Deck 9: Global Foreign-Exchange Markets

Question 1

A(n)________ is the price of a currency.

A) tariff
B) quota
C) exchange rate
D) subsidy

Answer 1

C

Question 2

In which of the following transactions is one currency swapped for another on one date and then swapped back on a future date?

A) reverse transaction
B) spot transaction
C) FX swap
D) outright forward transaction

Answer 2

C

Question 3

The ________ is the most widely traded currency in the world.

A) pound
B) yen
C) euro
D) U.S. dollar

Answer 3

D

Question 4

Outright forward transactions involve the exchange of currency on a future date beyond two business days at a fixed exchange rate,known as the ________.

A) spot rate
B) forward rate
C) option rate
D) reverse transaction rate

Question 5

An example of an electronic brokerage system used to trade foreign exchange is ________.

A) Reuters
B) Interbank Traders Ltd.
C) Bank for International Settlements
D) the reporting dealers clearing house

Question 6

Which term refers to money denominated in the currency of another nation or group of nations?

A) foreign exchange
B) foreign subsidy
C) export tariff
D) quota

Question 7

Which of the following best explains the increase in trading activity in recent years?

A) growing emphasis on hedge funds
B) availability of more global currencies
C) demands for immediate money access
D) advances in communication technology

Question 8

Which of the following would have the LEAST influence on price setting in the foreign exchange market?

A) Morgan Stanley
B) Deutsche Bank
C) Western Union
D) JP Morgan

Question 9

In 2010,what was the top remittance-receiving country in the world?

A) Brazil
B) Mexico
C) India
D) China

Question 10

In foreign-exchange markets,reporting dealers ________.

A) work extensively with non-financial institutions, such as the regional banks
B) trade more foreign exchange with other financial institutions than with any other category of users
C) trade more currency with governments and corporations than with other reporting dealers
D) are prohibited from trading currencies with other reporting dealers

Question 11

In foreign exchange markets,reporting dealers are ________.

A) financial institutions that actively participate in local and global foreign exchange markets
B) located primarily in New York City since U.S. dollars are the most widely traded currency
C) controlled by the Bank for International Settlements located in Switzerland
D) hedge funds and pension funds monitored by the World Bank

Question 12

The interbank market in foreign exchange is where ________.

A) electronic brokerage systems are required
B) banks trade currency with each other
C) reporting dealers set exchange terms
D) remittance payments are made

Question 13

A foreign exchange contract that is an agreement between two parties to buy or sell a particular currency at a particular price at a particular date in the future as specified in a standardized contract to all participants in the specified market is known as a(n)________.

A) spot contract
B) forward contract
C) futures contract
D) equity currency contract

Question 14

The U.S. dollar is most likely traded widely because it is ________.

A) a reserve currency held by many central banks
B) one of the oldest and most stable currencies in the world
C) monitored by the Bank of International Settlements and the U.S. Federal Reserve
D) based on prices of the NYSE, which is the world's largest foreign exchange center

Question 15

If Toranaga-san,who works for a Japanese trading company that operates in Japanese yen,wanted to purchase Spanish castanets from a company in Barcelona and needed euros to complete the transaction,he would use the ________ to gain access to spot euros.

A) stock market
B) foreign-exchange market
C) New York Stock Exchange
D) international export market

Question 16

The relationship between the value of the Brazilian and Chinese currencies is known as the ________.

A) stock price
B) exchange rate
C) foreign-exchange market
D) purchasing power parity

Question 17

A major challenge faced by Western Union in wiring money between the United States and Mexico is that ________.

A) it can only transfer funds in one direction
B) it is facing competition from some commercial banks
C) Mexican citizens do not like to use its services because it does not have strong ties with Mexican banks
D) Mexican citizens trust the banks but do not trust Western Union due to its heritage as a Western bank

Question 18

________ involve the exchange of currency the second day after the date on which the two foreign exchange traders agree to the transaction.

