Deck 2: The Foreign Exchange Market

Question 1

The term 'foreign exchange' means:

A) foreign reserves held by central banks
B) coins, notes and bank deposits in foreign currencies
C) loans and bonds denominated in foreign currencies
D) foreign coins and banknotes

Answer 1

coins, notes and bank deposits in foreign currencies

Question 2

Which of the following is not a characteristic of the foreign exchange market as a perfect market?

A) The volume of daily turnover is extremely high
B) A large number of buyers and sellers operate in the market
C) There is free access to information
D) The products are homogenous

Answer 2

The volume of daily turnover is extremely high

Question 3

Which of the following is not a characteristic of the foreign exchange market as an OTC market?

A) The market has no specific physical location
B) Buyers and sellers conclude transactions via means of telecommunication
C) It comprises both spot and forward transactions
D) There are no floor brokers

Answer 3

It comprises both spot and forward transactions

Question 4

A price taker in the foreign exchange market is:

A) a hedger who wants to avoid risk
B) a speculator who buys a currency at the current exchange rate, hoping that it would appreciate
C) a market participant who takes the current exchange rate to be the equilibrium exchange rate
D) a market participant who buys and sells currencies at the exchange rates quoted by large commercial banks

Question 5

A price maker in the foreign exchange market is:

A) a speculator who acts upon a subjectively expected exchange rate
B) a foreign exchange forecaster
C) a large commercial bank quoting bid and offer rates
D) a government agency which regulates trading and controls exchange rates

Question 6

A foreign exchange broker earns income by:

A) charging fees for services rendered
B) speculating in the foreign exchange market
C) exploiting the bid-offer spread
D) engaging in riskless arbitrage operations

Question 7

A foreign exchange dealer engages in:

A) taking speculative open positions on currencies
B) exploiting arbitrage opportunities
C) buying and selling currencies to hedge open positions
D) all of the given answers

Question 8

Importers participate in the foreign exchange market because:

A) the market provides letters of credit
B) the market provides short-term loans
C) they need foreign currency to pay for imported goods
D) foreign exchange brokers bring together importers and exporters

Question 9

Exporters participate in the foreign exchange market because:

A) the market provides letters of credit
B) the market provides short-term loans
C) they sell foreign currency they receive from foreigners buying their goods
D) foreign exchange brokers bring together importers and exporters

Question 10

Central banks buy and sell currencies on the foreign exchange market to:

A) make profit and accumulate reserves
B) smooth out fluctuations in exchange rates
C) finance the country's international transactions
D) smooth out capital movements

Question 11

The average daily turnover in the foreign exchange market (USD) in 2001 fell for the first time as recorded in the BIS surveys since 1989 due to:

A) the introduction of the euro
B) the terrorist attack on 9/11
C) the decline in the value of the U.S. dollar
D) none of the given answers

Question 12

In order of importance, the following were the major centres in which foreign exchange was traded in

A) U.S.; U.K.; China; Japan; Singapore; HK; and Australia
B) U.K.; U.S.; Switzerland; Japan; Singapore; HK; and Australia
C) U.K.; U.S.; China; Japan; Singapore; HK; and Australia
D) U.S.; U.K.; Switzerland; Japan; Singapore; HK; and Australia

Question 13

In order of importance, the following were the major foreign exchange counterparties in 2007.

A) Reserve Banks; Financial Institutions; and Others
B) Reserve Banks; Interbank; and Others
C) Financial Institutions; Interbank; and Others
D) Interbank; Financial Institutions; and Others

Question 14

In order of importance, the following were the major currency pairs traded in 2007.

A) USD/JPY; USD/EUR; USD/GBP; and USD/AUD
B) USD/EUR; USD/JPY; USD/GBP; and USD/AUD
C) USD/GBP; USD/EUR; USD/JPY; and USD/AUD
D) USD/EUR; USD/GBP; USD/JPY; and USD/AUD

Question 15

The U.S. dollar is the most heavily traded currency on the foreign exchange market for all of the following reasons EXCEPT:

A) it is a major component of international reserves
B) it is used to settle international transactions
C) the sheer size of the U.S. financial markets
D) the U.S. is the largest consumer of oil which is priced in U.S. dollar

Question 16

The British pound is still heavily traded because it is:

A) a hard currency
B) a petrocurrency
C) historically an important currency
D) the domestic currency in London, which is the most important foreign exchange centre

Question 17

An 'exotic' currency is a currency:

A) which is printed on exotic paper
B) which is not traded heavily
C) which is traded in exotic resorts
D) of a country that has a balance of payments deficit

Question 18

The substantial growth in the daily turnover in the Australian foreign exchange market, since deregulation in 1983, may be attributed to:

A) the enhanced opportunities for foreign investment post deregulation
B) Australia's above average level of real interest rates post deregulation
C) Australia's time zone, which links trading in New York and Europe
D) all of the given answers

Question 19

A foreign exchange transaction consists of the following sequential process:

A) Price discovery; Decision making; Execution; Settlement; and Position keeping
B) Decision making; Price discovery; Execution; Settlement; and Position keeping
C) Decision making; Execution; Price discovery; Settlement; and Position keeping
D) Decision making; Execution; Settlement; Price discovery; and Position keeping

Question 20

In the interbank foreign exchange market, the term 'immediate delivery' implies that the delivery of currencies takes place:

A) immediately after the conclusion of the transaction
B) one business day after the conclusion of the transaction
C) two business days after the conclusion of the transaction
D) by the end of the same business day

