Question 1

What is the spot (or cash) exchange rate market? Are exchange rates free to float?

Accepted Answer

The spot or cash exchange rate market is the market for settlement of a foreign-exchange transaction within two business days. Since the early 1970s, exchange rates among major currencies have been free to float, with market forces determining the relative value of a currency. Thus, each day a currency's price relative to that of another freely floating currency may stay the same, increase, or decrease.

Question 2

If the number of units of a foreign currency that can be obtained for one dollar (the price of a dollar in that currency or indirect quotation) rises, the dollar is said to ________ relative to the currency, and the currency is said to ________. Thus, appreciation means a decline in the ________ quotation.

Accepted Answer

A)  appreciate; depreciate; direct 
B)  depreciate; appreciate; indirect. 
C)  appreciate; depreciate; direct, 
D)  depreciate; appreciate; indirect., 
A)  appreciate; depreciate; direct 
B)  depreciate; appreciate; indirect. 
C)  appreciate; depreciate; direct, 
D)  depreciate; appreciate; indirect., A

Question 3

Which of the below statements is FALSE?

Accepted Answer

A)  The Eurocurrency market is the name of the unregulated and informal market for bank deposits and bank loans denominated in a currency other than that of the country where the bank initiating the transaction is located. 
B)  Just like a forward or futures contract, an option gives the option buyer the opportunity to benefit from favorable exchange rate movements but establishes a maximum loss. 
C)  Foreign-exchange futures contracts for the major currencies are traded on the International Monetary Market (IMM), a division of the Chicago Mercantile Exchange. 
D)  The two types of foreign currency options are options on the foreign currency and futures options. 
A)  The Eurocurrency market is the name of the unregulated and informal market for bank deposits and bank loans denominated in a currency other than that of the country where the bank initiating the transaction is located. 
B)  Just like a forward or futures contract, an option gives the option buyer the opportunity to benefit from favorable exchange rate movements but establishes a maximum loss. 
C)  Foreign-exchange futures contracts for the major currencies are traded on the International Monetary Market (IMM), a division of the Chicago Mercantile Exchange. 
D)  The two types of foreign currency options are options on the foreign currency and futures options. B

Question 4

Exchange rate quotations may be either direct or indirect. The difference depends on identifying one currency as a local currency and the other as a foreign currency.

Accepted Answer

A) True 
 B)False

Question 5

The most traded currency pair is ________, which has captured about 30% of the global turnover. The ________ and ________ represent about 20% and 11%, respectively.

Accepted Answer

A)  GBP/USD; USD/JPY; EUR/USD 
B)  USD/JPY; EUR/USD; GBP/USD 
C)  EUR/USD; USD/JPY; GBP/USD 
D)  EUR/USD; GBP/USD; USD/JPY 
A)  GBP/USD; USD/JPY; EUR/USD 
B)  USD/JPY; EUR/USD; GBP/USD 
C)  EUR/USD; USD/JPY; GBP/USD 
D)  EUR/USD; GBP/USD; USD/JPY

Question 6

The development of the swap market reduced arbitrage opportunities.

Accepted Answer

A) True 
 B)False

Question 7

Contrast what a currency option contract gives compared to a forward or futures contract. What is the option price?

Accepted Answer

In contrast to a forward or futures cont

Question 8

A ________ is the number of units of a local currency exchangeable for one unit of a foreign currency, while an ________ is the number of units of a foreign currency that can be exchanged for one unit of a local currency.

Accepted Answer

A)  direct price; indirect sale 
B)  indirect price; direct quote 
C)  direct quote; indirect quote 
D)  indirect quote; direct sale 
A)  direct price; indirect sale 
B)  indirect price; direct quote 
C)  direct quote; indirect quote 
D)  indirect quote; direct sale

Question 9

The one-year ________ fixes today the exchange rate one year from now.

Accepted Answer

A)  forward exchange rate 
B)  spot exchange rate 
C)  forward transaction rate 
D)  All of these 
A)  forward exchange rate 
B)  spot exchange rate 
C)  forward transaction rate 
D)  All of these

Question 10

The largest sector of the Eurocurrency market involves bank deposits and bank loans in U.S. dollars and is called the ________.

