Deck 9: Global Foreign-Exchange Markets

Question 1

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

Answer 1

B

Question 2

Most foreign exchange is handled through voice brokers.

Answer 2

False

Question 3

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

Answer 3

B

Question 4

________ 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 5

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 6

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

Question 7

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 8

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

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

Question 9

What is the Bank for International Settlements? What three categories does the BIS designate in the foreign-exchange market? Briefly describe each category.

Question 10

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 11

Historically, what is the top remittance-receiving country in Latin America?

A)Brazil
B)Mexico
C)Uruguay
D)Venezuela

Question 12

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

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 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

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

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

Question 15

A tariff is the price of a currency.

Question 16

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 17

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 18

What is remittance income? What institutions in Mexico can handle remittance accounts? Why are some institutions used more frequently than others?

Question 19

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 20

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 21

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 22

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

Question 23

What is a futures contract? What institutions handle futures contracts?

Question 24

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 25

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

Question 26

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 27

How is foreign exchange traded? What methods are available?

Question 28

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 29

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 30

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 reais for Swiss francs?

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

Question 31

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

Question 32

A major challenge faced by Western Union in transferring money between the United States and Mexico is that Mexican citizens trust the banks but do not trust Western Union due to its reliance on global banks.

Question 33

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 34

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

Question 35

What are the two major segments of the foreign-exchange market? What types of foreign-exchange instruments are traded within these markets?

Question 36

The U.S.dollar is widely traded because it is a transaction currency in many international commodity markets.

Question 37

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 38

According to 2010 surveys, the most frequently traded currency pair is the U.S.dollar and Japanese yen.

Question 39

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 40

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

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

Question 41

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 42

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 43

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 44

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 45

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 46

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

Question 47

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 48

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 49

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

Question 50

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 51

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 52

What are the characteristics of the forward market? Why do companies participate in the forward market? Provide an example to illustrate your answer.

Question 53

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 54

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

Question 55

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

Question 56

What is currency speculation? Why is it risky?

Question 57

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

Question 58

Options are more flexible than forward contracts.

Question 59

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 60

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 61

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 62

Why would companies become involved in arbitrage? What is the difference between arbitrage and interest arbitrage?

Question 63

What are the characteristics of the spot market? What institutions handle spot exchanges?

Question 64

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 65

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 66

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 67

The Chicago Mercantile Exchange and NASDAQ are part of the OTC market.

Question 68

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 69

Jason works in finance at an MNE.Part of his job is to invest large sums of money in various markets.His latest transaction was investing $10,000 in British pounds for 120 days, then taking the British pounds and investing them in euros for 90 days, and then converting it all back to U.S.dollars.Jason is most likely participating in ________.

A)interest arbitrage
B)speculation
C)cryptocurrency
D)options

Question 70

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 71

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 72

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 73

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 74

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 between North and South America

Question 75

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 76

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 77

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 78

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 79

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 80

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