Question 21

In the foreign exchange market, a 'contract date' is:

A) the expiry date of a forward contract
B) the date on which a futures contract is traded
C) the date on which two banks start a currency swap
D) the date on which a foreign exchange transaction is concluded at the exchange rate prevailing at the time

Question 22

If the exchange rate between the Australian dollar and the U.S. dollar is expressed in direct quotation from an Australian perspective, then a rise in the exchange rate implies:

A) appreciation of the U.S. dollar
B) depreciation of the U.S. dollar
C) appreciation of the Australian dollar
D) both depreciation of the U.S. dollar and appreciation of the Australian dollar

Question 23

If the exchange rate between the Australian dollar and the British pound is expressed in indirect quotation from an Australian perspective, then a fall in the exchange rate implies:

A) depreciation of the pound
B) appreciation of the Australian dollar
C) depreciation of the Australian dollar
D) both depreciation of the pound and appreciation of the Australian dollar

Question 24

If the exchange rate between the Australian dollar and the New Zealand dollar is expressed as AUD/ NZD, then this is:

A) a direct quotation from a New Zealand perspective
B) an indirect quotation from a New Zealand perspective
C) a reciprocal quotation from a New Zealand perspective
D) an indirect or a reciprocal quotation from a New Zealand perspective

Question 25

You are given the exchange rate AUD/USD 1.7662. Calculate the indirect quote of the Australian dollar from an Australian viewpoint.

A) AUD/USD 0.5662
B) USD/AUD 1.7662
C) AUD/USD 1.7662
D) USD/AUD 0.5662

Question 26

In 2002, the AUD/USD exchange rate fell from 1.9585 to 1.7662. Calculate the percentage change in the Australian dollar against the U.S. dollar.

A) -9.82%
B) +9.82%
C) +10.89%
D) -10.89%

Question 27

In 2002, the EUR/AUD exchange rate fell from 0.5764 to 0.5403. Calculate the percentage change in the Australian dollar against the euro.

A) +6.26%
B) -6.26%
C) +6.68%
D) -6.68%

Question 28

In the foreign exchange market, price-takers:

A) buy high and sell low
B) buy at the bid rate and sell at the offer rate
C) buy at the offer rate and sell at the bid rate
D) buy high and sell low, which is the same as buy at the offer rate and sell at the bid rate

Question 29

You are given the exchange rate AUD/USD 1.7652/1.7672. Calculate the bid offer spread.

A) 20 pips
B) 20 cents
C) 0.0020
D) 20%

Question 30

In the foreign exchange market, market makers:

A) buy high and sell low
B) buy at the bid rate and sell at the offer rate
C) buy at the offer rate and sell at the bid rate
D) buy high and sell low, which is the same as buy at the offer rate and sell at the bid rate

Question 31

You are given the exchange rate AUD/USD 1.7652/1.7672. Calculate the direct quote of the U.S. dollar from an American viewpoint.

A) AUD/USD 0.5665/0.5659
B) AUD/USD 0.5659/0.5665
C) USD/AUD 0.5665/0.5659
D) USD/AUD 0.5659/0.5665

Question 32

If the AUD/USD exchange rate declines from 1.9585 to 1.7662, then the fall is equal to:

A) 1,923 points
B) 192,300 pips
C) 19.23 points
D) 1,923 pips

Question 33

'Reciprocity' in the foreign exchange market refers to the practice by two foreign exchange dealers when they:

A) exchange information on expected movements in exchange rates
B) quote to each other narrow bid-offer spreads
C) buy from each other a currency before reversing the operation
D) exchange visits to discuss the latest market developments

Question 34

A 'misquote' arises when a dealer:

A) quotes the rates of the wrong currency
B) quotes a one-way rate
C) quotes the bid rate only
D) mistakenly quotes a low rate

Question 35

Calculate the EUR/AUD cross OFFER rate. You are given the following exchange rates: ?

A) 0.5493
B) 0.5259
C) 0.5419
D) 0.5331

Question 36

Dealer A quotes 1.7652/1.7672 for the AUD/USD exchange rate to Dealer B. The price (in U.S. dollars) at which B can buy one unit of the Australian dollar is:

A) 1.7652
B) 1.7672
C) 0.5665
D) 0.5659

Question 37

Calculate the USD/AUD 3-months forward spread in percentage terms. Complete the missing values in the blotter provided below:

A) USD Deal Amount: -2,824,859; and USD Balance: -8,474,576
B) USD Deal Amount: -2,824,859; and USD Balance: -8,486,732
C) USD Deal Amount: +8,850,000; and USD Balance: +14,511,873
D) USD Deal Amount: +2,824,859; and USD Balance: +8,486,732

Question 38

Calculate the USD/AUD 3-months forward spread in percentage terms. You are given the following exchange rates:

A) -0.03%
B) -3.35%
C) -3.32%
D) -0.83%

Question 39

This means that: The following are the spot and the swap forward rates of the AUD/USD.

A) the U.S. dollar is selling at a forward discount
B) the U.S. dollar is selling at a forward premium
C) the Australian dollar is selling at a forward discount
D) after allowing for transaction costs, both currencies sell at par

Question 40

If the AUD/USD forward spread is -5.00%, which interpretation is correct?

A) The U.S. dollar is selling forward at a premium against the Australian dollar.
B) The U.S. dollar is selling forward at a discount against the Australian dollar.
C) The Australian dollar is selling forward at a discount against the U.S. dollar.
D) None of the given answers.