Question 1

FX trading risk exposure continues into the night until all FI operations are closed.

Accepted Answer

A) True 
 B)False

Question 2

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 3

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

Accepted Answer

A) True 
 B)False

Question 4

Suppose that the current spot exchange rate of Canadian dollars for Russian rubles is $0.15/1ruble. The price of Russian-produced goods increases by 8 percent, and the Canadian price index increases by 3 percent. According to PPP, the new exchange rate of Russian rubles to 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 5

A positive net exposure position in FX implies that the FI is

Accepted Answer

A) net long in a currency and exposed to depreciation of the foreign currency. 
B) net short in a currency and exposed to depreciation of the foreign currency. 
C) net long in a currency and exposed to appreciation of the foreign currency. 
D) net short in a currency and exposed to appreciation of the foreign currency. 
E) neither long nor short in a currency. 
A) net long in a currency and exposed to depreciation of the foreign currency. 
B) net short in a currency and exposed to depreciation of the foreign currency. 
C) net long in a currency and exposed to appreciation of the foreign currency. 
D) net short in a currency and exposed to appreciation of the foreign currency. 
E) neither long nor short in a currency.

Question 6

Deviations from the international currency parity relationships may occur because of

Accepted Answer

A) free capital movements across national boundaries. 
B) barriers to cross-border financial flows. 
C) perfect rationality of market participants. 
D) differences in each country's productive capacity. 
E) Basel capital regulations. 
A) free capital movements across national boundaries. 
B) barriers to cross-border financial flows. 
C) perfect rationality of market participants. 
D) differences in each country's productive capacity. 
E) Basel capital regulations.

Question 7

An FI can eliminate its currency risk exposure by matching its foreign currency assets to its foreign currency liabilities.

Accepted Answer

A) True 
 B)False

Question 8

Yen Bank wishes to invest in Yen loans at a rate of 10 percent. The bank will fund the loans in the domestic GIC 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 9

The foreign exchange market in Tokyo is the largest FX trading market.

Accepted Answer

A) True 
 B)False

Question 10

The following are the net currency positions of a Canadian FI (stated in Canadian dollars).   How would you characterize the FI's risk exposure to fluctuations in the Swiss franc/dollar exchange rate?

Accepted Answer

A) The FI is net short in the franc and therefore faces the risk that the franc will rise in value against the U.S. dollar. 
B) The FI is net short in the franc and therefore faces the risk that the franc will fall in value against the U.S. dollar. 
C) The FI is net long in the franc and therefore faces the risk that the franc will fall in value against the U.S. dollar. 
D) The FI is net long in the franc and therefore faces the risk that the franc will rise in value against the U.S. dollar. 
E) The FI has a balanced position in the Swiss franc. 
A) The FI is net short in the franc and therefore faces the risk that the franc will rise in value against the U.S. dollar. 
B) The FI is net short in the franc and therefore faces the risk that the franc will fall in value against the U.S. dollar. 
C) The FI is net long in the franc and therefore faces the risk that the franc will fall in value against the U.S. dollar. 
D) The FI is net long in the franc and therefore faces the risk that the franc will rise in value against the U.S. dollar. 
E) The FI has a balanced position in the Swiss franc.

Question 11

As of 2012, which of the following FX "markets" is the largest?

Accepted Answer

A) London. 
B) New York. 
C) Tokyo. 
D) Hong Kong. 
E) Zurich. 
A) London. 
B) New York. 
C) Tokyo. 
D) Hong Kong. 
E) Zurich.

Question 12

The greater the volatility of foreign exchange rates given any net exposure position, the greater the fluctuations in value of the foreign exchange portfolio.

Accepted Answer

A) True 
 B)False

Question 13

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 14

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 15

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 16

FX risk exposure of an FI essentially relates to which of the following activities?

Accepted Answer

A) Purchase and sale of foreign currencies to allow customers to participate in and complete international commercial trade transactions. 
B) Purchase and sale of foreign currencies to allow customers to take positions in foreign real and financial investments. 
C) Purchase and sale of foreign currencies for hedging purposes to offset customer exposure in any given currency. 
D) Purchase and sale of foreign currencies for speculative purposes through forecasting or anticipating future movements in FX rates. 
E) None of these. 
A) Purchase and sale of foreign currencies to allow customers to participate in and complete international commercial trade transactions. 
B) Purchase and sale of foreign currencies to allow customers to take positions in foreign real and financial investments. 
C) Purchase and sale of foreign currencies for hedging purposes to offset customer exposure in any given currency. 
D) Purchase and sale of foreign currencies for speculative purposes through forecasting or anticipating future movements in FX rates. 
E) None of these.

Question 17

The one-year CD rates for financial institutions with AA ratings are 5 percent in Canada and 8 percent in France. An AA-rated Canadian financial institution can borrow by issuing GICs or lend by purchasing GICs at these rates in either market. The current spot rate is $0.20/Euro. If the bank receives a quote of $0.1975/€ for one-year forward rates for the Euro (to buy and to sell), what is the arbitrage profit for the bank if it uses $1,000,000 as the notional amount?

Accepted Answer

A) $5,000. 
B) $16,500. 
C) $19,350. 
D) $22,000. 
E) $25,675. 
A) $5,000. 
B) $16,500. 
C) $19,350. 
D) $22,000. 
E) $25,675.

Question 18

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 in one year there is no change to either interest rates or exchange rates, what is the end-of-year profit or loss for the bank? (Hint: Annual interest is paid on both the Canadian bonds and the CD on the date of liquidation in exactly one year.)

Accepted Answer

A) Profit of US$20,000. 
B) Loss of C$224,000. 
C) Profit of US$50,000. 
D) Profit of C$63,700. 
E) Profit of US$313,000. 
A) Profit of US$20,000. 
B) Loss of C$224,000. 
C) Profit of US$50,000. 
D) Profit of C$63,700. 
E) Profit of US$313,000.

Question 19

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 20

The one-year CD rates for financial institutions with AA ratings are 5 percent in Canada and 8 percent in France. An AA-rated Canadian financial institution can borrow by issuing GICs or lend by purchasing GICs 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/€.

Exam 13: Foreign Exchange Risk

FX trading risk exposure continues into the night until all FI operations are closed.

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

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

Suppose that the current spot exchange rate of Canadian dollars for Russian rubles is $0.15/1ruble. The price of Russian-produced goods increases by 8 percent, and the Canadian price index increases by 3 percent. According to PPP, the new exchange rate of Russian rubles to dollars is

A positive net exposure position in FX implies that the FI is

Deviations from the international currency parity relationships may occur because of

An FI can eliminate its currency risk exposure by matching its foreign currency assets to its foreign currency liabilities.

The foreign exchange market in Tokyo is the largest FX trading market.

The following are the net currency positions of a Canadian FI (stated in Canadian dollars). How would you characterize the FI's risk exposure to fluctuations in the Swiss franc/dollar exchange rate?

As of 2012, which of the following FX "markets" is the largest?

The greater the volatility of foreign exchange rates given any net exposure position, the greater the fluctuations in value of the foreign exchange portfolio.

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

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

FX risk exposure of an FI essentially relates to which of the following activities?

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

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