Question 1

The ________ is the market for settlement of a foreign-exchange transaction within two business days.

Accepted Answer

A)  forward exchange rate market 
B)  futures exchange rate market 
C)  current exchange rate market 
D)  spot exchange rate market 
A)  forward exchange rate market 
B)  futures exchange rate market 
C)  current exchange rate market 
D)  spot exchange rate market

Question 2

Since the early 1970s, exchange rates among major currencies have been free to float, with ________ 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 ________.

Accepted Answer

A)  risk/beta forces; increase or decrease. 
B)  market forces; increase or stay the same. 
C)  risk/beta forces; same, increase, or decrease. 
D)  market forces; same, increase, or decrease. 
A)  risk/beta forces; increase or decrease. 
B)  market forces; increase or stay the same. 
C)  risk/beta forces; same, increase, or decrease. 
D)  market forces; same, increase, or decrease.

Question 3

In regards to the perspective of a U.S. investor, which of the below statements is FALSE?

Accepted Answer

A)  The cash flows of assets denominated in a foreign currency expose the investor to uncertainty as to the actual level of the cash flow measured in U.S. dollars. 
B)  The actual number of U.S. dollars that the investor eventually gets depends on the exchange rate between the U.S. dollar and the foreign currency at the time the nondollar cash flow is received and exchanged for U.S. dollars. 
C)  If the foreign currency depreciates (declines in value) relative to the U.S. dollar (that is, the U.S. dollar appreciates), the dollar value of the cash flows will be proportionately less, leading to foreign exchange risk. 
D)  The cash flows of assets denominated in a foreign currency expose the investor to uncertainty as to the actual level of the cash flow measured in that foreign currency. 
A)  The cash flows of assets denominated in a foreign currency expose the investor to uncertainty as to the actual level of the cash flow measured in U.S. dollars. 
B)  The actual number of U.S. dollars that the investor eventually gets depends on the exchange rate between the U.S. dollar and the foreign currency at the time the nondollar cash flow is received and exchanged for U.S. dollars. 
C)  If the foreign currency depreciates (declines in value) relative to the U.S. dollar (that is, the U.S. dollar appreciates), the dollar value of the cash flows will be proportionately less, leading to foreign exchange risk. 
D)  The cash flows of assets denominated in a foreign currency expose the investor to uncertainty as to the actual level of the cash flow measured in that foreign currency.

Question 4

The countries of the European Union electing to be members of the Economic and Monetary Union (EMU) are subject to a ________ conversion rate against their national currencies and relative to the euro, but the value of the euro against all other currencies ________ according to market conditions.

Accepted Answer

A)  flexible oscillates 
B)  fixed fluctuates 
C)  flexible is fixed 
D)  fixed is stationary 
A)  flexible oscillates 
B)  fixed fluctuates 
C)  flexible is fixed 
D)  fixed is stationary

Question 5

Quoting in terms of U.S. dollars per unit of foreign currency is called ________ terms, while quoting in terms of the number of units of the foreign currency per U.S. dollar is called ________ terms.

Accepted Answer

A)  United States; European 
B)  American; European 
C)  domestic; foreign 
D)  local or current; non-U.S. 
A)  United States; European 
B)  American; European 
C)  domestic; foreign 
D)  local or current; non-U.S.

Question 6

Barring any government restrictions, ________ will assure that the exchange rate between two countries will be the same in both countries. The ________ between two countries other than the United States can be inferred from their exchange rates with the U.S. dollar.

Accepted Answer

A)  certainty arbitrage; empirical exchange rate 
B)  riskless arbitrage; theoretical exchange rate 
C)  riskless arbitrage; empirical spot rate 
D)  certainty arbitrage; theoretical spot rate 
A)  certainty arbitrage; empirical exchange rate 
B)  riskless arbitrage; theoretical exchange rate 
C)  riskless arbitrage; empirical spot rate 
D)  certainty arbitrage; theoretical spot rate

Question 7

The exchange rate between the U.S. dollar and the euro can be quoted as ________.

Accepted Answer

A)  the amount of U.S. dollars necessary to acquire one British pound, and this is the dollar price of one pound. 
B)  the number of euros necessary to acquire one Japanese yet, or the yen price of one dollar. 
C)  the amount of U.S. dollars needed to acquire one euro, and this is the dollar price of one euro. 
D)  the amount of U.S. dollars needed to acquire one Mexican peso, and this is the dollar price of one peso. 
A)  the amount of U.S. dollars necessary to acquire one British pound, and this is the dollar price of one pound. 
B)  the number of euros necessary to acquire one Japanese yet, or the yen price of one dollar. 
C)  the amount of U.S. dollars needed to acquire one euro, and this is the dollar price of one euro. 
D)  the amount of U.S. dollars needed to acquire one Mexican peso, and this is the dollar price of one peso.

