Question 1

The reasons nondepository FIs have less FX risk than major money center banks include

Accepted Answer

A) Smaller asset sizes. 
B) Prudent person concerns. 
C) Regulations. 
D) All of the options. 
E) Smaller asset sizes and regulations. 
A) Smaller asset sizes. 
B) Prudent person concerns. 
C) Regulations. 
D) All of the options. 
E) Smaller asset sizes and regulations.

Question 2

In 2015, approximately _______ of the daily foreign exchange transactions occurred outside of the spot market?

Accepted Answer

A) 35 percent 
B) 60 percent 
C) 15 percent 
D) 75 percent 
E) 90 percent 
A) 35 percent 
B) 60 percent 
C) 15 percent 
D) 75 percent 
E) 90 percent

Question 3

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 forward exchange rate to eliminate the preference for the yen loans?

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 4

Which of the following is NOT a source of foreign exchange risk?

Accepted Answer

A) Trading foreign currencies. 
B) Making domestic-currency loans to foreign corporations. 
C) Buying foreign-issued securities. 
D) Issuing foreign currency-denominated debt. 
E) Making foreign currency loans. 
A) Trading foreign currencies. 
B) Making domestic-currency loans to foreign corporations. 
C) Buying foreign-issued securities. 
D) Issuing foreign currency-denominated debt. 
E) Making foreign currency loans.

Question 5

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 the Japanese yen?

Accepted Answer

A) +30,000. 
B) +40,600. 
C) -19,400. 
D) -40,600. 
E) +20,600. 
A) +30,000. 
B) +40,600. 
C) -19,400. 
D) -40,600. 
E) +20,600.

Question 6

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 you wanted to hedge your bank's risk exposure, what hedge position would you take?

Accepted Answer

A) A short interest rate hedge to protect against interest rate declines and a short currency hedge to protect against increases in the value of the Canadian dollar with respect to the U.S.dollar. 
B) A short interest rate hedge to protect against interest rate increases and a short currency hedge to protect against declines in the value of the Canadian dollar with respect to the U.S.dollar. 
C) A long interest rate hedge to protect against interest rate increases and a long currency hedge to protect against declines in the value of the Canadian dollar with respect to the U.S.dollar. 
D) A long interest rate hedge to protect against interest rate declines and a long currency hedge to protect against increases in the value of the Canadian dollar with respect to the U.S.dollar. 
E) A long interest rate hedge to protect against interest rate declines and a short currency hedge to protect against increases in the value of the Canadian dollar with respect to the U.S.dollar. 
A) A short interest rate hedge to protect against interest rate declines and a short currency hedge to protect against increases in the value of the Canadian dollar with respect to the U.S.dollar. 
B) A short interest rate hedge to protect against interest rate increases and a short currency hedge to protect against declines in the value of the Canadian dollar with respect to the U.S.dollar. 
C) A long interest rate hedge to protect against interest rate increases and a long currency hedge to protect against declines in the value of the Canadian dollar with respect to the U.S.dollar. 
D) A long interest rate hedge to protect against interest rate declines and a long currency hedge to protect against increases in the value of the Canadian dollar with respect to the U.S.dollar. 
E) A long interest rate hedge to protect against interest rate declines and a short currency hedge to protect against increases in the value of the Canadian dollar with respect to the U.S.dollar.

Question 7

The law of one price is based on the theory behind purchasing power parity, in that in the long run exchange rates move toward rate that equalize the prices of identical basket of goods and services in any two countries.

Accepted Answer

A) True 
 B)False

Question 8

As the U.S.dollar appreciates against the Japanese yen, U.S.goods become less expensive to Japanese consumers.

Accepted Answer

A) True 
 B)False

Question 9

The decrease in European FX volatility during the last decade has occurred because of

Accepted Answer

A) the stabilizing force of the euro. 
B) reduction in inflation rates in European countries. 
C) the reduced volatility in many emerging-market countries. 
D) the greater volatilities of Asian currencies. 
E) the stabilizing force of the euro and reduction in inflation rates in European countries. 
A) the stabilizing force of the euro. 
B) reduction in inflation rates in European countries. 
C) the reduced volatility in many emerging-market countries. 
D) the greater volatilities of Asian currencies. 
E) the stabilizing force of the euro and reduction in inflation rates in European countries.

Question 10

According to purchasing power parity (PPP), foreign currency exchange rates between two countries adjust to reflect changes in each country's

Accepted Answer

A) unemployment rates. 
B) export competitiveness. 
C) inflation rates. 
D) foreign exchange reserves. 
E) reserve requirements. 
A) unemployment rates. 
B) export competitiveness. 
C) inflation rates. 
D) foreign exchange reserves. 
E) reserve requirements.

Question 11

Foreign exchange trading has been called the fairest market in the world because

Accepted Answer

A) no single institution can control the direction of the market. 
B) trading may take place at any time during a 24-hour period. 
C) the volume of trading is very large and liquid. 
D) trading may take place anywhere as there is no central location for foreign exchange trading. 
E) all of the options are correct. 
A) no single institution can control the direction of the market. 
B) trading may take place at any time during a 24-hour period. 
C) the volume of trading is very large and liquid. 
D) trading may take place anywhere as there is no central location for foreign exchange trading. 
E) all of the options are correct.