Accepted Answer

A)  Eurodollar sector. 
B)  Eurofutures market. 
C)  Eurodeposits sector. 
D)  Eurodollar market. 
A)  Eurodollar sector. 
B)  Eurofutures market. 
C)  Eurodeposits sector. 
D)  Eurodollar market.

Question 11

The three currency pairs (and their abbreviations) that are most commonly traded are ________.

Accepted Answer

A)  Euro against U.S. dollar (GBP/US
D) . 
B)  U.S. dollar against Japanese yen (USD/JPY). 
C)  British pound against mexican peso (GBP/MP). 
D)  Swiss franc against U.S. dollar (SF/US
D) . 
A)  Euro against U.S. dollar (GBP/US
D) . 
B)  U.S. dollar against Japanese yen (USD/JPY). 
C)  British pound against mexican peso (GBP/MP). 
D)  Swiss franc against U.S. dollar (SF/US
D) .

Question 12

To derive the theoretical forward exchange rate using the arbitrage argument, we made several assumptions. When the assumptions are violated, the actual forward exchange rate may deviate from the theoretical forward exchange rate. Describe two of these assumptions.

Accepted Answer

Below are four assumptions.
First, in de

Question 13

The foreign exchange market can best be described as an interbank over-the-counter market.

Accepted Answer

A) True 
 B)False

Question 14

Which of the below statements is FALSE?

Accepted Answer

A)  Spot exchange rates adjust to compensate for the relative inflation rate reflecting the so-called purchasing power parity relationship. 
B)  The purchasing power parity relationship posits that the exchange rate - the domestic price of the foreign currency - is proportional to the domestic inflation rate, and inversely proportional to foreign inflation. 
C)  Because of the importance of the euro in the international financial system, currency quotations are all relative to the euro. 
D)  Suppose that on day 1 the spot exchange rate between the U.S. dollar and country X is $0.80 and on the next day, day 2, it changes to $0.81. Thus, the currency unit of country X appreciated relative to the U.S. dollar from day 1 to day 2. 
A)  Spot exchange rates adjust to compensate for the relative inflation rate reflecting the so-called purchasing power parity relationship. 
B)  The purchasing power parity relationship posits that the exchange rate - the domestic price of the foreign currency - is proportional to the domestic inflation rate, and inversely proportional to foreign inflation. 
C)  Because of the importance of the euro in the international financial system, currency quotations are all relative to the euro. 
D)  Suppose that on day 1 the spot exchange rate between the U.S. dollar and country X is $0.80 and on the next day, day 2, it changes to $0.81. Thus, the currency unit of country X appreciated relative to the U.S. dollar from day 1 to day 2.

Question 15

Members of the EMU are said to be part of "Euroland" or the "euro zone" because the euro became the only legal currency.

Accepted Answer

A) True 
 B)False

Question 16

The arbitrage process that forces interest rate parity is called ________.

Accepted Answer

A)  uncovered interest parity. 
B)  covered dividend arbitrage. 
C)  covered interest arbitrage. 
D)  covered interest parity. 
A)  uncovered interest parity. 
B)  covered dividend arbitrage. 
C)  covered interest arbitrage. 
D)  covered interest parity.

Question 17

A ________ in the foreign exchange market leads arbitrageurs to act, with the result that the forward exchange rate changes.

Accepted Answer

A)  riskless and uncertain arbitrage situation 
B)  risky arbitrage situation 
C)  risky opportunity possibility 
D)  riskless arbitrage situation 
A)  riskless and uncertain arbitrage situation 
B)  risky arbitrage situation 
C)  risky opportunity possibility 
D)  riskless arbitrage situation

Question 18

In a world with market imperfections, it may be possible for an issuer to reduce its borrowing cost by borrowing funds denominated in a foreign currency and hedging the associated exchange rate risk, also known as an arbitrage opportunity.

Accepted Answer

A) True 
 B)False

Question 19

How do we mathematically express interest rate parity? In your answer describe all relevant variables.

Accepted Answer

Mathematically, interest rate parity bet

Question 20

Foreign-exchange risk ________.