A) Spot transactions
B) Outright forward transactions
C) FX swaps
D) Reverse transactions

Question 19

Which of the following is the largest source of foreign-exchange income in Mexico?

A) FDI
B) tourism
C) foreign aid
D) remittance income

Question 20

Western Union's role in foreign exchange trading is best described as ________.

A) setting a fair exchange rate in multiple currencies
B) transferring currency from one country to another
C) transferring Mexican pesos from the United States to Mexico
D) handling all money transfers that occur North and South America

Question 21

Melissa,a foreign exchange trader,wants to buy euros from Stephanie. Which of the following is the price at which Melissa is willing to buy euros?

A) spread
B) offer
C) bid
D) cross rate

Question 22

Why are options most likely so attractive to companies?

A) The writer of the option does not charge the company any fee for writing the option.
B) Options provide companies with more flexibility than a forward contract.
C) Options are usually cheaper than forward contracts.
D) Options can be used for only foreign exchange deals.

Question 23

The pound-dollar forward rate for pounds is $1.9068,and the spot rate is $1.9100. Pounds are selling at a ________.

A) discounted premium
B) backward discount
C) forward discount
D) forward premium

Question 24

Why is London most likely the top market for trading foreign exchange?

A) The British pound is the world's top trading currency.
B) Most multinational firms are headquartered in London.
C) London is uniquely positioned geographically in terms of time zones.
D) British traders have always been the most sophisticated in the world.

Question 25

As a trading currency,the euro is ________.

A) more widely traded than the U.S. dollar in seven of the top ten currency markets in the world
B) widely traded in London but not in any other major foreign exchange markets in the world
C) becoming more popular than the U.S. dollar because of its global acceptance
D) gaining ground against the U.S. dollar in Eastern European countries

Question 26

Stella,who works and lives in San Diego,wants to send money to her mother who lives in a small village south of Puerto Vallarta,Mexico. Stella typically uses Western Union to handle the transaction. Which of the following is the most likely reason that Stella uses Western Union?

A) no fees
B) convenience
C) low exchange rates
D) cross rate capability

Question 27

If a foreign currency is quoted in American terms (the direct quote)and the forward rate is greater than the spot rate,the foreign currency is selling at a ________.

A) forward premium
B) forward discount
C) backward discount
D) discounted premium

Question 28

A(n)________ is the right but not the obligation to buy or sell a foreign currency within a certain time period or on a specific date at a specific exchange rate.

A) forward rate
B) bid
C) offer
D) option

Question 29

In the spot market,the ________ is the difference between the bid and offer rates and is the trader's profit margin.

A) bid
B) offer
C) cross rate
D) spread

Question 30

The top location for trading foreign exchange is ________.

A) London
B) New York
C) Zurich
D) Tokyo

Question 31

Which of the following handles the majority of all foreign exchange activities?

A) multinational enterprises
B) commodities exchanges
C) commercial banks
D) regional banks

Question 32

Which of the following is most likely true regarding options?

A) An option can only be purchased from a commercial bank.
B) Options are never used with foreign currency.
C) An option is a right to sell foreign currency.
D) Options do not provide firms with flexibility.

Question 33

In the foreign exchange market,the bid is the rate at which ________.

A) the trader is willing to sell foreign exchange
B) the buyer is willing to swap foreign exchange
C) the trader is willing to buy foreign exchange
D) the trader earns a profit

Question 34

Albert,an employee at Morgan Stanley,has been given the task of handling the foreign exchange for a customer who is moving from Brazil to Switzerland in one week. Which of the following should Albert most likely use when exchanging the client's Brazilian real for Swiss francs?

A) spot rate
B) cross rate
C) currency option
D) current U.S. rate

Question 35

Compared with a forward contract,a futures contract ________.

A) is more flexible
B) is normally available through commercial banks
C) does not guarantee a future exchange rate
D) is only traded on an exchange

Question 36

As a center for foreign exchange trading,London ________.

