Question 1

Exchange rate quotations may be either direct or indirect. Distinguish between a direct and an indirect quote.

Accepted Answer

The difference between a direct or indir

Question 2

The birth of the euro was smooth and uneventful in terms of both market volatility and operations.

Accepted Answer

A) True 
 B)False

Question 3

As the currency swap market developed, the arbitrage opportunities for reduced funding costs that were available in the early days of the swap market became more common.

Accepted Answer

A) True 
 B)False

Question 4

Which of the below statements is FALSE?

Accepted Answer

A)  The foreign-exchange market is an over-the-counter market that operates 24 hours a day. 
B)  Market participants who want to buy or sell a currency must search different dealers to get the best exchange rate on a specific currency. 
C)  Foreign-exchange dealers do not quote one price, but quote an exchange rate at which they are willing to buy a foreign currency and one at which they are willing to sell a foreign currency. 
D)  Dealers in the foreign-exchange market are large international banks and other financial institutions that specialize in making markets in foreign exchange with commercial banks playing a small part of this market. 
A)  The foreign-exchange market is an over-the-counter market that operates 24 hours a day. 
B)  Market participants who want to buy or sell a currency must search different dealers to get the best exchange rate on a specific currency. 
C)  Foreign-exchange dealers do not quote one price, but quote an exchange rate at which they are willing to buy a foreign currency and one at which they are willing to sell a foreign currency. 
D)  Dealers in the foreign-exchange market are large international banks and other financial institutions that specialize in making markets in foreign exchange with commercial banks playing a small part of this market.

Question 5

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

Accepted Answer

A)  A French investor who acquires a yen-denominated Japanese bond is exposed to the risk that the Japanese yen will increase in value relative to the euro. 
B)  Suppose that IBM issues bonds denominated in euros. IBM's foreign-exchange risk is that, at the time the coupon interest payments must be made and the principal repaid, the U.S. dollar will have depreciated relative to the euro, requiring that IBM pay more dollars to satisfy its obligation. 
C)  Foreign-exchange risk is a consideration for the issuer. 
D)  Any investor who purchases an asset denominated in a currency that is not the medium of exchange in the investor's country faces foreign-exchange risk. 
A)  A French investor who acquires a yen-denominated Japanese bond is exposed to the risk that the Japanese yen will increase in value relative to the euro. 
B)  Suppose that IBM issues bonds denominated in euros. IBM's foreign-exchange risk is that, at the time the coupon interest payments must be made and the principal repaid, the U.S. dollar will have depreciated relative to the euro, requiring that IBM pay more dollars to satisfy its obligation. 
C)  Foreign-exchange risk is a consideration for the issuer. 
D)  Any investor who purchases an asset denominated in a currency that is not the medium of exchange in the investor's country faces foreign-exchange risk.

Question 6

Dealers in the foreign exchange market realize revenue from commissions charged on foreign exchange transactions.

Accepted Answer

A) True 
 B)False

Question 7

Consider the theoretical cross rate between Swiss francs and Japanese yen on March 10, 2009. The spot exchange rate for the two currencies in American terms was $0.8647 per Swiss franc and $0.0101 per Japanese yen. Which of the below is TRUE?

Accepted Answer

A)  The number of units of yen per unit of Swiss franc is 85.61386 yen per Swiss franc. 
B)  The number of Swiss francs exchangeable for one Japanese yen is 0.01168. 
C)  Taking the reciprocal gives the number of Swiss francs exchangeable for one Japanese yen 
D)  All of these 
A)  The number of units of yen per unit of Swiss franc is 85.61386 yen per Swiss franc. 
B)  The number of Swiss francs exchangeable for one Japanese yen is 0.01168. 
C)  Taking the reciprocal gives the number of Swiss francs exchangeable for one Japanese yen 
D)  All of these

Question 8

Mathematically, interest rate parity between the currencies of two countries, A and B, can be expressed as ________.

Accepted Answer

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

Question 9

The market for long-dated forward exchange rate contracts is thin, which decreases the cost of eliminating foreign-exchange risk.

Accepted Answer

A) True 
 B)False

Question 10

Which of the below statements is FALSE?

