Deck 2: The Foreign Exchange Market

Question 1

What is the name of the computer network in which member banks globally send and receive messages pertaining to foreign exchange transactions?

A) Fed funds
B) SWIFT
C) CHIPS
D) The Automated Clearing House (ACH)

Answer 1

B

Question 2

When an exchange rate is quoted by a dealer in country as the local currency price of one unit of foreign currency,he is quoting the ________.

A) indirect quote
B) direct quote
C) bid quote
D) ask quote

Answer 2

B

Question 3

Which one of the following are the main participants in the global currency markets?

A) commercial banks
B) insurance companies
C) hedge funds
D) private equity funds

Answer 3

A

Question 4

Which one of the following is not a characteristic of a liquid market?

A) Market makers stand ready to buy and sell currencies.
B) Foreign exchange dealers make transactions only with dealers.
C) It becomes easy to match buyers and sellers.
D) Transaction costs are low.

Question 5

The fourth decimal place in a dealer's quote in the trade jargon is known as the

A) pip.
B) round trip.
C) spread.
D) haircut.

Question 6

What currency currently serves as the world's primary vehicle currency?

A) Japanese yen
B) British pound
C) U.S. Dollar
D) European euro

Question 7

Which one of the following features is not part of the interbank foreign exchange market?

A) derivative securities such as foreign currency futures and options
B) trade in swaps and forward contracts
C) immediate exchanges of monies
D) non-strategic loans

Question 8

What do the market makers in the currency markets provide?

A) insurance against default by the buyers
B) solvency
C) stability
D) liquidity

Question 9

When it comes to currency transfers,what is the most important global interbank communications network?

A) CHIPS
B) TARGET
C) SWIFT
D) RTGS

Question 10

If you were trading currency in the New York currency market,the exchange rate between two currencies not expressed in U.S.dollars would be known as the ________ quote.

A) direct
B) indirect
C) cross-rate
D) European

Question 11

The ________ quote refers to the dollar price of a foreign currency.

A) European
B) American
C) Bid
D) Ask

Question 12

The difference between the ask rate and the bid rate is known as the

A) arbitrage profit.
B) dealer's profit.
C) spread.
D) bid-ask spread.

Question 13

Which of the following markets is comprises the world's major banks and other financial institutions?

A) Forex Market
B) Spot Market
C) Interbank Market
D) Money Market

Question 14

What is the name of the rate currency traders quote in the interbank market to sell foreign currencies?

A) bid-ask spread
B) bid rate
C) cross rate
D) ask rate

Question 15

When someone in the currency market can buy a currency at a low price and sell it for a higher price,it is known as ________.

A) arbitrage
B) the bid-ask spread
C) hedging
D) interbank currency market

Question 16

What is the name of the risk that a financial institution may not deliver the currency on one side of a completed currency transaction?

A) dealer risk
B) market risk
C) Herstatt risk
D) exchange rate risk

Question 17

Which one of the following firms dominates the foreign exchange markets?

A) No one firm dominates.
B) Deutsche Bank
C) UBS
D) Citigroup

Question 18

How would economists most often define a perfectly competitive market?

A) Many firms compete with one another, and the cost of entering the market is low.
B) Many firms compete with one another, and the cost of entering the market is high.
C) Firms do not compete with one another, and the cost of entering the market is low.
D) Firms do not compete with one another, and the cost of entering the market is high.

Question 19

What is the largest financial market in the world measured in dollar-volume trade?

A) the U.S. stock markets
B) the currency markets
C) the forward and swap currency markets
D) the global market for loanable funds

Question 20

When transactions are conducted on the spot currency markets,________ business day(s)is(are)allowed for contract settlement.

A) one
B) two
C) five
D) ten

Question 21

Why are the bid-ask spreads quoted in the interbank spot market? What is their purpose?

Question 22

The cash manager at AmFlex Company needs to buy 1,000,000 British pounds to pay a British supplier.A currency broker quotes him a bid-ask rate of ?.4865-.5116/US$.What will be the dollar cost the 1,000,000 pounds?

A) $2,055,499
B) $1,954,652
C) $486,618
D) $511,587

Question 23

Describe how an exchange rate is like a market price?

Question 24

Eastern Copper Mines of New Zealand has called a broker at Deutsche Bank to ask her opinion about the Japanese yen to New Zealand dollar exchange rate.What would the broker's answer be?

A) ¥104.30/NZ$
B) ¥80.60/NZ$
C) ¥75.44/NZ$
D) ¥65.57/NZ$

Question 25

When it comes to trading global currency,all of the following markets are in the top five EXCEPT:

A) London.
B) Singapore.
C) Tokyo.
D) Frankfurt.

Question 26

The CFO at SmithKlone Company receives a lump sum payment from a foreign vendor of 2,000 euros and intends to convert them to US$.When she calls her currency broker,the quote given is €.6250-.6667/US$.What can she expect to realize in US$ from the broker?

A) $3,200
B) $3,000
C) $1,250
D) $1,334

Question 27

The broker at Deutsche Bank quotes bid-ask rates of ¥104.15-30/$.What would be its direct asking price for yen if the bank's €/$ ask rate is .6550?

A) €.0061/¥
B) €.00628/¥
C) €159.24/¥
D) €164.25/¥

Question 28

What is most different about the foreign exchange market versus the New York Stock Exchange?

Question 29

As a foreign exchange trade at Deutsche Bank,one of your customers would like a yen quote on Australian dollars.The current spot market rates are ¥101.37-85/U.S.$ and A$1.2924-44/U.S.$.What bid and ask yen cross rates would you quote on spot Australian dollars?

Question 30

What is a spot exchange-rate contract?

Question 31

When does delivery occur on a spot contract?

Question 32

Suppose Lufthansa receives the following indirect quotes in the currency markets of New York.They are €0.92-3/U.S.$.Given the quotes,there may or may not be arbitrage opportunities if you were a currency trader in Paris.What range of £/€ bid and ask quotes would motivate you to arbitrage the currencies? Explain.