A) actually trades more U.S. dollars than are traded in the United States
B) usually opens up for business as trades are winding down in the United States
C) deals primarily in European currencies and is not as active in trading U.S. dollars
D) deals primarily in spot rather than forward trades

Question 37

The pound-dollar forward rate for pounds is $1.9068,and the spot rate is $1.9059. Pounds are selling at a ________.

A) discounted premium
B) backward discount
C) forward premium
D) forward discount

Question 38

Which of the following is NOT one of the top four locations for trading foreign exchange?

A) London
B) New York
C) Tokyo
D) Hong Kong

Question 39

Which of the following is the price at which the trader is willing to sell foreign currency?

A) offer
B) bid
C) spread
D) cross rate

Question 40

If a foreign currency is quoted in American terms (the direct quote)and the forward rate for a foreign currency is less than the spot rate,the foreign currency is selling at a ________.

A) forward premium
B) backward discount
C) backward premium
D) forward discount

Question 41

A speculator is someone who ________.

A) trades foreign exchange illegally
B) deals in the black market in currency
C) takes positions in foreign exchange markets to earn a profit
D) works for OTC financial institutions rather than non-financial corporations

Question 42

Gomez Enterprises,a firm based in Mexico City,exported 1,000 circuit boards to Taylor Industries,a firm based in Chicago. Taylor received a document from Gomez that requests immediate payment for the goods. Gomez has most likely sent a ________.

A) time draft
B) sight draft
C) spot draft
D) futures draft

Question 43

In a ________,one party directs another party to make payment.

A) reverse letter of credit
B) commercial bill of exchange
C) commercial bill of trade
D) confirmed irrevocable foreign exchange transaction

Question 44

A letter of credit that provides an exporter with the guarantee of another bank in addition to the importer's bank is called ________.

A) a confirmed letter of credit
B) a time draft letter of credit
C) an amendable letter of credit
D) a cash in advance letter of credit

Question 45

If a company from Country A decides to sell merchandise to a company from Country B,then the company from Country A ________.

A) will denominate the sale in its own currency since it is too hard to convert foreign currency
B) will denominate the sale in the currency of the buyer since it is too hard for them to convert foreign currency
C) can denominate the sale in either currency and use the foreign exchange market to convert currency
D) can use the OTC market to convert receipts in the future and the exchange markets to convert receipts in the spot market

Question 46

Which of the following is an example of interest arbitrage?

A) investing in debt instruments in different currencies or different countries
B) selling U.S. dollars for Swiss francs, then selling Swiss francs for British pounds, then selling British pounds for U.S. dollars
C) investigating different commercial banks to find the best exchange rate
D) an American investing in a London-based company

Question 47

Ryan,a foreign exchange dealer,sold U.S. dollars for Swiss francs in the U.S.,then sold Swiss francs for Japanese yen in Switzerland,and then sold the Japanese yen for U.S. dollars in the U.S. Ryan hopes that he will end up with more U.S. dollars than when he began. Which term best describes Ryan's actions?

A) arbitrage
B) speculation
C) spot transaction
D) outright forward

Question 48

An investor sells Japanese yen which is yielding a low interest rate and uses the proceeds to buy Swiss francs that yield a higher interest rate. Which term best describes the investor's actions?

A) forward discount spread
B) interbank transaction
C) strike price option
D) carry trade

Question 49

Which of the following is NOT a reason a company would deal in foreign exchange?

A) to pay or receive dividends in a foreign currency
B) to speculate on possible future movements in a currency
C) to buy and sell merchandise denominated in a foreign currency
D) to import merchandise denominated in its currency rather than the currency of the exporter

Question 50

Anita,an employee at ABX Partners,a hedge fund firm,has purchased euros because she believes that the euro will strengthen against other currencies. Which term best describes Anita's activities?

A) arbitrage
B) speculation
C) spot transaction
D) outright forward

Question 51

Which of the following best explains why migrant workers in Dubai send money back home?

A) Non-citizens cannot purchase property.
B) Non-citizens have temporary visas.
C) Western Union offers low rates.
D) Labor demand is flexible.

