Question 1

Which of the following statements is true?

Accepted Answer

A)  The market in which foreign currency is traded for future delivery is called the forward market for foreign exchange. 
B)  The market in which foreign currency is traded for future delivery is called the future market for foreign exchange. 
C)  The market in which foreign currency is traded for future delivery is called the spot market for foreign exchange. 
D)  The market in which foreign currency is traded for future delivery is called the business market for foreign exchange. 
A)  The market in which foreign currency is traded for future delivery is called the forward market for foreign exchange. 
B)  The market in which foreign currency is traded for future delivery is called the future market for foreign exchange. 
C)  The market in which foreign currency is traded for future delivery is called the spot market for foreign exchange. 
D)  The market in which foreign currency is traded for future delivery is called the business market for foreign exchange. A

Question 2

Good managers can know in advance what exchange rates will be at the end of a particular time horizon.

Accepted Answer

A) True 
 B)False  False

Question 3

Which of the following statements is true?

Accepted Answer

A)  The rate of inflation is the difference between the real interest rate and a nominal interest rate. 
B)  The real interest rate is the product of a nominal interest rate and the expected rate of inflation. 
C)  The real interest rate is the difference between a nominal interest rate and the expected rate of inflation. 
D)  The nominal interest rate is the difference between a real interest rate and the expected rate of inflation. 
A)  The rate of inflation is the difference between the real interest rate and a nominal interest rate. 
B)  The real interest rate is the product of a nominal interest rate and the expected rate of inflation. 
C)  The real interest rate is the difference between a nominal interest rate and the expected rate of inflation. 
D)  The nominal interest rate is the difference between a real interest rate and the expected rate of inflation. C

Question 4

Which of the following are common FX trading activities?

Accepted Answer

A)  The purchase and sale of foreign currencies for speculative purposes through forecasting or anticipating future movements in FX rates. 
B)  The purchase and sale of foreign currencies to allow customers (or the FI itself) to take positions in foreign real and financial investments. 
C)  The purchase and sale of foreign currencies for hedging purposes to offset customer (or FI) exposure in any given currency. 
D)  All of the listed options are correct. 
A)  The purchase and sale of foreign currencies for speculative purposes through forecasting or anticipating future movements in FX rates. 
B)  The purchase and sale of foreign currencies to allow customers (or the FI itself) to take positions in foreign real and financial investments. 
C)  The purchase and sale of foreign currencies for hedging purposes to offset customer (or FI) exposure in any given currency. 
D)  All of the listed options are correct.

Question 5

An FI acts defensively as a hedger to reduce FX exposure if it engages in the purchase and sale of foreign currencies for hedging purposes to offset customer or FI exposure in any given currency.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following statements is true?

Accepted Answer

A)  Conceptually, an FX rate will appreciate in value relative to other currencies when demand is high. 
B)  Conceptually, an FX rate will appreciate in value relative to other currencies when supply is low. 
C)  Conceptually, an FX rate will depreciate in value relative to other currencies when demand is low. 
D)  All of the listed options are correct. 
A)  Conceptually, an FX rate will appreciate in value relative to other currencies when demand is high. 
B)  Conceptually, an FX rate will appreciate in value relative to other currencies when supply is low. 
C)  Conceptually, an FX rate will depreciate in value relative to other currencies when demand is low. 
D)  All of the listed options are correct.

Question 7

Which of the following statements best describes the interest rate parity theorem (IRPT)?

Accepted Answer

A)  The IRPT is a proposition stating that the nominal spread between domestic and foreign interest rates equals the percentage spread between forward and spot exchange rates. 
B)  The IRPT is a proposition stating that the nominal spread between domestic and foreign currency rates equals the percentage spread between forward and spot exchange rates. 
C)  The IRPT is a proposition stating that the discounted spread between domestic and foreign currency rates equals the percentage spread between forward and spot exchange rates. 
D)  The IRPT is a proposition stating that the discounted spread between domestic and foreign interest rates equals the percentage spread between forward and spot exchange rates. 
A)  The IRPT is a proposition stating that the nominal spread between domestic and foreign interest rates equals the percentage spread between forward and spot exchange rates. 
B)  The IRPT is a proposition stating that the nominal spread between domestic and foreign currency rates equals the percentage spread between forward and spot exchange rates. 
C)  The IRPT is a proposition stating that the discounted spread between domestic and foreign currency rates equals the percentage spread between forward and spot exchange rates. 
D)  The IRPT is a proposition stating that the discounted spread between domestic and foreign interest rates equals the percentage spread between forward and spot exchange rates.

