Question 1

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. D

Question 2

Which of the following statements is true?

Accepted Answer

A) The difference between a nominal interest rate and the rate of inflation is called the spread. 
B) The difference between a nominal interest rate and the rate of inflation is called the interest rate spread. 
C) The difference between a nominal interest rate and the rate of inflation is called the accumulated interest rate. 
D) The difference between a nominal interest rate and the rate of inflation is called the real interest rate. 
A) The difference between a nominal interest rate and the rate of inflation is called the spread. 
B) The difference between a nominal interest rate and the rate of inflation is called the interest rate spread. 
C) The difference between a nominal interest rate and the rate of inflation is called the accumulated interest rate. 
D) The difference between a nominal interest rate and the rate of inflation is called the real interest rate. D

Question 3

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

Question 4

Which of the following statements is true for an FI that holds €200 000 in assets and €150 000 in liabilities?

Accepted Answer

A) The FI is in a net long position. 
B) The FI has net foreign assets of €50 000. 
C) The FI faces the risk that the euro will fall in value against domestic currency. 
D) All of the listed options are correct. 
A) The FI is in a net long position. 
B) The FI has net foreign assets of €50 000. 
C) The FI faces the risk that the euro will fall in value against domestic currency. 
D) All of the listed options are correct.

Question 5

Which of the following statements is true?

Accepted Answer

A) The smaller the FI's net exposure in a foreign currency and the larger the foreign currency's exchange rate volatility, the larger is the potential dollar loss or gain to an FI's earnings. 
B) The smaller the FI's net exposure in a foreign currency and the smaller the foreign currency's exchange rate volatility, the larger is the potential dollar loss or gain to an FI's earnings. 
C) The larger the FI's net exposure in a foreign currency and the smaller the foreign currency's exchange rate volatility, the larger is the potential dollar loss or gain to an FI's earnings. 
D) The larger the FI's net exposure in a foreign currency and the larger the foreign currency's exchange rate volatility, the larger is the potential dollar loss or gain to an FI's earnings. 
A) The smaller the FI's net exposure in a foreign currency and the larger the foreign currency's exchange rate volatility, the larger is the potential dollar loss or gain to an FI's earnings. 
B) The smaller the FI's net exposure in a foreign currency and the smaller the foreign currency's exchange rate volatility, the larger is the potential dollar loss or gain to an FI's earnings. 
C) The larger the FI's net exposure in a foreign currency and the smaller the foreign currency's exchange rate volatility, the larger is the potential dollar loss or gain to an FI's earnings. 
D) The larger the FI's net exposure in a foreign currency and the larger the foreign currency's exchange rate volatility, the larger is the potential dollar loss or gain to an FI's earnings.

Question 6

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 7

Assume an Australian FI has US$100 000 in assets and US$200 000 in liabilities.Further, the FI has bought US$40 000 and sold US$20 000.What is the net FX bought position of the Australian FI?

Accepted Answer

A) -US$20 000 
B) US$20 000 
C) US$80 000 
D) US$100 000 
A) -US$20 000 
B) US$20 000 
C) US$80 000 
D) US$100 000

Question 8

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 9

Assume that an FI has the following assets and liabilities: Assets
Liabilities
A$100 million loans (one year)
A$200 million securities (one year)
A$100 million equivalent German loans (one year) (loans made in euros)
Which of the following statements is true?

Accepted Answer

A) The FI has a net long position in euros. 
B) The FI has mismatched the currency composition of its asset and liabilities portfolio. 
C) The FI has matched the maturities of its assets and liabilities. 
D) All of the listed options are correct. 
A) The FI has a net long position in euros. 
B) The FI has mismatched the currency composition of its asset and liabilities portfolio. 
C) The FI has matched the maturities of its assets and liabilities. 
D) All of the listed options are correct.

Question 10

The dollar loss/gain in a particular currency i can be calculated as:

Accepted Answer

A) Net exposure in foreign currency i multiplied by the volatility to the ($/foreign currency i) exchange rate. 
B) Net exposure in foreign currency i measured in Australian dollars divided by the volatility to the ($/foreign currency i) exchange rate. 
C) Net exposure in foreign currency i divided by the volatility to the ($/foreign currency i) exchange rate. 
D) Net exposure in foreign currency i measured in Australian dollars multiplied by the volatility to the ($/foreign currency i) exchange rate. 
A) Net exposure in foreign currency i multiplied by the volatility to the ($/foreign currency i) exchange rate. 
B) Net exposure in foreign currency i measured in Australian dollars divided by the volatility to the ($/foreign currency i) exchange rate. 
C) Net exposure in foreign currency i divided by the volatility to the ($/foreign currency i) exchange rate. 
D) Net exposure in foreign currency i measured in Australian dollars multiplied by the volatility to the ($/foreign currency i) exchange rate.

Question 11

According to PPP, foreign currency exchange rates between two countries adjust to reflect changes in each country's:

Accepted Answer

A) unemployment rates. 
B) export competitiveness. 
C) inflation rates. 
D) foreign exchange reserves. 
A) unemployment rates. 
B) export competitiveness. 
C) inflation rates. 
D) foreign exchange reserves.

Question 12

Assume an FI sells A$100 million for euros at the spot exchange rate today and receives A$100 million/ A$1.15 = €86.96 million.Further assume that the FI immediately lends the €86.96 to a German customer at 12 per cent p.a.for one year.Which of the following statements is true regarding this transaction?

