Deck 8: The Foreign Exchange Market

Question 1

The trade- weighted index (TWI) of the exchange rate:

A) is less relevant than bilateral rates when looking at the impact of the exchange rate on the economy.
B) is set by the RBA and remains fixed until the government alters exchange rate policy.
C) is composed of weights based on econometric estimates of exchange rate elasticities with the A$.
D) measures the average value of the A$ against all overseas currencies.

Answer 1

D

Question 2

If the spot exchange rate is 0.5650 and the forward quote is 10- 20 basis points, then the forward exchange rate is:

A) 0.5640 - 0.5660.
B) 0.5640 - 0.5670.
C) 0.5660 - 0.5670.
D) 0.5640 - 0.5630.

Answer 2

C

Question 3

Authorized FX dealers are subject to the:

A) Fisher Effect.
B) Corporations law.
C) ASX rules.
D) auction marketplace.

Answer 3

B

Question 4

A major factor contributing to economic globalisation over the last 20 years has been:

A) financial deregulation.
B) WAP technology.
C) the war in Iraq.
D) the BIS Basel committee.

Question 5

Suppose an Australian importer buys manufacturing equipment from France worth 50 million Euros at an exchange rate of AUD/EUR of 0.9622. Suppose that the exchange rate depreciates a week later to AUD/EUR = 0.9582. The net change in the import bill after the depreciation is:

A) $0.44 million.
B) $0.22 million.
C) minus $0.20 million.
D) minus $0.37 million.

Question 6

A university student uses the FX market. The most likely reason for using the market is:

A) borrowing.
B) travelling.
C) importing.
D) exporting.

Question 7

The AUD is ranked where in the world in turnover?

A) Sixth.
B) Thirteenth.
C) Twenty- eighth.
D) Fifty- third.

Question 8

The common code for the Australian dollar is:

A) ALD.
B) AUC.
C) ASD.
D) AUD.

Question 9

The indirect method of FX quoting is used in:

A) North America.
B) Asian countries.
C) European countries.
D) Commonwealth countries.

Question 10

The role of the foreign exchange (FX) market is to:

A) regulate the flow of capital from one country to another.
B) provide a clearing house for exchange of currencies.
C) achieve equilibrium in the balance of payments.
D) all of the above.

Question 11

An exchange rate that is agreed now and delivered in two days' time is known as a:

A) futures rate.
B) spot rate.
C) forward rate.
D) swap rate.

Question 12

If the expected sharemarket yield in Australia is 16% per annum and the expected annual depreciation of the AUD/USD exchange rate is 4%, then 'share market parity' (SMP) says that:

A) the authorities can reverse the fortunes of the AUD by reducing the return on the Australian sharemarket.
B) the expected sharemarket return in the US is 12%.
C) the Australian sharemarket's apparent outperforming of the US market is simply a statistical effect.
D) the expected sharemarket return in the US is 20%.

Question 13

Foreign exchange swaps are best described as:

A) the right but not the obligation to buy or sell a currency by an agreed future date at an agreed price.
B) a contract in which one currency is exchanged for another at a price set now and delivered in more than two days' time.
C) a contract for the simultaneous buying and selling of one currency in exchange for another at various value dates.
D) buying a currency and then reversing the position by selling a short time afterwards.

Question 14

If d = depreciation of country A's currency relative to B's, pA = inflation in A and pB = inflation in B, the equation for PPP is:

A) d = pA / pB.
B) d = pA - pB.
C) d = pA + pB.
D) d = pA × pB.

Question 15

Which of the following is a FX instrument?

A) Forward contract.
B) FX swap.
C) Spot contract.
D) All of the above.

Question 16

If a trader quotes the following exchange rate AUD/USD 0.7000- 0.7010, what is the spread?

A) 5
B) 10
C) 70
D) It cannot be determined.

Question 17

An exchange rate defined as the price of one unit of the home currency in terms of the overseas currency is known as a(n) quote.