Question 8

Which of the following is a reason for the decline in FX trading?

Accepted Answer

A)  The number of FX traders has decreased due to mergers of investment banks. 
B)  Advancements in technology have increased the efficiency of each FX trader, reducing the need for as many. 
C)  The move towards a single currency in Europe has reduced the need for FX trading. 
D)  All of the listed options are correct. 
A)  The number of FX traders has decreased due to mergers of investment banks. 
B)  Advancements in technology have increased the efficiency of each FX trader, reducing the need for as many. 
C)  The move towards a single currency in Europe has reduced the need for FX trading. 
D)  All of the listed options are correct.

Question 9

Assume an FI sells A$100 million for US dollars on the spot currency markets at an exchange rate of A$1.20 to US$1.00 and invests the US dollar assets at an interest rate of 12 per cent for one year. What is the value of the US dollar assets at the end of the year (round to two decimals)?

Accepted Answer

A)  US$134 400.00 million 
B)  US$22 400.00 million 
C)  US$93 333.33 million 
D)  US$560 000.00 million 
A)  US$134 400.00 million 
B)  US$22 400.00 million 
C)  US$93 333.33 million 
D)  US$560 000.00 million

Question 10

Assume an FI holds US$200 000 in assets and US$150 000 in liabilities. Which of the following statements is true?

Accepted Answer

A)  The FI has a net long in US$. 
B)  The FI has a net short in US$. 
C)  The FI has a net exposure of $50 000. 
D)  The FI has a net exposure of -$50 000. 
A)  The FI has a net long in US$. 
B)  The FI has a net short in US$. 
C)  The FI has a net exposure of $50 000. 
D)  The FI has a net exposure of -$50 000.

Question 11

The role of the forward FX contract is to offset the uncertainty regarding the future spot rate on a particular currency at the end of the investment horizon.

Accepted Answer

A) True 
 B)False

Question 12

The case of the National Australia Bank shows that:

Accepted Answer

A)  FX trading can result in significant losses for an FI. 
B)  FX trading losses can result in reputational loss for an FI. 
C)  the announcement of FX trading losses can lead to a fall in the share price of the FI at which the losses occurred. 
D)  All of the listed options are correct. 
A)  FX trading can result in significant losses for an FI. 
B)  FX trading losses can result in reputational loss for an FI. 
C)  the announcement of FX trading losses can lead to a fall in the share price of the FI at which the losses occurred. 
D)  All of the listed options are correct.

Question 13

Which of the following is an appropriate definition of a currency swap?

Accepted Answer

A)  A swap used to hedge against exchange rate risk from mismatched currencies on assets and liabilities. 
B)  A swap used to hedge against the general depreciation of a currency. 
C)  A swap used to hedge against the general appreciation of a currency. 
D)  A swap used to speculate on the depreciation or appreciation of a currency. 
A)  A swap used to hedge against exchange rate risk from mismatched currencies on assets and liabilities. 
B)  A swap used to hedge against the general depreciation of a currency. 
C)  A swap used to hedge against the general appreciation of a currency. 
D)  A swap used to speculate on the depreciation or appreciation of a currency.

Question 14

Which of the following statements is true?

Accepted Answer

A)  The reason why in a currency swap it is usual to include both principal and interest payments as part of the swap agreement is that both principal and interest are exposed to foreign exchange risk. 
B)  In a currency swap it is usual to include both principal and interest payments as part of the swap agreement as this makes the currency conversion less complex. 
C)  In a currency swap it is usual to include both principal and interest payments as part of the swap agreement as otherwise it is impossible to value the swap. 
D)  It is not usual to include both principal and interest payments as part of the swap agreement. 
A)  The reason why in a currency swap it is usual to include both principal and interest payments as part of the swap agreement is that both principal and interest are exposed to foreign exchange risk. 
B)  In a currency swap it is usual to include both principal and interest payments as part of the swap agreement as this makes the currency conversion less complex. 
C)  In a currency swap it is usual to include both principal and interest payments as part of the swap agreement as otherwise it is impossible to value the swap. 
D)  It is not usual to include both principal and interest payments as part of the swap agreement.