Question 8

Given a direct quote, we can obtain an indirect quote (which is simply the reciprocal of the direct quote), and vice versa. For example, on March 9, 2009, a U.S. investor is given a direct quote of 1.2674 U.S. dollars for one euro. That is, the price of a euro is $1.2674. What would be the indirect quote for the U.S. investor; that is, one U.S. dollar can be exchanged for how many euros (which is the euro price of a U.S. dollar)?

Accepted Answer

A)  1.2674 
B)  1.0000 
C)  0.8988 
D)  0.7889 
A)  1.2674 
B)  1.0000 
C)  0.8988 
D)  0.7889

Question 9

Consider a U.S. investor with a one-year investment horizon who can either deposit money in a U.S. bank for investment or deposit money in a bank in a foreign country. To determine the proper choice, the investor must know ________.

Accepted Answer

A)  the taxes paid in both countries on investment income. 
B)  the spot exchange rate between U.S. dollars and the foreign country's currency. 
C)  the spot exchange rate one year from now between U.S. dollars and the foreign currency. 
D)  All of these 
A)  the taxes paid in both countries on investment income. 
B)  the spot exchange rate between U.S. dollars and the foreign country's currency. 
C)  the spot exchange rate one year from now between U.S. dollars and the foreign currency. 
D)  All of these

Question 10

For foreign exchange, the ________ is the market of choice, and trading there is much ________ trading on exchanges.

Accepted Answer

A)  future market smaller than 
B)  forward market larger than 
C)  cash market larger than 
D)  spot market the same compared to 
A)  future market smaller than 
B)  forward market larger than 
C)  cash market larger than 
D)  spot market the same compared to

Question 11

Both European and U.S. investment banks play insignificant roles in the primary issuance of corporate debt denominated in euros.

Accepted Answer

A) True 
 B)False

Question 12

Four instruments are available to borrowers and investors to protect against adverse foreign-exchange rate movements including ________.

Accepted Answer

A)  currency forward contracts and currency futures contracts. 
B)  currency forward contracts but not currency swaps. 
C)  currency futures contracts but not currency options. 
D)  currency options but not currency swaps. 
A)  currency forward contracts and currency futures contracts. 
B)  currency forward contracts but not currency swaps. 
C)  currency futures contracts but not currency options. 
D)  currency options but not currency swaps.

Question 13

The birth of the euro on January 4, 1999, was smooth and uneventful in terms of both market volatility and operations. Several notable outcomes resulted from this event including: ________.

Accepted Answer

A)  The birth of the euro proved impossible. 
B)  The birth of the euro proved unstable. 
C)  The birth of the euro also gave birth to a large public and corporate capital market denominated in the euro. 
D)  The birth of the euro created differences in currency risk. 
A)  The birth of the euro proved impossible. 
B)  The birth of the euro proved unstable. 
C)  The birth of the euro also gave birth to a large public and corporate capital market denominated in the euro. 
D)  The birth of the euro created differences in currency risk.

Question 14

Which of the below statements is FALSE?

Accepted Answer

A)  Interest rate parity provides that a borrower who hedges in the forward exchange rate market realizes the same domestic borrowing rate whether borrowing domestically or in a foreign country. 
B)  In deriving the theoretical forward exchange rate using the arbitrage argument, we assume the investor faces commissions or bid-ask spread when exchanging in the spot market today and at the end of the investment horizon. 
C)  In deriving the theoretical forward exchange rate using the arbitrage argument, we assume that the borrowing and lending rates in each currency are the same. 
D)  Any restrictions on foreign investing or borrowing in each country impede arbitrage and may cause a divergence between actual and theoretical forward exchange rates. 
A)  Interest rate parity provides that a borrower who hedges in the forward exchange rate market realizes the same domestic borrowing rate whether borrowing domestically or in a foreign country. 
B)  In deriving the theoretical forward exchange rate using the arbitrage argument, we assume the investor faces commissions or bid-ask spread when exchanging in the spot market today and at the end of the investment horizon. 
C)  In deriving the theoretical forward exchange rate using the arbitrage argument, we assume that the borrowing and lending rates in each currency are the same. 
D)  Any restrictions on foreign investing or borrowing in each country impede arbitrage and may cause a divergence between actual and theoretical forward exchange rates.

Question 15

In general, an exchange rate is defined ________.

Accepted Answer

A)  as the amount of one currency that can be exchanged for a unit of another currency. 
B)  as the amount of two currencies that can be exchanged for a unit of another currency. 
C)  as the amount of a Japanese yen (and no other currency) that can be exchanged for a unit of any other currency in the world. 
D)  as the amount of one currency (of any country) that can be exchanged for a unit of a U.S. dollar and no other currency. 
A)  as the amount of one currency that can be exchanged for a unit of another currency. 
B)  as the amount of two currencies that can be exchanged for a unit of another currency. 
C)  as the amount of a Japanese yen (and no other currency) that can be exchanged for a unit of any other currency in the world. 
D)  as the amount of one currency (of any country) that can be exchanged for a unit of a U.S. dollar and no other currency.

Question 16

The theoretical forward rate implied by the interest rates and spot exchange rate can be expressed as ________.

