S.FI (stated in U.S.dollars). Note: Net currency positions are foreign exchange bought minus foreign exchange sold restated in U.S.dollar terms. $$\begin{array} { | l | r | } 
\hline { \text { Currency } } & \text { Net Position } \
\hline \text { Canadian Dollar } & \text { +US } \$ 1,200 \
\hline \text { Euro } & \text {-US } \$ 245,900 \
\hline \text { Japanese Yen } & + \mathrm { US } \$ 505,000 \
\hline \text { Swiss Frane } & \text {-US } \$ 36,700 \
\hline \text { British Pound } & \text { +US } \$ 447,900 \
\hline
\end{array}$$ How would you characterize the FI's risk exposure to fluctuations in the yen/dollar exchange rate?

Accepted Answer

A) The FI is net short in the yen and therefore faces the risk that the yen will rise in value against the U.S.dollar. 
B) The FI is net short in the yen and therefore faces the risk that the yen will fall in value against the U.S.dollar. 
C) The FI is net long in the yen and therefore faces the risk that the yen will fall in value against the U.S.dollar. 
D) The FI is net long in the yen and therefore faces the risk that the yen will rise in value against the U.S.dollar. 
E) The FI has a balanced position in the Japanese yen. 
A) The FI is net short in the yen and therefore faces the risk that the yen will rise in value against the U.S.dollar. 
B) The FI is net short in the yen and therefore faces the risk that the yen will fall in value against the U.S.dollar. 
C) The FI is net long in the yen and therefore faces the risk that the yen will fall in value against the U.S.dollar. 
D) The FI is net long in the yen and therefore faces the risk that the yen will rise in value against the U.S.dollar. 
E) The FI has a balanced position in the Japanese yen.

Question 3

The following are the net currency positions of a U.S.FI (stated in U.S.dollars). Note: Net currency positions are foreign exchange bought minus foreign exchange sold restated in U.S.dollar terms. $$\begin{array} { | l | r | } 
\hline { \text { Currency } } & \text { Net Position } \
\hline \text { Canadian Dollar } & \text { +US } \$ 1,200 \
\hline \text { Euro } & \text {-US } \$ 245,900 \
\hline \text { Japanese Yen } & + \mathrm { US } \$ 505,000 \
\hline \text { Swiss Frane } & \text {-US } \$ 36,700 \
\hline \text { British Pound } & \text { +US } \$ 447,900 \
\hline
\end{array}$$ What is the FI's total FX investment?

Accepted Answer

A) US $671,500. 
B) US $1,236,700. 
C) -US $671,500. 
D) -US $1,236,700. 
E) 0 
A) US $671,500. 
B) US $1,236,700. 
C) -US $671,500. 
D) -US $1,236,700. 
E) 0

Question 4

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. What is the end-of-year profit or loss to the bank if in one year the exchange rate falls to US $0.765 per Canadian dollar? (Assume that there is no change in interest rates.)

Accepted Answer

A) Loss of US $75,000. 
B) Profit of C $274,000. 
C) Loss of US $7,000. 
D) Profit of C $9,000. 
E) Loss of US $5,000. 
A) Loss of US $75,000. 
B) Profit of C $274,000. 
C) Loss of US $7,000. 
D) Profit of C $9,000. 
E) Loss of US $5,000.

Question 5

The FI is acting as a speculator when it

Accepted Answer

A) buys or sells currency to balance the FI's net exposure. 
B) takes a nonzero net position in a particular currency. 
C) processes an exporter's transaction in a foreign currency. 
D) makes a market in a currency. 
E) advises customers on their international business. 
A) buys or sells currency to balance the FI's net exposure. 
B) takes a nonzero net position in a particular currency. 
C) processes an exporter's transaction in a foreign currency. 
D) makes a market in a currency. 
E) advises customers on their international business.

Question 6

The FX markets of the world have become one of the largest of all financial markets.

