Deck 5: The Foreign Exchange Market

Question 1

Because the market for foreign exchange is worldwide, the volume of foreign exchange currency transactions is level throughout the 24-hour day.

Answer 1

False

Question 2

Dealers sometimes use brokers in the foreign exchange market because the dealers desire

A) speed.
B) accuracy.
C) to remain anonymous.
D) all of the above.

Answer 2

all of the above.

Question 3

Foreign exchange ________ earn a profit by a bid-ask spread on currencies they purchase and sell. Foreign exchange ________, on the other hand, earn a profit by bringing together buyers and sellers of foreign currencies and earning a commission on each sale and purchase.

A) central banks; treasuries
B) dealers; brokers
C) brokers; dealers
D) speculators; arbitragers

Answer 3

dealers; brokers

Question 4

________ seek to profit from trading in the market itself rather than having the foreign exchange transaction being incidental to the execution of a commercial or investment transaction.

A) Speculators and arbitragers
B) Foreign exchange brokers
C) Central banks
D) Treasuries

Question 5

Foreign exchange swaps were larger in 1998 than in 2001. The Bank for International Settlements attributes this to

A) the introduction of the euro.
B) growing electronic brokering in the spot interbank market.
C) consolidation in general.
D) all of the above.

Question 6

It is characteristic of foreign exchange dealers to

A) bring buyers and sellers of currencies together but never to buy and hold an inventory of currency for resale.
B) act as market makers, willing to buy and sell the currencies in which they specialize.
C) trade only with clients in the retail market and never operate in the wholesale market for foreign exchange.
D) All of the above are characteristics of foreign exchange dealers.

Question 7

________ are NOT one of the three categories reported for foreign exchange.

A) Spot transactions
B) Swap transactions
C) Strip transactions
D) Futures transactions

Question 8

The authors identify two tiers of foreign exchange markets:

A) bank and nonbank foreign exchange.
B) commercial and investment transactions.
C) interbank and client markets.
D) client and retail market.

Question 9

While trading in foreign exchange takes place worldwide, the major currency trading centers are located in

A) London, New York, and Tokyo.
B) New York, Zurich, and Bahrain.
C) Paris, Frankfurt, and London.
D) Los Angeles, New York, and London.

Question 10

A/An ________ is an agreement between a buyer and seller that a fixed amount of one currency will be delivered at a specified rate for some other currency.

A) Eurodollar transaction
B) import/export exchange
C) foreign exchange transaction
D) interbank market transaction

Question 11

Which of the following is NOT a motivation identified by the authors as a function of the foreign exchange market?

A) The transfer of purchasing power between countries.
B) Obtaining or providing credit for international trade transactions.
C) Minimizing the risks of exchange rate changes.
D) All of the above were identified as functions of the foreign exchange market.

Question 12

Currency trading lacks profitability for large commercial and investment banks but is maintained as a service for corporate and institutional customers.

Question 13

Dealers in foreign exchange departments at large international banks act as market makers and maintain inventories of the securities in which they specialize.

Question 14

Daily trading volume of foreign exchange had actually decreased in 2004 from the levels reported in 2001.

Question 15

The foreign exchange market is NOT efficient because

A) market participants do not compete with one another due to the fact that exchange takes place around the world and not in a single centralized location.
B) dealers have ask prices that are higher than bid prices.
C) central governments dominate the foreign exchange market and everybody knows that by definition, central governments are inefficient.
D) none of the reasons listed are accurate because the foreign exchange market is efficient.

Question 16

In the foreign exchange market, ________ seek all of their profit from exchange rate changes while ________ seek to profit from simultaneous exchange rate differences in different markets.

A) wholesalers; retailers
B) central banks; treasuries
C) speculators; arbitragers
D) dealers; brokers

Question 17

Which of the following may be participants in the foreign exchange markets?

A) bank and nonbank foreign exchange dealers
B) central banks and treasuries
C) speculators and arbitragers
D) All of the above.

Question 18

The primary motive of foreign exchange activities by most central banks is profit.

Question 19

Daily trading volume in the foreign exchange market was about ________ per ________ in 2007.

A) $3,200 billion; month
B) $1,000 billion; month
C) $3,200 billion; day
D) $1,000 billion; day

Question 20

Which of the following is NOT true regarding the market for foreign exchange?

A) The market provides the physical and institutional structure through which the money of one country is exchanged for another.
B) The rate of exchange is determined in the market.
C) Foreign exchange transactions are physically completed in the foreign exchange market.
D) All of the above are true.

