Question 1

The FI is acting as a hedger 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 a 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 a currency. 
E) advises customers on their international business.

Question 2

A negative 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 3

Average daily turnover in the FX market has recently been over $4 trillion.

Accepted Answer

A) True 
 B)False

Question 4

Forward contracts in FX are typically written for periods exceeding 6 months.

Accepted Answer

A) True 
 B)False

Question 5

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 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 6

The FX markets of the world have become one of the largest of all financial markets.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following FX trading activities is used to hedge FX risk?

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 these. 
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 these.

Question 8

Most nonbank FIs have foreign exchange risk exposure that is smaller than the exposure of the large Canadian banks.

Accepted Answer

A) True 
 B)False

Question 9

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 10

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.

Question 11

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. What is the end-of-year profit or loss to the bank if in one year Canadian bond rates increase to 7.538 percent? (Assume no change in either current U.S. interest rates or current exchange rates, US$0.78493/C$1.)

Accepted Answer

A) Loss of US$5,000. 
B) Profit of US$15,000. 
C) Loss of C$119,000. 
D) Profit of C$50,000. 
E) Loss of C$50,000. 
A) Loss of US$5,000. 
B) Profit of US$15,000. 
C) Loss of C$119,000. 
D) Profit of C$50,000. 
E) Loss of C$50,000.

Question 12

The following are the net currency positions of a U.S. FI (stated in U.S. dollars). Note: Net currency positions are foreign exchange bought minus foreign exchange sold restated in U.S. dollar terms.   What is the portfolio weight of the Japanese yen in this FI's portfolio of foreign currency?

Accepted Answer

A) +0.18 percent. 
B) -36.62 percent. 
C) +75.20 percent. 
D) -5.47 percent. 
E) +66.70 percent. 
A) +0.18 percent. 
B) -36.62 percent. 
C) +75.20 percent. 
D) -5.47 percent. 
E) +66.70 percent.

Question 13

The following are the net currency positions of a Canadian FI (stated in Canadian dollars).   What is the FI's net exposure in the Japanese yen?

Accepted Answer

A) +30,000. 
B) +40,600. 
C) -19,400. 
D) -40,600. 
E) +20,600. 
A) +30,000. 
B) +40,600. 
C) -19,400. 
D) -40,600. 
E) +20,600.

Question 14

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. What is the end-of-year profit or loss to the bank if in one year the exchange rate falls to US$0.765 per Canadian dollar? (Assume that there is no change in interest rates.)

Accepted Answer

A) Loss of US$75,000. 
B) Profit of C$274,000. 
C) Loss of US$7,000. 
D) Profit of C$9,000. 
E) Loss of US$5,000. 
A) Loss of US$75,000. 
B) Profit of C$274,000. 
C) Loss of US$7,000. 
D) Profit of C$9,000. 
E) Loss of US$5,000.

Question 15

A positive net exposure position in FX implies the FI is net short in a currency.

Accepted Answer

A) True 
 B)False

Question 16

When purchasing and selling foreign currencies to allow customers to take positions in foreign real and financial investments, the FI

Accepted Answer

A) acts defensively as a hedger. 
B) acts aggressively as a speculator. 
C) assumes the FX risk itself. 
D) acts as an agent. 
E) acts as a market maker. 
A) acts defensively as a hedger. 
B) acts aggressively as a speculator. 
C) assumes the FX risk itself. 
D) acts as an agent. 
E) acts as a market maker.

Question 17

Violation of the interest rate parity theorem would allow arbitrage profits.

Accepted Answer

A) True 
 B)False

Question 18

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 19

The total FX risk for a domestic bank that is making a one-year loan in a foreign currency is that the interest income expected on the loan is exposed to a depreciation of the foreign currency.

Accepted Answer

A) True 
 B)False

Question 20

The following are the net currency positions of a Canadian FI (stated in Canadian dollars).   What is the FI's net exposure in the Swiss franc?

Accepted Answer

A) +2,400. 
B) +400. 
C) -2,800. 
D) -2,400. 
E) +3,200. 
A) +2,400. 
B) +400. 
C) -2,800. 
D) -2,400. 
E) +3,200.

Exam 13: Foreign Exchange Risk

The FI is acting as a hedger when it

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

Average daily turnover in the FX market has recently been over $4 trillion.

Forward contracts in FX are typically written for periods exceeding 6 months.

The FX markets of the world have become one of the largest of all financial markets.

Which of the following FX trading activities is used to hedge FX risk?

Most nonbank FIs have foreign exchange risk exposure that is smaller than the exposure of the large Canadian banks.

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.

Most profits or losses on foreign trading for FIs come from

The following are the net currency positions of a U.S. FI (stated in U.S. dollars). Note: Net currency positions are foreign exchange bought minus foreign exchange sold restated in U.S. dollar terms. What is the portfolio weight of the Japanese yen in this FI's portfolio of foreign currency?

The following are the net currency positions of a Canadian FI (stated in Canadian dollars). What is the FI's net exposure in the Japanese yen?

A positive net exposure position in FX implies the FI is net short in a currency.

When purchasing and selling foreign currencies to allow customers to take positions in foreign real and financial investments, the FI

Violation of the interest rate parity theorem would allow arbitrage profits.

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

The total FX risk for a domestic bank that is making a one-year loan in a foreign currency is that the interest income expected on the loan is exposed to a depreciation of the foreign currency.

The following are the net currency positions of a Canadian FI (stated in Canadian dollars). What is the FI's net exposure in the Swiss franc?

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