Question 52

How does arbitrage differ from speculation?

A) Speculation, unlike arbitrage, is never used to protect against risk.
B) A speculator buys or sells foreign currency with the hope that that currency will either weaken or strengthen in the future, resulting in a profit.
C) Speculation is the purchase of foreign currency on one market for the immediate resale on another market.
D) Arbitrage is another way to speculate for profit or protect against risk.

Question 53

Which of the following is LEAST relevant to being designated by Euromoney magazine as a top foreign-exchange dealer?

A) capability of handling specific currencies
B) capability of assessing cultural risk
C) capability of handling derivatives
D) capability of engaging in analytics

Question 54

An irrevocable letter of credit ________.

A) is issued by a global credit agency
B) is the basis for multilateral credit netting
C) can be amended only if all parties involved agree
D) obligates the exporter's bank to pay interest to the importer

Question 55

A document requesting payment 30 days after delivery is known as a ________.

A) time draft
B) sight draft
C) spot draft
D) futures draft

Question 56

Which of the following best describes arbitrage?

A) using foreign exchange to fund new foreign direct investments
B) purchasing foreign currency in anticipation of long term trends
C) using foreign exchange instruments to speculate for profit
D) purchasing foreign currency on one market for immediate resale on another market

Question 57

Which of the following is NOT one of the top exchanges that trade in foreign currency futures and options?

A) CME
B) UBS
C) NYSE Liffe
D) NASDAQ OMX

Question 58

Companies most likely use the foreign exchange market to ________.

A) establish fair currency trading policies
B) facilitate regular business transactions
C) establish a global market presence
D) diversify their hedge funds

Question 59

Companies most likely use the foreign exchange market to ________.

A) diversify their expenses from other sources
B) convert money for use in financial transactions
C) increase their presence on the black market
D) acquire currency from emerging markets

Question 60

When selecting a commercial and/or investment bank to deal in foreign exchange,corporations are most likely to use ________.

A) the exchange-based market rather than the over-the-counter market
B) more than one bank to meet different needs
C) banks located in the home country
D) investment banks only

Question 61

The largest market in foreign exchange is in London.

Question 62

Hong Kong is one of the top four largest markets in the world in foreign exchange trades and the largest in Asia.

Question 63

In foreign exchange markets,reporting dealers trade more foreign exchange with other reporting dealers than with any other category of users.

Question 64

Options are more flexible than forward contracts.

Question 65

If the forward rate for a foreign currency is less than the spot rate,the foreign currency is selling at a forward premium.

Question 66

Although most foreign exchange activity takes place through big money center banks,the use of electronic trading has allowed even regional banks to deal directly in foreign exchange markets.

Question 67

One reason that companies use the foreign exchange market is to diversify their expenses from other sources.

Question 68

The U.S. dollar is important as a vehicle for foreign exchange transactions between two countries other than the United States.

Question 69

Outright forward transactions involve the exchange of currency the second day after the date on which the two foreign exchange traders agree to the transaction.

Question 70

An exchange rate is the number of units that buys one unit of another currency.

Question 71

In an FX swap,one currency is swapped for another on one date and then swapped back on a future date.

Question 72

Commercial banks look at foreign-exchange trading as a service extended primarily to important customers,not as a major business activity of its own.

Question 73

A currency sells at a forward premium when the forward rate is greater than the spot rate.

Question 74

Companies use the foreign exchange market to convert money for use in financial transactions.

Question 75

Most foreign exchange is handled through voice brokers.

Question 76

The U.S. dollar is so widely traded partially because the New York Stock Exchange is the biggest foreign exchange center in the world.

Question 77

The bid is the price at which the trader is willing to sell foreign currency.

Question 78

An offer is the right but not the obligation to buy or sell foreign currency.

Question 79

In the spot market,the spread is the difference between the bid and offer rates and is the trader's profit margin.

Question 80

A tariff is the price of a currency.