Question 21

With several exceptions, most interbank quotes are stated in European terms (meaning foreign currency unit per U.S. dollar).

Question 22

The greatest amount of foreign exchange trading takes place in the following three cities:

A) New York, London, and Tokyo.
B) New York, Singapore, and Zurich.
C) London, Frankfurt, and Paris.
D) London, Tokyo, and Zurich.

Question 23

The European and American terms for foreign currency exchange are square roots of one another.

Question 24

The four currencies that constitute about 80% of all foreign exchange trading are

A) U.K pound, Chinese yuan, euro, and Japanese yen.
B) U.S. dollar, euro, Chinese yuan, and U.K. pound.
C) U.S. dollar, Japanese yen, euro, and U.K. pound.
D) U.S. dollar, U.K. pound, yen, and Chinese yuan.

Question 25

American and British meanings differ for the word billion. Therefore, when traders refer to an American billion, they call it a/an ________.

A) Kiwi
B) Loony
C) Uncle Sam
D) Yard

Question 26

A ________ transaction in the foreign exchange market requires delivery of foreign exchange at some future date.

A) spot
B) forward
C) swap
D) currency

Question 27

A common type of swap transaction in the foreign exchange market is the ________ where the dealer buys the currency in the spot market and sells the same amount back to the same bank in the forward market.

A) "forward against spot"
B) "forspot"
C) "repurchase agreement"
D) "spot against forward"

Question 28

A foreign exchange ________ is the price of one currency expressed in terms of another currency. A foreign exchange ________ is a willingness to buy or sell at the announced rate.

A) quote; rate
B) quote; quote
C) rate; quote
D) rate; rate

Question 29

A/an ________ quote in the United States would be foreign units per dollar, while a/an ________ quote would be in dollars per foreign currency unit.

A) direct; direct
B) direct; indirect
C) indirect; indirect
D) indirect; direct

Question 30

The following is an example of an American term foreign exchange quote:

A) $20/£.
B) 0.85 euro/$.
C) 100¥/euro.
D) None of the above.

Question 31

Swap and forward transactions account for an insignificant portion of the foreign exchange market.

Question 32

From the viewpoint of a British investor, which of the following would be a direct quote in the foreign exchange market?

A) SF2.40/£
B) $1.50/£
C) £0.55/euro
D) $0.90/euro

Question 33

The ________ is a derivative forward contract that was created in the 1990s. It has the same characteristics and documentation requirements as traditional forward contracts except that they are only settled in U.S. dollars and the foreign currency involved in the transaction is not delivered.

A) nondeliverable forward
B) dollar only forward
C) virtual forward
D) internet forward

Question 34

A forward contract to deliver British pounds for U.S. dollars could be described either as ________ or ________.

A) buying dollars forward; buying pounds forward
B) selling pounds forward; selling dollars forward
C) selling pounds forward; buying dollars forward
D) selling dollars forward; buying pounds forward

Question 35

A ________ transaction in the foreign exchange market requires an almost immediate delivery of foreign exchange.

A) spot
B) forward
C) futures
D) none of the above

Question 36

Which of the following is NOT true regarding nondeliverable forward (NDF) contracts?

A) NDFs are used primarily for emerging market currencies.
B) Pricing of NDFs reflects basic interest rate differentials plus an additional premium charged for dollar settlement.
C) NDFs can only be traded by central banks.
D) All of the above are true.

Question 37

A spot transaction in the interbank market for foreign exchange would typically involve a two-day delay in the actual delivery of the currencies, while such a transaction between a bank and its commercial customer would not necessarily involve a two-day wait.

Question 38

Major exceptions to using European terms in foreign exchange include

A) trading yen and euros.
B) pounds and euros.
C) Mexican Pesos and euros.
D) all of the above.

Question 39

If the direct quote for a U.S. investor for British pounds is $1.43/£, then the indirect quote for the U.S. investor would be ________ and the direct quote for the British investor would be ________.

A) £0.699/$; £0.699/$
B) $0.699/£; £0.699/$
C) £1.43/£; £0.699/$
D) £0.699/$; $1.43/£

Question 40

Most foreign exchange transactions are through the U.S. dollar. If the transaction is expressed as the foreign currency per dollar this known as ________ whereas ________ are expressed as dollars per foreign unit.

A) European terms; indirect
B) American terms; direct
C) American terms; European terms
D) European terms; American terms

Question 41

For arbitrage opportunities to be practical,

A) participants must have instant access to quotes.
B) participants must have instant access to executions.
C) bank traders must be able to execute the arbitrage trades without an initial sum of money relying on their bank's credit standing.
D) all of the above must be true.