A) terms
B) inverse
C) direct
D) indirect

Question 18

The treasury division of a commercial bank generates income primarily by:

A) writing loans.
B) setting overall strategic direction.
C) running the branch network.
D) position- taking.

Question 19

In foreign currency trading, 'hedging' means:

A) eliminating currency risk by fixing an exchange rate in advance.
B) locking in a risk- free profit when the same currency is priced differently in two different markets by simultaneously buying in one market and selling in the other.
C) entering a contract to exchange currencies at an agreed future date in which the rate is not specified.
D) holding an open position in the hope of gaining from favourable currency movements.

Question 20

Interest rate parity (IRP) implies that:

A) international interest rates are irrelevant to exchange rate behaviour.
B) market interest rates for similar risk instruments tend to equate across countries on an exchange- rate- adjusted basis.
C) the annual depreciation of the home currency equals the foreign interest rate.
D) the forward rate (F) plus the spot rate (S) equals the interest rate (R).

Question 21

As the exchange rate depreciates, the aggregate value of Australian exports tends to rise.

Question 22

Globalisation is widely recognised as counteracting the propagation of financial crises across borders.

Question 23

As the exchange rate declines:

A) the aggregate level of imports into the economy tends to fall.
B) the volume of FX trading tends to fall.
C) the need for RBA intervention tends to fall.
D) the aggregate level of exports from the economy tends to fall.

Question 24

Which of the following best describes the 'commodity' currency in an FX quote?

A) The currency in whose terms the quote is being expressed.
B) The currency whose price is given in the exchange rate.
C) The currency that is actually going to be exchanged.
D) None of the above.

Question 25

The country with the highest weight in Australia's trade- weighted index is the US.

Question 26

Which of the following is NOT true?

A) The FX market provides participants with an alternative source of credit.
B) Foreign exchange is traded in a single location in each country.
C) Importers and exporters are frequent users of FX.
D) An official FX dealer must be licensed by the RBA.

Question 27

Sterilised intervention by the RBA in the FX market is the sale (purchase) of FX which is offset by an equivalent purchase (sale) of government securities so there is no change in the money base.

Question 28

An exchange rate is defined as the rate of return from holding a particular currency for the holding period.

Question 29

Suppose an Australian importer buys manufacturing equipment from France worth 50 million Euros at an exchange rate of AUD/EUR of 0.9622. Then the AUD- equivalent cost is:

A) $51.96 million.
B) $50.00 million.
C) $53.29 million.
D) $48.11 million.

Question 30

RBA intervention in the foreign currency market is designed to:

A) fix the value of the AUD.
B) reduce volatility of the AUD.
C) hedge the AUD.
D) none of the above.

Question 31

Suppose an Australian importer buys manufacturing equipment from France worth 50 million Euros at an exchange rate of AUD/EUR of 0.9622. Suppose that the exchange rate depreciates a week later to AUD/EUR = 0.9582. Then the AUD value of the import bill has:

A) remained unchanged.
B) risen.
C) fallen.
D) Without more information we cannot determine.

Question 32

Australia's exchange rate regime is called a:

A) adjustable link system.
B) crawling peg system.
C) fixed rate system.
D) floating rate system.

Question 33

In a direct FX quote:

A) the price is expressed in terms of x units of the home currency per unit of the overseas currency.
B) the price is expressed in terms of one unit of the home currency per x units of the overseas currency.
C) the quote is officially listed on the RBA dealing screen.
D) the quote is given via a broker rather than a bank.

Question 34

Which statement is FALSE?

A) All arbitrage involves a degree of exchange rate risk.
B) Speculation involves a risk of loss if exchange rates move in the opposite direction to that expected.
C) Foreign exchange swaps may be viewed as combinations of spot and forward contracts.
D) Currency options are especially useful when a player does not want to be locked in to buying or selling a currency at a future time.

Question 35

According to the 'purchasing power parity' (PPP), a McDonald's Big Mac in the UK should cost the same as:

A) a Big Mac purchased in the US expressed in US dollars.
B) a Big Mac purchased in the US expressed in UK pounds sterling.
C) a Big Mac purchased in the US, transported to the UK, and consumed in the UK.
D) a Big Mac purchased in the US.