Accepted Answer

A) True 
 B)False

Question 7

The following are the net currency positions of a U.S.FI (stated in U.S.dollars). Note: Net currency positions are foreign exchange bought minus foreign exchange sold restated in U.S.dollar terms. $$\begin{array} { | l | r | } 
\hline { \text { Currency } } & \text { Net Position } \
\hline \text { Canadian Dollar } & \text { +US } \$ 1,200 \
\hline \text { Euro } & \text {-US } \$ 245,900 \
\hline \text { Japanese Yen } & + \mathrm { US } \$ 505,000 \
\hline \text { Swiss Frane } & \text {-US } \$ 36,700 \
\hline \text { British Pound } & \text { +US } \$ 447,900 \
\hline
\end{array}$$ How would you characterize the FI's risk exposure to fluctuations in the Euro to dollar exchange rate?

Accepted Answer

A) The FI is net short in the Euro and therefore faces the risk that the Euro will rise in value against the U.S.dollar. 
B) The FI is net short in the Euro and therefore faces the risk that the Euro will fall in value against the U.S.dollar. 
C) The FI is net long in the Euro and therefore faces the risk that the Euro will fall in value against the U.S.dollar. 
D) The FI is net long in the Euro and therefore faces the risk that the Euro will rise in value against the U.S.dollar. 
E) The FI has a balanced position in the Euro. 
A) The FI is net short in the Euro and therefore faces the risk that the Euro will rise in value against the U.S.dollar. 
B) The FI is net short in the Euro and therefore faces the risk that the Euro will fall in value against the U.S.dollar. 
C) The FI is net long in the Euro and therefore faces the risk that the Euro will fall in value against the U.S.dollar. 
D) The FI is net long in the Euro and therefore faces the risk that the Euro will rise in value against the U.S.dollar. 
E) The FI has a balanced position in the Euro.

Question 8

Interest rate parity implies that the discounted spread between interest rates in two currencies should equal the percentage spread between forward and spot exchange rates.

Accepted Answer

A) True 
 B)False

Question 9

A forward market for FX is the market in which foreign currency is traded for immediate delivery.

Accepted Answer

A) True 
 B)False

Question 10

A negative 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 11

Forward contracts in FX are typically written for a period of one-, three-, or six-months.

Accepted Answer

A) True 
 B)False

Question 12

A positive net exposure position in FX implies the FI is net short in a currency.

Accepted Answer

A) True 
 B)False

Question 13

An FI has purchased (borrowed) a one-year $10 million Eurodollar deposit at an annual interest rate of 6 percent.It has invested these proceeds in one-year Euro (€) bonds at an annual rate of 6.5 percent after converting them at the current spot rate of €1.75/$.Both interest and principal are paid at the end of the year. At what one-year forward rate will the bank earn a 1 percent spread?

Accepted Answer

A) €1.7344/$. 
B) €1.7418/$. 
C) €1.7478/$. 
D) €1.7750/$. 
E) €1.7842/$. 
A) €1.7344/$. 
B) €1.7418/$. 
C) €1.7478/$. 
D) €1.7750/$. 
E) €1.7842/$.

Question 14

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. What is the end-of-year profit or loss to the bank if in one year Canadian bond rates increase to 7.538 percent? (Assume no change in either current U.S.interest rates or current exchange rates, US $0.78493/C $1.)

Accepted Answer

A) Loss of US $5,000. 
B) Profit of US $15,000. 
C) Loss of C $119,000. 
D) Profit of C $50,000. 
E) Loss of C $50,000. 
A) Loss of US $5,000. 
B) Profit of US $15,000. 
C) Loss of C $119,000. 
D) Profit of C $50,000. 
E) Loss of C $50,000.

Question 15

Deviations from the international currency parity relationships may occur because of

Accepted Answer

A) free capital movements across national boundaries. 
B) barriers to cross-border financial flows. 
C) perfect rationality of market participants. 
D) differences in each country's productive capacity. 
E) Basel capital regulations. 
A) free capital movements across national boundaries. 
B) barriers to cross-border financial flows. 
C) perfect rationality of market participants. 
D) differences in each country's productive capacity. 
E) Basel capital regulations.

Question 16

During 2012, the top four banks that operate in foreign currency trading comprised almost half of the market.

Accepted Answer

A) True 
 B)False

Question 17

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. If in one year there is no change to either interest rates or exchange rates, what is the end-of-year profit or loss for the bank? (Hint: Annual interest is paid on both the Canadian bonds and the CD on the date of liquidation in exactly one year.)