Question 42

What are some of the reasons central banks and treasuries enter the foreign exchange markets, and in what important ways are they different from other foreign exchange participants?

Question 43

New York City has the greatest volume of foreign exchange activity in the world.

Question 44

Most transactions in the interbank foreign exchange trading are primarily conducted via telecommunication techniques and little is conducted face-to-face.

Question 45

Given the following exchange rates, which of the multiple-choice choices represents a potentially profitable intermarket arbitrage opportunity?
¥129.87/$
Euro 1.1226/$
Euro 0.00864/¥

A) ¥115.69/euro
B) ¥114.96/euro
C) $0.8908/euro
D) $0.0077/¥

Question 46

TABLE 6.1
Use the table to answer following question(s).

Refer to Table 6.1. The current spot rate of dollars per pound as quoted in a newspaper is ________ or ________.

A) £1.4484/$; $0.6904/£
B) $1.4481/£; £0.6906/$
C) $1.4484/£; £0.6904/$
D) £1.4487/$; $0.6903/£

Question 47

The U.S. dollar suddenly changes in value against the euro moving from an exchange rate of $0.8909/euro to $0.08709/euro. Thus, the dollar has ________ by ________.

A) appreciated; 2.30%
B) depreciated; 2.30%
C) appreciated; 2.24%
D) depreciated; 2.24%

Question 48

The article in the text about an intern's first day on the job as a currency trader relates how what he/she had learned in business school had very little to do with how trading decisions were made on the floor of the exchange.

Question 49

Given the following quotations (where the dollar is the home currency), what is the annualized forward premium (discount) on the U.S. dollar?
Spot rate: $1.305/euro 6-month forward rate: $1.335/euro

A) premium; 4.4944%
B) premium; 4.5977%
C) discount; 4.4944%
D) discount; 4.5977%

Question 50

Define spot, forward, and swap transactions in the foreign exchange market and give an example of how each could be used.

Question 51

Given the following pair wise exchange rates, estimate the cross-rate of pounds per euro.
$0)8410/£ $1.2223/euro

A) £1.000/euro
B) £1.5062/euro
C) £0.6639/euro
D) euro 1.5062/£

Question 52

Currency trading increased tremendously between 2004 and 2007 with daily trading volume jumping from $1.9 trillion to $3.2 trillion. Which of the following do experts think was a major driving force behind the increased daily volume?

A) increased activity by specialized investment groups such as hedge funds
B) institutional investors holding more internationally diversified portfolios thus requiring more currency transactions
C) increased use of technical computer-based trading
D) all of the above

Question 53

The Continuous Linked Settlement system (CLS) links with the Real-Time Gross Settlement (RTGS) systems and is expected to eventually result in same-day settlement rather than the current two-day settlement required for foreign exchange spot market transactions.

Question 54

TABLE 6.1
Use the table to answer following question(s).

Refer to Table 6.1. The one-month forward bid price for dollars as denominated in Japanese yen is ________.

A) -¥20
B) -¥18
C) ¥129.74/$
D) ¥129.62/$

Question 55

TABLE 6.1
Use the table to answer following question(s).

Refer to Table 6.1. Cross rates

A) are often reported in the form of a matrix in the financial newspapers.
B) can be used to check on opportunities for intermarket arbitrage.
C) for the spot market in the table are ⁵188.10/³ (using the mid rates).
D) are all of the above.

Question 56

Global daily foreign exchange turnover (combined swaps, spot, and forward transactions) has declined from roughly $1,500 billion in 2001, to $1,200 in 2004, to $1,000 in 2007.

Question 57

When the cross rate for currencies offered by two banks differs from the exchange rate offered by a third bank, a triangular arbitrage opportunity exists.

Question 58

TABLE 6.1
Use the table to answer following question(s).

Refer to Table 6.1. According to the information provided in the table, the 6-month yen is selling at a forward ________ of approximately ________ per annum. (Use the mid rates to make your calculations.)

A) discount; 2.09%
B) discount; 2.06%
C) premium; 2.09%
D) premium; 2.06%

Question 59

________ make money on currency exchanges by the difference between the ________ price, or the price they offer to pay, and the ________ price, or the price at which they offer to sell the currency.

A) Dealers; ask; bid
B) Dealers; bid; ask
C) Brokers; ask; bid
D) Brokers; bid; ask

Question 60

TABLE 6.1
Use the table to answer following question(s).

Refer to Table 6.1. The ask price for the two-year swap for a British pound is ________.

A) $1.4250/£
B) $1.4257/£
C) -$230
D) -$238