Question 12

As the U.S.dollar appreciates against the Japanese yen, Japanese goods sold in the U.S.become less expensive to the U.S.consumer.

Accepted Answer

A) True 
 B)False

Question 13

In which of the following FX trading activities does the FI not assume FX risk?

Accepted Answer

A) The purchase and sale of foreign currencies for the purpose of profiting from forecasting or anticipating future movements in FX rates. 
B) The purchase and sale of foreign currencies to allow customers to partake in and complete international commercial trade transactions. 
C) The purchase and sale of foreign currencies for the purpose of offsetting customer exposure in any given currency. 
D) The purchase and sale of foreign currencies to allow customers to take positions in foreign real and financial investments. 
E) The purchase and sale of foreign currencies to allow customers to partake in and complete international commercial trade transactions and to take positions in foreign real and financial investments. 
A) The purchase and sale of foreign currencies for the purpose of profiting from forecasting or anticipating future movements in FX rates. 
B) The purchase and sale of foreign currencies to allow customers to partake in and complete international commercial trade transactions. 
C) The purchase and sale of foreign currencies for the purpose of offsetting customer exposure in any given currency. 
D) The purchase and sale of foreign currencies to allow customers to take positions in foreign real and financial investments. 
E) The purchase and sale of foreign currencies to allow customers to partake in and complete international commercial trade transactions and to take positions in foreign real and financial investments.

Question 14

The FI is acting as a hedger 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 15

Most profits or losses on foreign trading come from taking an open position in currencies.

Accepted Answer

A) True 
 B)False

Question 16

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. What is the spread earned if the bank can sell one-year forward Euros at €1.755/$?

Accepted Answer

A) -0.70 percent. 
B) -0.25 percent. 
C) 0.00 percent. 
D) 0.20 percent. 
E) 0.50 percent. 
A) -0.70 percent. 
B) -0.25 percent. 
C) 0.00 percent. 
D) 0.20 percent. 
E) 0.50 percent.

Question 17

Long-term violations of the interest rate parity relationship may occur if imperfections in the international financial markets are allowed to exist.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following FX trading activities is used to hedge FX risk?

Accepted Answer

A) The purchase and sale of foreign currencies for the purpose of profiting from forecasting or anticipating future movements in FX rates. 
B) The purchase and sale of foreign currencies to allow customers to partake in and complete international commercial trade transactions. 
C) The purchase and sale of foreign currencies for the purpose of offsetting customer exposure in any given currency. 
D) The purchase and sale of foreign currencies to allow customers to take positions in foreign real and financial investments. 
E) None of the options. 
A) The purchase and sale of foreign currencies for the purpose of profiting from forecasting or anticipating future movements in FX rates. 
B) The purchase and sale of foreign currencies to allow customers to partake in and complete international commercial trade transactions. 
C) The purchase and sale of foreign currencies for the purpose of offsetting customer exposure in any given currency. 
D) The purchase and sale of foreign currencies to allow customers to take positions in foreign real and financial investments. 
E) None of the options.

Question 19

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 the Swiss franc?

Accepted Answer

A) +2,400. 
B) +400. 
C) -2,800. 
D) -2,400. 
E) +3,200. 
A) +2,400. 
B) +400. 
C) -2,800. 
D) -2,400. 
E) +3,200.

Question 20

The real interest rate reflects the underlying real sector demand and supply for funds denominated in the domestic currency.

Accepted Answer

A) True 
 B)False

Exam 13: Foreign Exchange Risk

The reasons nondepository FIs have less FX risk than major money center banks include

In 2015, approximately _______ of the daily foreign exchange transactions occurred outside of the spot market?

Which of the following is NOT a source of foreign exchange risk?

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 the Japanese yen?

The law of one price is based on the theory behind purchasing power parity, in that in the long run exchange rates move toward rate that equalize the prices of identical basket of goods and services in any two countries.

As the U.S.dollar appreciates against the Japanese yen, U.S.goods become less expensive to Japanese consumers.

The decrease in European FX volatility during the last decade has occurred because of

According to purchasing power parity (PPP), foreign currency exchange rates between two countries adjust to reflect changes in each country's

Foreign exchange trading has been called the fairest market in the world because

As the U.S.dollar appreciates against the Japanese yen, Japanese goods sold in the U.S.become less expensive to the U.S.consumer.

In which of the following FX trading activities does the FI not assume FX risk?

The FI is acting as a hedger when it

Most profits or losses on foreign trading come from taking an open position in currencies.

Long-term violations of the interest rate parity relationship may occur if imperfections in the international financial markets are allowed to exist.

Which of the following FX trading activities is used to hedge FX risk?

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 the Swiss franc?

The real interest rate reflects the underlying real sector demand and supply for funds denominated in the domestic 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

Filters