Accepted Answer

A)  In the real world, it is rare that the theoretical cross rate, as computed from actual dealer dollar exchange rate quotes, will differ from the actual cross rate quoted by dealers. 
B)  Arbitraging to take advantage of cross-rate mispricing is called triangular arbitrage, so named because it involves positions in three currencies. 
C)  The arbitrage keeps actual cross rates dissimilar to theoretical cross rates. 
D)  Barring any government restrictions, riskless arbitrage will assure that the exchange rate between two countries will be the same in both countries. 
A)  In the real world, it is rare that the theoretical cross rate, as computed from actual dealer dollar exchange rate quotes, will differ from the actual cross rate quoted by dealers. 
B)  Arbitraging to take advantage of cross-rate mispricing is called triangular arbitrage, so named because it involves positions in three currencies. 
C)  The arbitrage keeps actual cross rates dissimilar to theoretical cross rates. 
D)  Barring any government restrictions, riskless arbitrage will assure that the exchange rate between two countries will be the same in both countries.

Question 11

A key factor affecting the expectation of changes in a country's exchange rate with another currency is the relative ________ of the two countries.

Accepted Answer

A)  known inflation rate 
B)  known purchasing power 
C)  expected inflation rate 
D)  expected risk-free rate 
A)  known inflation rate 
B)  known purchasing power 
C)  expected inflation rate 
D)  expected risk-free rate

Question 12

From the perspective of a U.S. investor, the cash flows of assets denominated in a foreign currency offer the investor to certainty as to the actual level of the cash flow measured in U.S. dollars.

Accepted Answer

A) True 
 B)False

Question 13

To qualify as a participating country in the Economic and Monetary Union (EMU) requires that a country satisfy certain economic standards. These standards include: ________.

Accepted Answer

A)  the annual fiscal deficit is to be no more than 3% of the gross disposable product (GDP). 
B)  the total outstanding government indebtedness is to be no more than 60% of GDP. 
C)  the voters of a country seeking membership have to approve the joining of the EMU by popular referendum. 
D)  All of these 
A)  the annual fiscal deficit is to be no more than 3% of the gross disposable product (GDP). 
B)  the total outstanding government indebtedness is to be no more than 60% of GDP. 
C)  the voters of a country seeking membership have to approve the joining of the EMU by popular referendum. 
D)  All of these

Question 14

The currency pair that is most commonly traded is U.S. dollar against Japanese yen (USD/JPY).

Accepted Answer

A) True 
 B)False

Question 15

Mathematically, interest rate parity between the currencies of two countries, A and B, can be expressed as $$\mathrm { I } \left( 1 + \mathrm { i } _ { \mathrm { A } } \right) = \left( \frac { 1 } { \mathrm {~S} } \right) ( 1 + \mathrm { i } \mathrm { B } ) \mathrm { F }$$
 where ________.

Accepted Answer

A)  I = amount of A's currency to be invested for a time period of length t 
B)  F = spot exchange rate: price of foreign currency in terms of domestic currency (units of domestic currency per unit of foreign currency) 
C)  S = t-period forward rate: price of foreign currency t periods from now 
D)  iB = interest rate on an investment maturing at time t in country A 
A)  I = amount of A's currency to be invested for a time period of length t 
B)  F = spot exchange rate: price of foreign currency in terms of domestic currency (units of domestic currency per unit of foreign currency) 
C)  S = t-period forward rate: price of foreign currency t periods from now 
D)  iB = interest rate on an investment maturing at time t in country A

Question 16

Dealers in the foreign exchange market realize revenue from the bid-ask spread but not from trading profits.

Accepted Answer

A) True 
 B)False

Question 17

Which of the below statements is TRUE?

