Deck 5: The Market for Foreign Exchange

Question 1

Spot foreign exchange trading

A)accounted for about 5 percent of all foreign exchange trades in 2013.
B)accounted for about 20 percent of all foreign exchange trades in 2013.
C)accounted for about 40 percent of all foreign exchange trades in 2013.
D)accounted for about 70 percent of all foreign exchange trades in 2013.

Answer 1

C

Question 2

Most foreign exchange transactions are for

A)intervention by central banks.
B)interbank trades between international banks or nonbank dealers.
C)retail trade.
D)purchase of hard currencies.

Answer 2

B

Question 3

The world's largest foreign exchange trading center is

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

Answer 3

C

Question 4

The difference between a broker and a dealer is

A)dealers sell drugs; brokers sell houses.
B)brokers bring together buyers and sellers,but carry no inventory; dealers stand ready to buy and sell from their inventory.
C)brokers transact in stocks and bonds; currency is bought and sold through dealers.
D)none of the options

Question 5

The current exchange rate is £1.00 = $2.00.Compute the correct balances in Bank A's correspondent account(s)with Bank B if a currency trader employed at Bank A buys £45,000 from a currency trader at Bank B for $90,000 using its correspondent relationship with Bank B.

A)Bank A's dollar-denominated account at B will fall by $90,000.
B)Bank B's dollar-denominated account at A will rise by $90,000.
C)Bank A's pound-denominated account at B will rise by £45,000.
D)Bank B's pound-denominated account at A will fall by £45,000.
E)all of the options

Question 6

The current exchange rate is £1.00 = $2.00.Compute the correct balances in Bank A's correspondent account(s)with Bank B if a currency trader employed at Bank A buys £45,000 from a currency trader at Bank B for $90,000 using its correspondent relationship with Bank B.

A)Bank A's dollar-denominated account at B will rise by $90,000.
B)Bank B's dollar-denominated account at A will fall by $90,000.
C)Bank A's pound-denominated account at B will rise by £45,000.
D)Bank B's pound-denominated account at A will rise by £45,000.

Question 7

Suppose that the current exchange rate is €0.80 = $1.00.The direct quote,from the U.S.perspective is

A)€1.00 = $1.25.
B)€0.80 = $1.00.
C)£1.00 = $1.80.
D)none of the options

Question 8

Indirect exchange rate quotations from the U.S.perspective are

A)the price of one unit of the foreign currency in terms of the U.S.dollar.
B)the price of one U.S.dollar in the foreign currency.

Question 9

Intervention in the foreign exchange market is the process of

A)a central bank requiring the commercial banks of that country to trade at a set price level.
B)commercial banks in different countries coordinating efforts in order to stabilize one or more currencies.
C)a central bank buying or selling its currency in order to influence its value.
D)the government of a country prohibiting transactions in one or more currencies.

Question 10

The current exchange rate is €1.00 = $1.50.Compute the correct balances in Bank A's correspondent account(s)with Bank B if a currency trader employed at Bank A buys €100,000 from a currency trader at Bank B for $150,000 using its correspondent relationship with Bank B.

A)Bank A's dollar-denominated account at B will fall by $150,000.
B)Bank B's dollar-denominated account at A will fall by $150,000.
C)Bank A's pound-denominated account at B will fall by €100,000.
D)Bank B's pound-denominated account at A will rise by €100,000.

Question 11

At the wholesale level,

A)most trading takes place OTC between individuals on the floor of the exchange.
B)most trading takes place over the phone.
C)most trading flows over Reuters and EBS platforms.
D)most trading flows through specialized "broking" firms.

Question 12

Consider a U.S.importer desiring to purchase merchandise from a Dutch exporter invoiced in euros,at a cost of €512,100.The U.S.importer will contact his U.S.bank (where of course he has an account denominated in U.S.dollars)and inquire about the exchange rate,which the bank quotes as €1.0242/$1.00.The importer accepts this price,so his bank will ________ the importer's account in the amount of ________.

