Question 1

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. 
A) Trading foreign currencies. 
B) Making domestic-currency loans to foreign corporations. 
C) Buying foreign-issued securities. 
D) Issuing foreign currency-denominated debt.

Question 2

The interest rate parity theorem implies that while interest rates are hedged, the dollar return on foreign investments can be above or below the return on domestic investments.

Accepted Answer

A) True 
 B)False

Question 3

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 4

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% for one year.What are 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 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

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 7

Explain the concept of the interest rate parity theorem (IRPT) and its implications for FIs?

Accepted Answer

Intuitively, the interest rate parity th

Question 8

Currency swaps are used to hedge against exchange rate risk from mismatched currencies on assets and liabilities.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following statements is true?

Accepted Answer

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

Question 10

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 11

Which of the following FX trading activities is used for purposes of speculation?

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. 
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.

Question 12

Which of the following statements is true?

Accepted Answer

A) In case an FI purchases or sells foreign currencies to allow customers to partake in and complete international commercial trade transactions, the FI acts as an agent of its customers for a fee and does assume part of the FX risk. 
B) In case an FI purchases or sells foreign currencies to allow customers to partake in and complete international commercial trade transactions, the FI acts as an agent of its customers for a fee but does not assume any of the FX risk. 
C) In case an FI purchases or sells foreign currencies to allow customers to partake in and complete international commercial trade transactions, the FI acts as a hedger to reduce the FX exposure. 
D) In case an FI purchases or sells foreign currencies to allow customers to partake in and complete international commercial trade transactions, the FI acts as an agent of its customers for a fee and as a hedger to reduce the FX exposures. 
A) In case an FI purchases or sells foreign currencies to allow customers to partake in and complete international commercial trade transactions, the FI acts as an agent of its customers for a fee and does assume part of the FX risk. 
B) In case an FI purchases or sells foreign currencies to allow customers to partake in and complete international commercial trade transactions, the FI acts as an agent of its customers for a fee but does not assume any of the FX risk. 
C) In case an FI purchases or sells foreign currencies to allow customers to partake in and complete international commercial trade transactions, the FI acts as a hedger to reduce the FX exposure. 
D) In case an FI purchases or sells foreign currencies to allow customers to partake in and complete international commercial trade transactions, the FI acts as an agent of its customers for a fee and as a hedger to reduce the FX exposures.

Question 13

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 14

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 15

Indirect quote shows the amount of foreign currency received for each unit of home currency exchanged.

Accepted Answer

A) True 
 B)False

Question 16

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 17

Which of the following statements is true?

Accepted Answer

A) Foreign exchange rate is the exchange rate agreed to today for future delivery of a currency. 
B) Future exchange rate is the exchange rate agreed to today for future delivery of a currency. 
C) Forward exchange rate is the exchange rate agreed to today for future delivery of a currency. 
D) Future exchange rate is the exchange rate agreed to today for future delivery of a currency futures contract. 
A) Foreign exchange rate is the exchange rate agreed to today for future delivery of a currency. 
B) Future exchange rate is the exchange rate agreed to today for future delivery of a currency. 
C) Forward exchange rate is the exchange rate agreed to today for future delivery of a currency. 
D) Future exchange rate is the exchange rate agreed to today for future delivery of a currency futures contract.

Question 18

Which of the following statements is true?

Accepted Answer

A) By directly matching its foreign asset and liability book, an FI can lock in a positive return on profit spread if exchange rates rise over the investment period. 
B) By directly matching its foreign asset and liability book, an FI can lock in a positive return on profit spread if exchange rates fall over the investment period. 
C) By directly matching its foreign asset and liability book, an FI can lock in a positive return on profit spread whichever direction exchange rates change over the investment period. 
D) By directly matching its foreign asset and liability book, an FI holds a neutral position, that is, earnings equalling zero, whichever direction exchange rates change over the investment period. 
A) By directly matching its foreign asset and liability book, an FI can lock in a positive return on profit spread if exchange rates rise over the investment period. 
B) By directly matching its foreign asset and liability book, an FI can lock in a positive return on profit spread if exchange rates fall over the investment period. 
C) By directly matching its foreign asset and liability book, an FI can lock in a positive return on profit spread whichever direction exchange rates change over the investment period. 
D) By directly matching its foreign asset and liability book, an FI holds a neutral position, that is, earnings equalling zero, whichever direction exchange rates change over the investment period.

Question 19

Which of the following statements is true?

Accepted Answer

A) Net exposure refers to the degree to which a bank is net long (negative) or net short (positive) in a given currency. 
B) Gross exposure refers to the degree to which a bank is net long (negative) or net short (positive) in a given currency. 
C) Net exposure refers to the degree to which a bank is net long (positive) or net short (negative) in a given currency. 
D) Gross exposure refers to the degree to which a bank is net long (positive) or net short (negative) in a given currency. 
A) Net exposure refers to the degree to which a bank is net long (negative) or net short (positive) in a given currency. 
B) Gross exposure refers to the degree to which a bank is net long (negative) or net short (positive) in a given currency. 
C) Net exposure refers to the degree to which a bank is net long (positive) or net short (negative) in a given currency. 
D) Gross exposure refers to the degree to which a bank is net long (positive) or net short (negative) in a given currency.

Question 20

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.

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

The interest rate parity theorem implies that while interest rates are hedged, the dollar return on foreign investments can be above or below the return on domestic investments.

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.

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% for one year.What are the Australian dollar proceeds from the US dollar investment (round to two decimals)?

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.

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 the concept of the interest rate parity theorem (IRPT) and its implications for FIs?

Currency swaps are used to hedge against exchange rate risk from mismatched currencies on assets and liabilities.

Which of the following statements is true?

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

Which of the following FX trading activities is used for purposes of speculation?

Which of the following statements is true?

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 are common FX trading activities?

Indirect quote shows the amount of foreign currency received for each unit of home currency exchanged.

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?

Which of the following statements is true?

Which of the following statements is true?

Which of the following statements is true?

Why Are Financial Institutions Special

The Financial Service Industry: Depository Institutions

The Financial Service Industry: Other Financial Institutions

Risks 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

Managing Interest Rate Risk Using Securitisation

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 Risks

Capital Management and Adequacy

Filters

Exam 13: Foreign Exchange Risk

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

The interest rate parity theorem implies that while interest rates are hedged, the dollar return on foreign investments can be above or below the return on domestic investments.

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.

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% for one year.What are the Australian dollar proceeds from the US dollar investment (round to two decimals)?

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.

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 the concept of the interest rate parity theorem (IRPT) and its implications for FIs?

Currency swaps are used to hedge against exchange rate risk from mismatched currencies on assets and liabilities.

Which of the following statements is true?

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

Which of the following FX trading activities is used for purposes of speculation?

Which of the following statements is true?

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 are common FX trading activities?

Indirect quote shows the amount of foreign currency received for each unit of home currency exchanged.

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?

Which of the following statements is true?

Which of the following statements is true?

Which of the following statements is true?

Why Are Financial Institutions Special

The Financial Service Industry: Depository Institutions

The Financial Service Industry: Other Financial Institutions

Risks 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

Managing Interest Rate Risk Using Securitisation

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 Risks

Capital Management and Adequacy

Filters