Question 1

FX trading income is derived only from profit (or loss) on the FI's speculative currency positions.

Accepted Answer

A) True 
 B)False

Question 2

In 2011, during the financial crisis, which country was viewed as a safe haven and saw its currency appreciate in value relative to other currencies because of the demand for the currency?

Accepted Answer

A) Australia. 
B) Dubai. 
C) Canada. 
D) Argentina. 
E) Switzerland. 
A) Australia. 
B) Dubai. 
C) Canada. 
D) Argentina. 
E) Switzerland.

Question 3

In recent years, average daily trading volume at foreign exchange markets has been ______ the average daily trading volume of the NYSE?

Accepted Answer

A) one-half 
B) 20 times 
C) 40 times 
D) 70 times 
E) 85 times 
A) one-half 
B) 20 times 
C) 40 times 
D) 70 times 
E) 85 times

Question 4

Average daily turnover in the FX market has recently been over $5 trillion.

Accepted Answer

A) True 
 B)False

Question 5

An FI can control its FX risk exposure by on-balance-sheet and off-balance-sheet hedging.

Accepted Answer

A) True 
 B)False

Question 6

The underlying cause of foreign exchange volatility reflects fluctuations in the demand and supply of a country's currency.

Accepted Answer

A) True 
 B)False

Question 7

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 new exchange rate of Russian rubles to U.S.dollars is

Accepted Answer

A) 0.15. 
B) 0.1425. 
C) 0.141. 
D) 0.1605. 
E) 0.159. 
A) 0.15. 
B) 0.1425. 
C) 0.141. 
D) 0.1605. 
E) 0.159.

Question 8

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. Assume that instead of investing in Euro bonds at a fixed rate of 6.5 percent, it invests them in variable rates of LIBOR + 1.5 percent, reset every six months.The current LIBOR rate is 5 percent.What is the annual spread earned by the bank if LIBOR at the end of six months is 5.5 percent? Assume both interest and principal will be reinvested in six months.Assume the exchange rate remains at €1.75/$ at the end of the year.

Accepted Answer

A) 0.50 percent. 
B) 0.68 percent. 
C) 0.86 percent. 
D) 0.90 percent. 
E) 0.95 percent. 
A) 0.50 percent. 
B) 0.68 percent. 
C) 0.86 percent. 
D) 0.90 percent. 
E) 0.95 percent.

Question 9

Which of the following FX trading activities is used for purposes of speculation?

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 10

The one-year CD rates for financial institutions with AA ratings are 5 percent in the U.S.and 8 percent in France.An AA-rated U.S.financial institution can borrow by issuing CDs or lend by purchasing CDs at these rates in either market.The current spot rate is $0.20/Euro. What should be the one-year forward rate in order to prevent any arbitrage?

Accepted Answer

A) $0.1944/€. 
B) $0.1975/€. 
C) $0.2000/€. 
D) $0.2025/€. 
E) $0.2031/€. 
A) $0.1944/€. 
B) $0.1975/€. 
C) $0.2000/€. 
D) $0.2025/€. 
E) $0.2031/€.

Question 11

If foreign currency exchange rates are highly positively correlated, how can a FI reduce its exchange rate risk exposure?

Accepted Answer

A) By taking net long positions in all currencies. 
B) By taking net short positions in all currencies. 
C) By taking opposing net short and net long positions in different currencies. 
D) By maximizing net FX exposure in each currency, independently. 
E) By minimizing net FX exposure in each currency, independently. 
A) By taking net long positions in all currencies. 
B) By taking net short positions in all currencies. 
C) By taking opposing net short and net long positions in different currencies. 
D) By maximizing net FX exposure in each currency, independently. 
E) By minimizing net FX exposure in each currency, independently.

Question 12

The exposure to foreign exchange risk by U.S.FIs has decreased with the growth of the various derivative markets.

Accepted Answer

A) True 
 B)False

Question 13

The reason an FI receives a fee when purchasing foreign currencies that allow customers to complete international transactions is because the FI assumes some FX risk.

Accepted Answer

A) True 
 B)False

Question 14

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 by the bank if the end-of-year exchange rate is €1.77/$?

Accepted Answer

A) -1.00 percent. 
B) -0.70 percent. 
C) -0.25 percent. 
D) 0.00 percent. 
E) 0.20 percent. 
A) -1.00 percent. 
B) -0.70 percent. 
C) -0.25 percent. 
D) 0.00 percent. 
E) 0.20 percent.

Question 15

The FI is acting as a FX market agent for its customers 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 its domestic 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 its domestic currency. 
E) advises customers on their international business.

Question 16

U.S.pension funds invest approximately one percent (1%) of their portfolios in foreign securities.

Accepted Answer

A) True 
 B)False

Question 17

On-balance-sheet hedging involves making changes in the on-balance-sheet assets and liabilities to protect FI profits from FX risk without the use of derivative securities.

Accepted Answer

A) True 
 B)False

Question 18

The spot foreign exchange market is where forward and futures contracts and swap agreements are transacted.

Accepted Answer

A) True 
 B)False

Question 19

The one-year CD rates for financial institutions with AA ratings are 5 percent in the U.S.and 8 percent in France.An AA-rated U.S.financial institution can borrow by issuing CDs or lend by purchasing CDs at these rates in either market.The current spot rate is $0.20/Euro. What should be the spot rate in order for no arbitrage to take place, assuming the one-year forward rate is $0.1975/€?

Accepted Answer

A) $0.1944/€. 
B) $0.1975/€. 
C) $0.2000/€. 
D) $0.2025/€. 
E) $0.2031/€. 
A) $0.1944/€. 
B) $0.1975/€. 
C) $0.2000/€. 
D) $0.2025/€. 
E) $0.2031/€.

Question 20

Most profits or losses on foreign trading for FIs come from

Accepted Answer

A) open positions or speculation. 
B) market making. 
C) acting as agents for retail customers. 
D) acting as agents for wholesale customers. 
E) hedging activities. 
A) open positions or speculation. 
B) market making. 
C) acting as agents for retail customers. 
D) acting as agents for wholesale customers. 
E) hedging activities.

Exam 13: Foreign Exchange Risk

FX trading income is derived only from profit (or loss) on the FI's speculative currency positions.

In 2011, during the financial crisis, which country was viewed as a safe haven and saw its currency appreciate in value relative to other currencies because of the demand for the currency?

In recent years, average daily trading volume at foreign exchange markets has been ______ the average daily trading volume of the NYSE?

Average daily turnover in the FX market has recently been over $5 trillion.

An FI can control its FX risk exposure by on-balance-sheet and off-balance-sheet hedging.

The underlying cause of foreign exchange volatility reflects fluctuations in the demand and supply of a country's currency.

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 new exchange rate of Russian rubles to U.S.dollars is

Which of the following FX trading activities is used for purposes of speculation?

If foreign currency exchange rates are highly positively correlated, how can a FI reduce its exchange rate risk exposure?

The exposure to foreign exchange risk by U.S.FIs has decreased with the growth of the various derivative markets.

The reason an FI receives a fee when purchasing foreign currencies that allow customers to complete international transactions is because the FI assumes some FX risk.

The FI is acting as a FX market agent for its customers when it

U.S.pension funds invest approximately one percent (1%) of their portfolios in foreign securities.

On-balance-sheet hedging involves making changes in the on-balance-sheet assets and liabilities to protect FI profits from FX risk without the use of derivative securities.

The spot foreign exchange market is where forward and futures contracts and swap agreements are transacted.

Most profits or losses on foreign trading for FIs come from

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