A)debit; $500,000
B)debit; $524,492
C)credit; $500,000
D)debit; €512,100

Question 13

The standard size foreign exchange transactions are for

A)$10 million USD.
B)$1 million USD.
C)€1 million.
D)none of the options

Question 14

The foreign exchange market closes

A)never.
B)4:00 p.m.EST (New York time).
C)4:00 p.m.GMT (London time).
D)4:00 p.m.(Tokyo time).

Question 15

Most interbank trades are

A)speculative or arbitrage transactions.
B)simple order processing for the retail client.
C)overnight loans from one bank to another.
D)brokered by dealers.

Question 16

Country	U.S. $ equiv.		Currency per U.S. $
	Tuesday	Monday	Tuesday	Monday
Britain (Pound) £62,500	1.6000	1.6100	0.6250	0.6211
1 Month Forward	1.6100	1.6300	0.6211	0.6173
3 Month Forward	1.6300	1.6600	0.6173	0.6024
6 Month Forward	1.6600	1.7200	0.6024	0.5814
13 Month Forward	1.7200	1.8000	0.5814	0.5556

Using the table shown,what is the most current spot exchange rate shown for British pounds? Use a direct quote from a U.S.perspective.

A)$1.61 = £1.00
B)$1.60 = £1.00
C)$1.00 = £0.625
D)$1.72 = £1.00

Question 17

Suppose that the current exchange rate is €1.00 = $1.60.The indirect quote,from the U.S.perspective is

A)€1.00 = $1.60.
B)€0.6250 = $1.00.
C)€1.60 = $1.00.
D)none of the options

Question 18

On average,worldwide daily trading of foreign exchange is closest to

A)$100 million.
B)$15 billion.
C)$504 billion.
D)$5 trillion.

Question 19

The spot market

A)involves the almost-immediate purchase or sale of foreign exchange.
B)involves the sale of futures,forwards,and options on foreign exchange.
C)takes place only on the floor of a physical exchange.
D)all of the options

Question 20

Suppose that the current exchange rate is £1.00 = $2.00.The indirect quote,from the U.S.perspective is

A)£1.00 = $2.00.
B)£1.00 = $0.50.
C)£0.50 = $1.00.
D)none of the options

Question 21

Suppose the spot ask exchange rate,S^a($/£),is $1.90 = £1.00 and the spot bid exchange rate,S^b($/£),is $1.89 = £1.00.If you were to buy $10,000,000 worth of British pounds and then sell them five minutes later,how much of your $10,000,000 would be "eaten" by the bid-ask spread?

A)$1,000,000
B)$52,910
C)$100,000
D)$52,632

Question 22

What is the BID cross-exchange rate for Swiss Francs priced in euro? Hint: Find the price that a currency dealer will pay in euro to buy Swiss francs.

A)€0.5386/CHF
B)€0.5389/CHF
C)€0.5463/CHF
D)€0.5466/CHF

Question 23

Suppose you observe the following exchange rates: €1 = $1.25; £1 = $2.00.Calculate the euro-pound crossrate.

A)£1 = €1.60
B)£1 = €0.625
C)£2.50 = €1
D)£1 = €2.50

Question 24

A dealer in British pounds who thinks that the pound is about to depreciate

A)may want to widen his bid-ask spread by raising his ask price and lowering his bid.
B)may want to lower both his bid price and his ask price.
C)may want to lower his ask price while raising his bid.
D)none of the options

Question 25

Suppose you observe the following exchange rates: €1 = $1.45; £1 = $1.90.Calculate the euro-pound exchange rate.

A)€1.3103 = £1.00
B)£1.3333 = €1.00
C)€2.00 = £1
D)€3 = £1

Question 26

In conversation,interbank foreign exchange traders use a shorthand abbreviation in expressing spot currency quotations.Consider a $/£ bid-ask quote of $1.2519-$1.2523.The "big figure," assumed to be known to all traders is ________.

A)1.2523
B)1
C)1.25
D)23

Question 27

It is common practice among currency traders worldwide to both price and trade currencies against the U.S.dollar.Consider a currency dealer who makes a market in 5 currencies against the dollar.If he were to supply quotes for each currency in terms of all of the others,how many quotes would he have to provide?