Question 15

Assume an FI sells A$100 million for US dollars on the spot currency markets at an exchange rate of A$1.10 to US $1.00 and invests the US dollar assets at an interest rate of 12 per cent for one year. What is the Australian dollar proceeds from the US dollar investment (round to two decimals)?

Accepted Answer

A)  A$100.00 million 
B)  A$112.00 million 
C)  A$90.91 million 
D)  A$101.82 million 
A)  A$100.00 million 
B)  A$112.00 million 
C)  A$90.91 million 
D)  A$101.82 million

Question 16

Off-balance-sheet hedging involves making changes in the on-balance-sheet assets and liabilities to protect the FI's profits from FX risk and taking positions in forward or other derivative securities to hedge FX risk.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements is true?

Accepted Answer

A)  Conceptually, an FX rate will appreciate in value relative to other currencies when demand is low. 
B)  Conceptually, an FX rate will appreciate in value relative to other currencies when supply is high. 
C)  Conceptually, an FX rate will depreciate in value relative to other currencies when demand is low. 
D)  Conceptually, an FX rate will appreciate in value relative to other currencies when supply is low. 
A)  Conceptually, an FX rate will appreciate in value relative to other currencies when demand is low. 
B)  Conceptually, an FX rate will appreciate in value relative to other currencies when supply is high. 
C)  Conceptually, an FX rate will depreciate in value relative to other currencies when demand is low. 
D)  Conceptually, an FX rate will appreciate in value relative to other currencies when supply is low.

Question 18

Explain how forward contracts can be used to hedge an FI's FX exposures.

Accepted Answer

An FI that invests in foreign assets can

Question 19

A US FI wishes to hedge a €10 000 000 loan using euro currency futures. Each euro futures contract is for €125 000, and the hedge ratio is 1.40. The loan is payable in one year in euros. How many currency contracts are necessary to hedge this asset?

Accepted Answer

A)  112 bought euro currency futures contracts. 
B)  112 sold euro currency futures contracts. 
C)  80 bought euro currency futures contracts. 
D)  80 sold euro currency futures contracts. 
A)  112 bought euro currency futures contracts. 
B)  112 sold euro currency futures contracts. 
C)  80 bought euro currency futures contracts. 
D)  80 sold euro currency futures contracts.

Question 20

Suppose an FI has the following assets and liabilities:
  To invest $100 million of the $200 million securities in one-year euro loans, the Australian FI engaged in the following transactions:
At the beginning of the year, it sold $100 million for euros on the spot currency markets at an exchange rate of A$2 to €1.
It takes the equivalent euro amount and makes one-year euro loans at a 15 per cent interest rate.
At the end of the year, the Australian FI repatriates the funds back to Australia at the same spot currency market rate of A$2/ €1.
a) Calculate the equivalent euro amount of $100 million using the spot exchange rate stated in transaction (1).
b) Calculate the value of the euro assets at the end of the year.
c) Calculate the dollar proceed of the euro investment.
d) Assume that the A$100 million loans yield a rate of 10 per cent p.a. What is the FI's weighted return on investments?

Accepted Answer

a) At the beginning of the year, the Aus

Which of the following statements is true?

Good managers can know in advance what exchange rates will be at the end of a particular time horizon.

Which of the following statements is true?

Which of the following are common FX trading activities?

An FI acts defensively as a hedger to reduce FX exposure if it engages in the purchase and sale of foreign currencies for hedging purposes to offset customer or FI exposure in any given currency.

Which of the following statements is true?

Which of the following statements best describes the interest rate parity theorem (IRPT)?

Which of the following is a reason for the decline in FX trading?

Assume an FI sells A$100 million for US dollars on the spot currency markets at an exchange rate of A$1.20 to US$1.00 and invests the US dollar assets at an interest rate of 12 per cent for one year. What is the value of the US dollar assets at the end of the year (round to two decimals)?