Accepted Answer

A) Profit of US $20,000. 
B) Loss of C $224,000. 
C) Profit of US $50,000. 
D) Profit of C $63,700. 
E) Profit of US $313,000. 
A) Profit of US $20,000. 
B) Loss of C $224,000. 
C) Profit of US $50,000. 
D) Profit of C $63,700. 
E) Profit of US $313,000.

Question 18

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

Accepted Answer

A) The FI is net short in the British pound and therefore faces the risk that the British pound will rise in value against the U.S.dollar. 
B) The FI is net short in the British pound and therefore faces the risk that the British pound will fall in value against the U.S.dollar. 
C) The FI is net long in the British pound and therefore faces the risk that the British pound will fall in value against the U.S.dollar. 
D) The FI is net long in the British pound and therefore faces the risk that the British pound will rise in value against the U.S.dollar. 
E) The FI has a balanced position in the British pound. 
A) The FI is net short in the British pound and therefore faces the risk that the British pound will rise in value against the U.S.dollar. 
B) The FI is net short in the British pound and therefore faces the risk that the British pound will fall in value against the U.S.dollar. 
C) The FI is net long in the British pound and therefore faces the risk that the British pound will fall in value against the U.S.dollar. 
D) The FI is net long in the British pound and therefore faces the risk that the British pound will rise in value against the U.S.dollar. 
E) The FI has a balanced position in the British pound.

Question 19

As of 2015, which of the following FX "markets" is the largest?

Accepted Answer

A) London. 
B) New York. 
C) Tokyo. 
D) Hong Kong. 
E) Zurich. 
A) London. 
B) New York. 
C) Tokyo. 
D) Hong Kong. 
E) Zurich.

Question 20

The following are the net currency positions of a U.S.FI (stated in U.S.dollars). Note: Net currency positions are foreign exchange bought minus foreign exchange sold restated in U.S.dollar terms. $$\begin{array} { | l | r | } 
\hline { \text { Currency } } & \text { Net Position } \
\hline \text { Canadian Dollar } & \text { +US } \$ 1,200 \
\hline \text { Euro } & \text {-US } \$ 245,900 \
\hline \text { Japanese Yen } & + \mathrm { US } \$ 505,000 \
\hline \text { Swiss Frane } & \text {-US } \$ 36,700 \
\hline \text { British Pound } & \text { +US } \$ 447,900 \
\hline
\end{array}$$ What is the portfolio weight of the Euro in this FI's portfolio of foreign currency?

Accepted Answer

A) +0.18 percent. 
B) -36.62 percent. 
C) +75.20 percent. 
D) -5.47 percent. 
E) +66.70 percent. 
A) +0.18 percent. 
B) -36.62 percent. 
C) +75.20 percent. 
D) -5.47 percent. 
E) +66.70 percent.

The nominal interest rate is equal to the

The FI is acting as a speculator when it

The FX markets of the world have become one of the largest of all financial markets.

Interest rate parity implies that the discounted spread between interest rates in two currencies should equal the percentage spread between forward and spot exchange rates.

A forward market for FX is the market in which foreign currency is traded for immediate delivery.

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

Forward contracts in FX are typically written for a period of one-, three-, or six-months.

A positive net exposure position in FX implies the FI is net short in a currency.

Deviations from the international currency parity relationships may occur because of

During 2012, the top four banks that operate in foreign currency trading comprised almost half of the market.

As of 2015, which of the following FX "markets" is the largest?

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

Filters

Exam 13: Foreign Exchange Risk

The nominal interest rate is equal to the

The FI is acting as a speculator when it

The FX markets of the world have become one of the largest of all financial markets.

Interest rate parity implies that the discounted spread between interest rates in two currencies should equal the percentage spread between forward and spot exchange rates.

A forward market for FX is the market in which foreign currency is traded for immediate delivery.

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

Forward contracts in FX are typically written for a period of one-, three-, or six-months.

A positive net exposure position in FX implies the FI is net short in a currency.

Deviations from the international currency parity relationships may occur because of

During 2012, the top four banks that operate in foreign currency trading comprised almost half of the market.

As of 2015, which of the following FX "markets" is the largest?

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

Filters