A)36
B)30
C)60
D)120
E)none of the options

Question 28

The bid price

A)is the price that the dealer has just paid for something,his historical cost of the most recent trade.
B)is the price that a dealer stands ready to pay.
C)refers only to auctions like eBay,not over-the-counter transactions with dealers.
D)is the price that a dealer stands ready to sell at.

Question 29

If the $/€ bid and ask prices are $1.50/€ and $1.51/€,respectively,the corresponding €/$ bid and ask prices are

A)€0.6667 and €0.6623.
B)$1.51 and $1.50.
C)€0.6623 and €0.6667.
D)cannot be determined with the information given.

Question 30

Suppose you observe the following exchange rates: €1 = $1.60; £1 = $2.00.Calculate the euro-pound exchange rate.

A)€1.3333 = £1.00
B)£1.3333 = €1.00
C)€3.00 = £1
D)€1.25 = £1.00

Question 31

Suppose you observe the following exchange rates: €1 = $1.50; ¥120 = $1.00.Calculate the euro-yen exchange rate.

A)¥133.33 = €1.00
B)¥1.00 = €180
C)¥80 = €1.00
D)€1 = £2.50

Question 32

The AUD/$ spot exchange rate is AUD1.60/$ and the SF/$ is SF1.25/$.The AUD/SF cross exchange rate is ________.

A)0.7813
B)2.0000
C)1.2800
D)0.3500

Question 33

A dealer in pounds who thinks that the exchange rate is about to increase in volatility

A)may want to widen his bid-ask spread.
B)may want to decrease his bid-ask spread.
C)may want to lower his ask price.
D)none of the options

Question 34

+

Country	U.S. $ equiv.		Currency per U.S. $
	Tuesday	Monday	Tuesday	Monday
Britain (Pound) £62,500	2.0000	1.9800	0.5000	0.5051
1 Month Forward	2.0100	1.9900	0.4975	0.5025
3 Month Forward	2.0200	2.0000	0.4950	0.5000
6 Months Forward	2.0300	2.0100	0.4926	0.4975
12 Months Forward	2.0400	2.0200	0.4902	0.4950
Euro £62,500	1.5000	1.4800	0.6667	0.6757
1 Month Forward	1.5100	1.4900	0.6623	0.6711
3 Month Forward	1.5200	1.5000	0.6579	0.6667
6 Months Forward	1.5300	1.5100	0.6536	0.6623
12 Months Forward	1.5400	1.5200	0.6494	0.6579

Using the table shown,what is the spot cross-exchange rate between pounds and euro?

A)€1.00 = £0.75
B)£1.33 = €1.00
C)£1.00 = €0.75
D)none of the options

Question 35

Suppose you observe the following exchange rates: €1 = $1.50; £1 = $2.00.Calculate the euro-pound exchange rate.

A)€1.3333 = £1.00
B)£1.3333 = €1.00
C)€3.00 = £1
D)€1.25 = £1.00

Question 36

In conversation,interbank foreign exchange traders use a shorthand abbreviation in expressing spot currency quotations.Consider a $/£ bid-ask quote of $1.2519-$1.2523.The currency dealer would likely quote that as ________.

A)19-23
B)23-19
C)4 points
D)none of the options

Question 37

A dealer in British pounds who thinks that the pound is about to appreciate

A)may want to widen his bid-ask spread by raising his ask price.
B)may want to lower his bid price.
C)may want to lower his ask price.
D)none of the options

Question 38

It is common practice among currency traders worldwide to both price and trade currencies against the U.S.dollar.In fact,2013 BIS statistics indicate that about ________ of currency trading in the world involves the U.S.dollar on one side of the transaction.

A)87 percent
B)75 percent
C)45 percent
D)15 percent

Question 39

In the Interbank market,the standard size of a trade among large banks in the major currencies is

A)for the U.S.-dollar equivalent of $10,000,000,000.
B)for the U.S.-dollar equivalent of $10,000,000.
C)for the U.S.-dollar equivalent of $100,000.
D)for the U.S.-dollar equivalent of $1,000.