Accepted Answer

A) The FI can sell the expected principal and interest proceeds from the euro loan forward for Australian dollars today at today's forward rate for one-year delivery to hedge its position. 
B) Assuming the FI decides to enter into a forward contract on its FX exposure at the current forward one-year exchange rate between Australian dollars and euros at A$1.10/€1, then it means that the buyer of the forward contract promises to pay €86.96 * (A$1.10/€1) = A$95.57 million to the FI. 
C) At maturity, the German borrower repays the loan to the FI plus interest in dollars, i.e.(€86.96 * 1.12) * (A$1.15/€1) = A$112.00 million. 
D) All of the listed options are correct. 
A) The FI can sell the expected principal and interest proceeds from the euro loan forward for Australian dollars today at today's forward rate for one-year delivery to hedge its position. 
B) Assuming the FI decides to enter into a forward contract on its FX exposure at the current forward one-year exchange rate between Australian dollars and euros at A$1.10/€1, then it means that the buyer of the forward contract promises to pay €86.96 * (A$1.10/€1) = A$95.57 million to the FI. 
C) At maturity, the German borrower repays the loan to the FI plus interest in dollars, i.e.(€86.96 * 1.12) * (A$1.15/€1) = A$112.00 million. 
D) All of the listed options are correct.

Question 13

Which of the following statements is true?

Accepted Answer

A) Holding less assets than liabilities in a given currency is referred to as a net short position. 
B) Holding less assets than liabilities in a given currency is referred to a net long position. 
C) Holding less assets than liabilities in a given currency is referred to as a gross short position. 
D) Holding less assets than liabilities in a given currency is referred to as a gross long position. 
A) Holding less assets than liabilities in a given currency is referred to as a net short position. 
B) Holding less assets than liabilities in a given currency is referred to a net long position. 
C) Holding less assets than liabilities in a given currency is referred to as a gross short position. 
D) Holding less assets than liabilities in a given currency is referred to as a gross long position.

Question 14

Which of the following statements is true for an FI that holds €200 000 in assets and €250 000 in liabilities?

Accepted Answer

A) The FI faces the risk that the euro will fall in value against domestic currency. 
B) The FI faces the risk that the euro will rise in value against domestic currency. 
C) The FI has net foreign assets of €200 000. 
D) The FI has net foreign assets of €50 000. 
A) The FI faces the risk that the euro will fall in value against domestic currency. 
B) The FI faces the risk that the euro will rise in value against domestic currency. 
C) The FI has net foreign assets of €200 000. 
D) The FI has net foreign assets of €50 000.

Question 15

The proposition stating that the discounted spread between domestic and foreign interest rates equals the percentage spread between forward and spot exchange rates is called:

Accepted Answer

A) Interest rate parity theorem. 
B) Domestic and foreign interest rate agreement. 
C) Percentage spread theorem. 
D) None of the listed options are correct. 
A) Interest rate parity theorem. 
B) Domestic and foreign interest rate agreement. 
C) Percentage spread theorem. 
D) None of the listed options are correct.

Question 16

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 17

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.

Question 18

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 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.What type of currency hedge is necessary to protect the FI from exchange rate risk?

Accepted Answer

A) Buy euro currency futures. 
B) Sell euro currency futures. 
C) Finance the loan with Eurodollar deposits. 
D) Either Sell euro currency futures or finance the loan with Eurodollar deposits. 
A) Buy euro currency futures. 
B) Sell euro currency futures. 
C) Finance the loan with Eurodollar deposits. 
D) Either Sell euro currency futures or finance the loan with Eurodollar deposits.

Question 20

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

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

Which of the following statements is true?

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

Which of the following statements is true for an FI that holds €200 000 in assets and €150 000 in liabilities?

Which of the following statements is true?

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.

Assume an Australian FI has US$100 000 in assets and US$200 000 in liabilities.Further, the FI has bought US$40 000 and sold US$20 000.What is the net FX bought position of the Australian FI?

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 that an FI has the following assets and liabilities: Assets Liabilities A$100 million loans (one year) A$200 million securities (one year) A$100 million equivalent German loans (one year) (loans made in euros) Which of the following statements is true?

The dollar loss/gain in a particular currency i can be calculated as:

According to PPP, foreign currency exchange rates between two countries adjust to reflect changes in each country's:

Which of the following statements is true?

Which of the following statements is true for an FI that holds €200 000 in assets and €250 000 in liabilities?

The proposition stating that the discounted spread between domestic and foreign interest rates equals the percentage spread between forward and spot exchange rates is called:

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

Which of the following statements is true?

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?

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.What type of currency hedge is necessary to protect the FI from exchange rate risk?

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.

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 best describes the interest rate parity theorem (IRPT)?

Which of the following statements is true?

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

Which of the following statements is true for an FI that holds €200 000 in assets and €150 000 in liabilities?

Which of the following statements is true?

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.

Assume an Australian FI has US$100 000 in assets and US$200 000 in liabilities.Further, the FI has bought US$40 000 and sold US$20 000.What is the net FX bought position of the Australian FI?

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 that an FI has the following assets and liabilities: Assets Liabilities A$100 million loans (one year) A$200 million securities (one year) A$100 million equivalent German loans (one year) (loans made in euros) Which of the following statements is true?

The dollar loss/gain in a particular currency i can be calculated as:

According to PPP, foreign currency exchange rates between two countries adjust to reflect changes in each country's:

Which of the following statements is true?

Which of the following statements is true for an FI that holds €200 000 in assets and €250 000 in liabilities?

The proposition stating that the discounted spread between domestic and foreign interest rates equals the percentage spread between forward and spot exchange rates is called:

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

Which of the following statements is true?

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?

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.What type of currency hedge is necessary to protect the FI from exchange rate risk?

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.

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