Accepted Answer

A)  is the risk that a currency's value may change adversely. 
B)  is an unimportant consideration for all participants in the international financial markets. 
C)  cannot affect an international investor's return after adjusting for changes in the exchange rate. 
D)  cannot affect issues denominated in a foreign currency (e.g., in terms of the effective value of the cash payments owed to investors). 
A)  is the risk that a currency's value may change adversely. 
B)  is an unimportant consideration for all participants in the international financial markets. 
C)  cannot affect an international investor's return after adjusting for changes in the exchange rate. 
D)  cannot affect issues denominated in a foreign currency (e.g., in terms of the effective value of the cash payments owed to investors).

Exam 32: The Market for Foreign Exchange and Risk Control Instruments

What is the spot (or cash) exchange rate market? Are exchange rates free to float?

Which of the below statements is FALSE?

Exchange rate quotations may be either direct or indirect. The difference depends on identifying one currency as a local currency and the other as a foreign currency.

The most traded currency pair is ________, which has captured about 30% of the global turnover. The ________ and ________ represent about 20% and 11%, respectively.

The development of the swap market reduced arbitrage opportunities.

Contrast what a currency option contract gives compared to a forward or futures contract. What is the option price?

A ________ is the number of units of a local currency exchangeable for one unit of a foreign currency, while an ________ is the number of units of a foreign currency that can be exchanged for one unit of a local currency.

The one-year ________ fixes today the exchange rate one year from now.

The largest sector of the Eurocurrency market involves bank deposits and bank loans in U.S. dollars and is called the ________.

The three currency pairs (and their abbreviations) that are most commonly traded are ________.

To derive the theoretical forward exchange rate using the arbitrage argument, we made several assumptions. When the assumptions are violated, the actual forward exchange rate may deviate from the theoretical forward exchange rate. Describe two of these assumptions.

The foreign exchange market can best be described as an interbank over-the-counter market.

Which of the below statements is FALSE?

Members of the EMU are said to be part of "Euroland" or the "euro zone" because the euro became the only legal currency.

The arbitrage process that forces interest rate parity is called ________.

A ________ in the foreign exchange market leads arbitrageurs to act, with the result that the forward exchange rate changes.

In a world with market imperfections, it may be possible for an issuer to reduce its borrowing cost by borrowing funds denominated in a foreign currency and hedging the associated exchange rate risk, also known as an arbitrage opportunity.

How do we mathematically express interest rate parity? In your answer describe all relevant variables.

Foreign-exchange risk ________.

Introduction

Financial Institutions, Financial Intermediaries, and Asset Management Firms

Depository Institutions: Activities and Characteristics

The U.S. Federal Reserve and the Creation of Money

Monetary Policy in the United States

Insurance Companies

Investment Companies and Exchange Traded Funds

Pension Funds

Properties and Pricing of Financial Assets

The Level and Structure of Interest Rates

The Term Structure of Interest Rates

Risk/Return and Asset Pricing Models

Primary Markets and the Underwriting of Securities

Secondary Markets

Treasury and Agency Securities Markets

Municipal Securities Markets

Markets for Common Stock: The Basic Characteristics

Markets for Common Stock: Structure and Organization

Markets for Corporate Senior Instruments: I

Markets for Corporate Senior Instruments: II

The Markets for Bank Obligations

The Residential Mortgage Market

Mortgage-Backed Securities Market

Market for Commercial Mortgage Loans and Commercial Mortgage-Backed Securities

Market for Asset-Backed Securities

Financial Futures Markets

Options Markets

Pricing of Futures and Options Contracts

The Applications of Futures and Options Contracts

OTC Interest Rate Derivatives: Forward Rate Agreements, Swaps, Caps, and Floors

Market for Credit Risk Transfer Vehicles: Credit Derivatives and Collateralized Debt Obligations

Filters

The most traded currency pair is , which has captured about 30% of the global turnover. The and represent about 20% and 11%, respectively.

A is the number of units of a local currency exchangeable for one unit of a foreign currency, while an is the number of units of a foreign currency that can be exchanged for one unit of a local currency.