Question 40

The dollar-euro exchange rate is $1.25 = €1.00 and the dollar-yen exchange rate is ¥100 = $1.00.What is the euro-yen cross rate?

A)€125 = ¥1.00
B)€1.00 = ¥125
C)€1.00 = ¥0.80
D)none of the options

Question 41

Market microstructure refers to

A)the basic mechanics of how a marketplace operates.
B)the basics of how to make small (micro-sized)currency trades.
C)how macroeconomic variables such as GDP and inflation are determined.
D)none of the options

Question 42

Using the table above,what is the bid price of pounds in terms of euro?

A)€1.3371/£
B)€1.3378/£
C)£0.7475/€
D)£0.7479/€

Question 43

The euro-pound cross exchange rate can be computed as:

A)S(€/£)= S($/£)× S(€/$)
B)S(€/£)=
C)S(€/£)=
D)all of the options

Question 44

Using the table above,what is the bid price of euro in terms of pounds?

A)€1.3371/£
B)€1.3378/£
C)£0.7475/€
D)£0.7479/€

Question 45

What is the ASK cross-exchange rate for Swiss Francs priced in euro? Hint: Find the price that a currency dealer will take in euro to sell Swiss francs.

A)€0.5386/CHF
B)€0.5389/CHF
C)€0.5463/CHF
D)€0.5466/CHF

Question 46

Suppose a bank customer wishes to trade out of British pounds and into Swiss francs.

A)In dealer jargon,this is a currency against currency trade.
B)The bank will frequently handle such a trade by selling British pounds for U.S.dollars and then buying Swiss francs with U.S.dollars.
C)The bank would typically sell the British pounds directly for Swiss francs.
D)In dealer jargon,this is a currency against currency trade,and the bank will frequently handle such a trade by selling British pounds for U.S.dollars and then buying Swiss francs with U.S.dollars.

Question 47

You are a U.S.-based treasurer with $1,000,000 to invest.The dollar-euro exchange rate is quoted as $1.50 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00.If a bank quotes you a cross rate of £1.00 = €1.25 how can you make money?

A)No arbitrage is possible.
B)Buy euro at $1.50/€,buy £ at €1.25/£,sell £ at $2/£.
C)Buy £ $2/£,buy € at €1.25/£,sell € at $1.50/€.
D)none of the options

Question 48

Using the table above,what is the ask price of euro in terms of pounds?

A)€1.3371/£
B)€1.3378/£
C)£0.7475/€
D)£0.7479/€

Question 49

You are a U.S.-based treasurer with $1,000,000 to invest.The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00.If a bank quotes you a cross rate of £1.00 = €1.20 how much money can an astute trader make?

A)No arbitrage is possible
B)$1,160,000
C)$41,667
D)$40,000

Question 50

The Singapore dollar-U.S.dollar (S$/$)spot exchange rate is S$1.60/$,the Canadian dollar-U.S.dollar (CD/$)spot rate is CD1.33/$ and the S$/CD1.15.Determine the triangular arbitrage profit that is possible if you have $1,000,000.

A)$44,063 profit
B)$46,093 loss
C)No profit is possible
D)$46,093 profit

Question 51

What is the BID cross-exchange rate for Canadian dollars priced in euro? Hint: Find the price that a currency dealer will pay in euro to buy Canadian dollars.

A)€0.6094/CAD
B)€0.6104/CAD
C)€0.6181/CAD
D)€0.6191/CAD

Question 52

Suppose a bank customer with €1,000,000 wishes to trade out of euro and into Japanese yen.The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-yen exchange rate is quoted at $1.00 = ¥120.How many yen will the customer get?

A)¥192,000,000
B)¥5,208,333
C)¥75,000,000
D)¥5,208.33

Question 53

Find the no-arbitrage cross exchange rate.The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00.

A)€1.25/£1.00
B)$1.25/£1.00
C)£1.25/€1.00
D)€0.80/£1.00

Question 54

You are a U.S.-based treasurer with $1,000,000 to invest.The dollar-euro exchange rate is quoted as $1.20 = €1.00 and the dollar-pound exchange rate is quoted at $1.80 = £1.00.If a bank quotes you a cross rate of £1.00 = €1.50,how much money can an astute trader make?

