Question 1

The use of an exchange rate forward contract assures the FI of the opportunity to buy (or sell) the foreign currency at a future time at a known price.

Accepted Answer

A) True 
 B)False

Question 2

Off-balance-sheet hedging involves taking a position in FX forward or other derivative securities even though no FX assets or liabilities are on the balance sheet.

Accepted Answer

A) True 
 B)False

Question 3

Directly matching foreign asset and liability books in the same FX currency will allow an FI to hedge or lock in a profit spread regardless of future changes in exchange rates.

Accepted Answer

A) True 
 B)False

Question 4

An FI has purchased (borrowed) a one-year $10 million Eurodollar deposit at an annual interest rate of 6 percent. It has invested these proceeds in one-year Euro (€) bonds at an annual rate of 6.5 percent after converting them at the current spot rate of €1.75/$. Both interest and principal are paid at the end of the year. Assume that instead of investing in Euro bonds at a fixed rate of 6.5 percent, it invests them in variable rates of LIBOR + 1.5 percent, reset every six months. The current LIBOR rate is 5 percent. What is the annual spread earned by the bank if LIBOR at the end of six months is 5.5 percent? Assume both interest and principal will be reinvested in six months. Assume the exchange rate remains at €1.75/$at the end of the year.

Accepted Answer

A) 0.50 percent. 
B) 0.68 percent. 
C) 0.86 percent. 
D) 0.90 percent. 
E) 0.95 percent. 
A) 0.50 percent. 
B) 0.68 percent. 
C) 0.86 percent. 
D) 0.90 percent. 
E) 0.95 percent.

Question 5

The market in which foreign currency is traded for future delivery is the forward foreign exchange market.

Accepted Answer

A) True 
 B)False

Question 6

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 British pound to dollar exchange rate?

Accepted Answer

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

Question 7

The decrease in European FX volatility during the last decade has occurred because of

Accepted Answer

A) the stabilizing force of the euro. 
B) reduction in inflation rates in European countries. 
C) the reduced volatility in many emerging-market countries. 
D) the greater volatilities of Asian currencies. 
E) the stabilizing force of the euro, and reduction in inflation rates in European countries. 
A) the stabilizing force of the euro. 
B) reduction in inflation rates in European countries. 
C) the reduced volatility in many emerging-market countries. 
D) the greater volatilities of Asian currencies. 
E) the stabilizing force of the euro, and reduction in inflation rates in European countries.

The use of an exchange rate forward contract assures the FI of the opportunity to buy (or sell) the foreign currency at a future time at a known price.

Off-balance-sheet hedging involves taking a position in FX forward or other derivative securities even though no FX assets or liabilities are on the balance sheet.

Directly matching foreign asset and liability books in the same FX currency will allow an FI to hedge or lock in a profit spread regardless of future changes in exchange rates.

The market in which foreign currency is traded for future delivery is the forward foreign exchange 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 British pound to dollar exchange rate?

The decrease in European FX volatility during the last decade has occurred because of

Why Are Financial Institutions Special

Deposit-Taking Institutions

Finance Companies

Securities, Brokerage, and Investment Banking

Mutual Funds, Hedge Funds, and Pension Funds

Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loans

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization Index

Filters

Exam 13: Foreign Exchange Risk

The use of an exchange rate forward contract assures the FI of the opportunity to buy (or sell) the foreign currency at a future time at a known price.

Off-balance-sheet hedging involves taking a position in FX forward or other derivative securities even though no FX assets or liabilities are on the balance sheet.

Directly matching foreign asset and liability books in the same FX currency will allow an FI to hedge or lock in a profit spread regardless of future changes in exchange rates.

The market in which foreign currency is traded for future delivery is the forward foreign exchange 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 British pound to dollar exchange rate?

The decrease in European FX volatility during the last decade has occurred because of

Why Are Financial Institutions Special

Deposit-Taking Institutions

Finance Companies

Securities, Brokerage, and Investment Banking

Mutual Funds, Hedge Funds, and Pension Funds

Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loans

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization Index

Filters