Accepted Answer

A)  Looking at it from a U.S. participant's perspective, we see that a quote indicating the number of dollars exchangeable for one unit of a foreign currency is an indirect quote. 
B)  A direct quote from a U.S. participant's perspective would be the number of units of the foreign currency that can be exchanged for one U.S. dollar. 
C)  From the point of view of a non-U.S. participant, the number of U.S. dollars exchangeable for one unit of a non-U.S. currency is an indirect quote. 
D)  From the point of view of a non-U.S. participant, the number of units of a non-U.S. currency exchangeable for a Japanese yen is a direct quote. 
A)  Looking at it from a U.S. participant's perspective, we see that a quote indicating the number of dollars exchangeable for one unit of a foreign currency is an indirect quote. 
B)  A direct quote from a U.S. participant's perspective would be the number of units of the foreign currency that can be exchanged for one U.S. dollar. 
C)  From the point of view of a non-U.S. participant, the number of U.S. dollars exchangeable for one unit of a non-U.S. currency is an indirect quote. 
D)  From the point of view of a non-U.S. participant, the number of units of a non-U.S. currency exchangeable for a Japanese yen is a direct quote.

Question 18

Consider a currency swap where two companies issue bonds in the other's bond market and enter into an agreement. This agreement requires that ________.

Accepted Answer

A)  the two parties exchange the proceeds received from the sale of the bonds. 
B)  the two parties make the coupon payments to service the debt of the other party. 
C)  both parties agree to exchange the par value of the bonds with the exchange coming at the termination date of the currency swap (which coincides with the maturity of the bonds). 
D)  All of these 
A)  the two parties exchange the proceeds received from the sale of the bonds. 
B)  the two parties make the coupon payments to service the debt of the other party. 
C)  both parties agree to exchange the par value of the bonds with the exchange coming at the termination date of the currency swap (which coincides with the maturity of the bonds). 
D)  All of these

Question 19

Which of the below statements is FALSE?

Accepted Answer

A)  Futures options are options to enter into foreign-exchange futures contracts. 
B)  Only options on the major currencies are traded in the over-the-counter market. 
C)  In addition to the organized exchanges, an over-the-counter market exists for options on currencies. 
D)  In the case of currency options, the underlying is the foreign currency specified by the option contract. 
A)  Futures options are options to enter into foreign-exchange futures contracts. 
B)  Only options on the major currencies are traded in the over-the-counter market. 
C)  In addition to the organized exchanges, an over-the-counter market exists for options on currencies. 
D)  In the case of currency options, the underlying is the foreign currency specified by the option contract.

Question 20

The fundamental fact of international finance is that different countries issue different currencies, and the relative values of those currencies may change ________.

Accepted Answer

A)  quickly, substantially, and without warning. 
B)  reflect economic developments. 
C)  as a response to political events that make no economic sense. 
D)  All of these 
A)  quickly, substantially, and without warning. 
B)  reflect economic developments. 
C)  as a response to political events that make no economic sense. 
D)  All of these

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

Exchange rate quotations may be either direct or indirect. Distinguish between a direct and an indirect quote.

The birth of the euro was smooth and uneventful in terms of both market volatility and operations.

As the currency swap market developed, the arbitrage opportunities for reduced funding costs that were available in the early days of the swap market became more common.

Which of the below statements is FALSE?

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

Dealers in the foreign exchange market realize revenue from commissions charged on foreign exchange transactions.

Consider the theoretical cross rate between Swiss francs and Japanese yen on March 10, 2009. The spot exchange rate for the two currencies in American terms was $0.8647 per Swiss franc and $0.0101 per Japanese yen. Which of the below is TRUE?

Mathematically, interest rate parity between the currencies of two countries, A and B, can be expressed as ________.

The market for long-dated forward exchange rate contracts is thin, which decreases the cost of eliminating foreign-exchange risk.

Which of the below statements is FALSE?

A key factor affecting the expectation of changes in a country's exchange rate with another currency is the relative ________ of the two countries.

From the perspective of a U.S. investor, the cash flows of assets denominated in a foreign currency offer the investor to certainty as to the actual level of the cash flow measured in U.S. dollars.

To qualify as a participating country in the Economic and Monetary Union (EMU) requires that a country satisfy certain economic standards. These standards include: ________.

The currency pair that is most commonly traded is U.S. dollar against Japanese yen (USD/JPY).

Dealers in the foreign exchange market realize revenue from the bid-ask spread but not from trading profits.

Which of the below statements is TRUE?

Consider a currency swap where two companies issue bonds in the other's bond market and enter into an agreement. This agreement requires that ________.

Which of the below statements is FALSE?

The fundamental fact of international finance is that different countries issue different currencies, and the relative values of those currencies may change ________.

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