Accepted Answer

A) 
$\mathrm{S}=\mathrm{F}\left(\frac{1-\mathrm{i}_{\mathrm{A}}}{1+\mathrm{i}_{\mathrm{B}}}\right)$ 
B) 
$\mathrm{F}=\mathrm{S}\left(\frac{1+\mathrm{i}_{\mathrm{A}}}{1-\mathrm{i}_{\mathrm{B}}}\right)$ 
C) 
$F=S\left(\frac{1+i_{A}}{1+i_{B}}\right)$ 
D) 
$F=S\left(\frac{1-i_{A}}{1-i_{B}}\right)$ 
A) 
$\mathrm{S}=\mathrm{F}\left(\frac{1-\mathrm{i}_{\mathrm{A}}}{1+\mathrm{i}_{\mathrm{B}}}\right)$ 
B) 
$\mathrm{F}=\mathrm{S}\left(\frac{1+\mathrm{i}_{\mathrm{A}}}{1-\mathrm{i}_{\mathrm{B}}}\right)$ 
C) 
$F=S\left(\frac{1+i_{A}}{1+i_{B}}\right)$ 
D) 
$F=S\left(\frac{1-i_{A}}{1-i_{B}}\right)$

Question 17

On the corporate side, the primary issuance of corporate debt denominated in the euro has become small and not liquid.

Accepted Answer

A) True 
 B)False

Question 18

Forward contracts ________.

Accepted Answer

A)  typically have a maturity of more than 2 years. 
B)  that are shorter-dated have relatively large bid-ask spreads. 
C)  are not attractive for hedging long-dated foreign currency exposure. 
D)  that are longer-dated have a the bid-ask spread (for a given currency) that decreases with the maturity of the contract. 
A)  typically have a maturity of more than 2 years. 
B)  that are shorter-dated have relatively large bid-ask spreads. 
C)  are not attractive for hedging long-dated foreign currency exposure. 
D)  that are longer-dated have a the bid-ask spread (for a given currency) that decreases with the maturity of the contract.

Question 19

Prior to the establishment of the currency swap market, capitalizing on such arbitrage opportunities did not require use of the currency forward market.

Accepted Answer

A) True 
 B)False

Question 20

What is a key factor affecting the expectation of changes in a country's exchange rate with another currency? Explain in terms of the purchasing power parity relationship?

Accepted Answer

A key factor affecting the expectation o

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

The ________ 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 ________ 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 ________.

In regards to the perspective of a U.S. investor, which of the below statements is FALSE?

The countries of the European Union electing to be members of the Economic and Monetary Union (EMU) are subject to a ________ conversion rate against their national currencies and relative to the euro, but the value of the euro against all other currencies ________ according to market conditions.

Quoting in terms of U.S. dollars per unit of foreign currency is called ________ terms, while quoting in terms of the number of units of the foreign currency per U.S. dollar is called ________ terms.

Barring any government restrictions, ________ will assure that the exchange rate between two countries will be the same in both countries. The ________ between two countries other than the United States can be inferred from their exchange rates with the U.S. dollar.

The exchange rate between the U.S. dollar and the euro can be quoted as ________.

Consider a U.S. investor with a one-year investment horizon who can either deposit money in a U.S. bank for investment or deposit money in a bank in a foreign country. To determine the proper choice, the investor must know ________.

For foreign exchange, the ________ is the market of choice, and trading there is much ________ trading on exchanges.

Both European and U.S. investment banks play insignificant roles in the primary issuance of corporate debt denominated in euros.

Four instruments are available to borrowers and investors to protect against adverse foreign-exchange rate movements including ________.

The birth of the euro on January 4, 1999, was smooth and uneventful in terms of both market volatility and operations. Several notable outcomes resulted from this event including: ________.

Which of the below statements is FALSE?

In general, an exchange rate is defined ________.

The theoretical forward rate implied by the interest rates and spot exchange rate can be expressed as ________.

On the corporate side, the primary issuance of corporate debt denominated in the euro has become small and not liquid.

Forward contracts ________.

Prior to the establishment of the currency swap market, capitalizing on such arbitrage opportunities did not require use of the currency forward market.

What is a key factor affecting the expectation of changes in a country's exchange rate with another currency? Explain in terms of the purchasing power parity relationship?

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

Since the early 1970s, exchange rates among major currencies have been free to float, with 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 .

The countries of the European Union electing to be members of the Economic and Monetary Union (EMU) are subject to a conversion rate against their national currencies and relative to the euro, but the value of the euro against all other currencies according to market conditions.

Quoting in terms of U.S. dollars per unit of foreign currency is called terms, while quoting in terms of the number of units of the foreign currency per U.S. dollar is called terms.

Barring any government restrictions, will assure that the exchange rate between two countries will be the same in both countries. The between two countries other than the United States can be inferred from their exchange rates with the U.S. dollar.

For foreign exchange, the is the market of choice, and trading there is much trading on exchanges.