Assume an FI holds US$200 000 in assets and US$150 000 in liabilities. Which of the following statements is true?

The role of the forward FX contract is to offset the uncertainty regarding the future spot rate on a particular currency at the end of the investment horizon.

The case of the National Australia Bank shows that:

Which of the following is an appropriate definition of a currency swap?

Which of the following statements is true?

Assume an FI sells A$100 million for US dollars on the spot currency markets at an exchange rate of A$1.10 to US $1.00 and invests the US dollar assets at an interest rate of 12 per cent for one year. What is the Australian dollar proceeds from the US dollar investment (round to two decimals)?

Off-balance-sheet hedging involves making changes in the on-balance-sheet assets and liabilities to protect the FI's profits from FX risk and taking positions in forward or other derivative securities to hedge FX risk.

Which of the following statements is true?

Explain how forward contracts can be used to hedge an FI's FX exposures.

A US FI wishes to hedge a €10 000 000 loan using euro currency futures. Each euro futures contract is for €125 000, and the hedge ratio is 1.40. The loan is payable in one year in euros. How many currency contracts are necessary to hedge this asset?

Why Are Financial Institutions Special

The Financial Services Industry: Depository Institutions

The Financial Services Industry: Other Financial Institutions

Risk of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: the Duration Model

Managing Interest Rate Risk Using Off Balance Sheet Instruments

Credit Risk I: Individual Loan Risk

Market Risk

Credit Risk I: Individual Loan Risk

Credit Risk II: Loan Portfolio and Concentration Risk

Sovereign Risk

Liquidity Risk

Liability and Liquidity Management

Off-Balance-Sheet Activities

Technology and Other Operational Risk

Capital Management and Adequacy

Filters

Exam 13: Foreign Exchange Risk

Which of the following statements is true?

Good managers can know in advance what exchange rates will be at the end of a particular time horizon.

Which of the following statements is true?

Which of the following are common FX trading activities?

An FI acts defensively as a hedger to reduce FX exposure if it engages in the purchase and sale of foreign currencies for hedging purposes to offset customer or FI exposure in any given currency.

Which of the following statements is true?

Which of the following statements best describes the interest rate parity theorem (IRPT)?

Which of the following is a reason for the decline in FX trading?

Assume an FI sells A$100 million for US dollars on the spot currency markets at an exchange rate of A$1.20 to US$1.00 and invests the US dollar assets at an interest rate of 12 per cent for one year. What is the value of the US dollar assets at the end of the year (round to two decimals)?

Assume an FI holds US$200 000 in assets and US$150 000 in liabilities. Which of the following statements is true?

The role of the forward FX contract is to offset the uncertainty regarding the future spot rate on a particular currency at the end of the investment horizon.

The case of the National Australia Bank shows that:

Which of the following is an appropriate definition of a currency swap?

Which of the following statements is true?

Assume an FI sells A$100 million for US dollars on the spot currency markets at an exchange rate of A$1.10 to US $1.00 and invests the US dollar assets at an interest rate of 12 per cent for one year. What is the Australian dollar proceeds from the US dollar investment (round to two decimals)?

Off-balance-sheet hedging involves making changes in the on-balance-sheet assets and liabilities to protect the FI's profits from FX risk and taking positions in forward or other derivative securities to hedge FX risk.

Which of the following statements is true?

Explain how forward contracts can be used to hedge an FI's FX exposures.

A US FI wishes to hedge a €10 000 000 loan using euro currency futures. Each euro futures contract is for €125 000, and the hedge ratio is 1.40. The loan is payable in one year in euros. How many currency contracts are necessary to hedge this asset?

Why Are Financial Institutions Special

The Financial Services Industry: Depository Institutions

The Financial Services Industry: Other Financial Institutions

Risk of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: the Duration Model

Managing Interest Rate Risk Using Off Balance Sheet Instruments

Credit Risk I: Individual Loan Risk

Market Risk

Credit Risk I: Individual Loan Risk

Credit Risk II: Loan Portfolio and Concentration Risk

Sovereign Risk

Liquidity Risk

Liability and Liquidity Management

Off-Balance-Sheet Activities

Technology and Other Operational Risk

Capital Management and Adequacy

Filters