Question 36

When the USD is worth less forward than it is worth spot, we say that the USD is trading at a 'premium'.

Question 37

An exporter selling to the US market wishes to hedge a future foreign exchange transaction using the forward market. He will:

A) buy and sell the USD forward today.
B) buy the USD forward today.
C) sell the USD forward today.
D) buy and sell the USD in the future at the future spot price.

Question 38

If an FX dealer gives a quote of AUD1/USD0.7510- 20 it means:

A) the spread is 0.10.
B) the trader is willing to buy AUD for 75.10 US cents and sell for 75.20 US cents.
C) the dealer is giving a two- way quote.
D) all of the above.

Question 39

The real exchange rate (RER) is defined as RER = E × (PA/PO) where E is the number of units of foreign currency per AUD, PA is the price level in Australia, and PO is the weighted average of prices in the trading partner countries.

Question 40

The international code for the UK pound sterling is GBP.

Question 41

If an exporter to the US expects the AUD to depreciate, she will buy the USD forward.

Question 42

The term currency in an exchange rate quote is one whose price is given in the exchange rate.

Question 43

Losses that arise as a result of the impact of unfavourable movements in market prices are known as operational risk.

Question 44

In order to obtain a licence to deal in FX, applicants must hold a minimum of A$1 million in capital at all times.

Question 45

Assume that the Australian interest rate is 2% higher than the US interest rate. Then funds will flow out of Australia to the US and cause the AUD to depreciate.

Question 46

When the RBA intervenes in the FX market using a buy/sell swap, it will sell AUD in the spot market and buy it in the forward market.

Question 47

In the world of FX, 'sentiment' refers to the mood and prevailing opinion in the market about a given currency's prospects.

Question 48

The 'law of one price' says that products will have the same price in different countries when the exchange rates between various countries are allowed for.

Question 49

The exchange rate AUD/USD 0.5439 is interpreted as one Australian dollar equals 0.5439 US dollars.

Question 50

An argument used in favour of fixed exchange rates is that it removes the uncertainty that arises out of currency movements.

Question 51

If a university student wishes to buy $1000 USD for her overseas trip and the current exchange rate with the AUD is AUD/USD = 0.5347, the amount of AUD she must pay is $1870.21.

Question 52

Under an adjustable peg exchange rate regime, the authorities intervene in the FX market to try to influence the exchange rate towards a target value.

Question 53

One step in controlling trading risk is the separation of trading and settlements functions.

Question 54

If the AUD appreciates by 5% against the US dollar and depreciates by 5% against the Japanese yen, then the trade- weighted index (TWI) of the AUD will rise by 10%.

Question 55

The forward exchange rate minus the spot rate equals the forward margin.

Question 56

Arbitrage is possible when distinct but essentially equivalent products are priced differently.

Question 57

An increase in exports from Australia will decrease the supply of foreign currency.

Question 58

A cross- currency interest rate swap is a product under which the fixed- interest payments in one currency are exchanged for variable interest payments in another currency.

Question 59

Suppose the US interest rate is 6% and the Australian rate is 8%. If interest rate parity (IRP) holds, then the differential suggests the market expects the AUD to depreciate against the USD 1% per annum.

Question 60

FX traders quote buy and sell prices so that they can buy high and sell low.

Question 61

Explain the meaning and use of forward exchange rates.

Question 62

Outline the various factors influencing exchange rates.

Question 63

The Euro became legal tender in the participating countries in 1980.

Question 64

Explain the difference between direct and indirect exchange rate quotes.

Question 65

Reuters is a company that supplies specialised data for foreign exchange (FX) traders.

Question 66

Discuss the aims and methods of central bank intervention in the FX market.

Question 67

What is the trade- weighted index?

Question 68

The international 3- digit code for the Swiss Franc is SWF.

Question 69

The US and sixteen member states of the European union are participating in the common Euro currency.

Question 70

The Australian FX market is ranked 9th in the world in volume of daily turnover.