A)No arbitrage is possible
B)$1,160,000
C)$500,000
D)$250,000

Question 55

Using the table above,what is the ask price of pounds in terms of euro?

A)€1.3371/£
B)€1.3378/£
C)£0.7475/€
D)£0.7479/€

Question 56

Including the transaction costs of the bid-ask spread,the euro-pound cross exchange rate for a customer who wants to sell euro and buy pounds can be computed as

A)S^b(£/€)= S^b($/€)× S^b(£/$)
B)S^a(€/£)= S^a(€/$)× S^a($/£)
C)S^b(€/£)= S^b($/€)×
D)all of the options

Question 57

You are a U.S.-based treasurer with $1,000,000 to invest.The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00.If a bank quotes you a cross rate of £1.00 = €1.20 how can you make money?

A)No arbitrage is possible
B)Buy euro at $1.60/€,buy £ at €1.20/£,sell £ at $2/£
C)Buy £ $2/£,buy € at €1.20/£,sell € at $1.60/€
D)none of the options

Question 58

Find the no-arbitrage cross exchange rate.The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-yen exchange rate is quoted at $1.00 = ¥120.

A)€192/¥1.00
B)€1.92/¥100
C)€1.25/¥1.00
D)€1.00/¥1.92

Question 59

What is the ASK cross-exchange rate for Canadian dollars priced in euro? Hint: Find the price that a currency dealer will take in euro to sell Canadian dollars.

A)€0.6094/CAD
B)€0.6104/CAD
C)€0.6181/CAD
D)€0.6191/CAD

Question 60

Suppose you observe the following exchange rates: €1 = $.85; £1 = $1.60; and €2.00 = £1.00.Starting with $1,000,000,how can you make money?

A)Exchange $1m for £625,000 at £1 = $1.60.Buy €1,250,000 at €2 = £1.00; trade for $1,062,500 at €1 = $.85.
B)Start with dollars,exchange for euros at €1 = $.85; exchange for pounds at €2.00 = £1.00; exchange for dollars at £1 = $1.60.
C)Start with euros; exchange for pounds; exchange for dollars; exchange for euros.
D)No arbitrage profit is possible.

Question 61

The forward price

A)may be higher than the spot price.
B)may be the same as the spot price.
C)may be less than the spot price.
D)all of the options

Question 62

If one has agreed to buy a foreign exchange forward,

A)you have a short position in the forward contract.
B)you have a long position in the forward contract.
C)until the exchange rate moves,you haven't made money,so you're neither short nor long.
D)you have a long position in the spot market.

Question 63

Which of the following are correct?

A) (j / k)=
B) (j / k)=
C) (k / j)=
D)all of the options

Question 64

The forward market

A)involves contracting today for the future purchase of sale of foreign exchange at the spot rate that will prevail at the maturity of the contract.
B)involves contracting today for the future purchase of sale of foreign exchange at a price agreed upon today.
C)involves contracting today for the right but not obligation to the future purchase of sale of foreign exchange at a price agreed upon today.
D)none of the options

Question 65

The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€.You enter into a short position on €1,000.At maturity,the spot exchange rate is $1.60/€.How much have you made or lost?

A)Lost $100
B)Made €100
C)Lost $50
D)Made $150

Question 66

Consider a trader who takes a long position in a six-month forward contract on the euro.The forward rate is $1.75 = €1.00; the contract size is €62,500.At the maturity of the contract the spot exchange rate is $1.65 = €1.00.

A)The trader has lost $625.
B)The trader has lost $6,250.
C)The trader has made $6,250.
D)The trader has lost $66,287.88.

Question 67

When a currency trades at a discount in the forward market

A)the forward rate is less than the spot rate.
B)the forward rate is more than the spot rate.
C)the forward exchange rate is less than one dollar .
D)the exchange rate is less than it was yesterday.

Question 68

For a U.S.trader working in American quotes,if the forward price is higher than the spot price

A)the currency is trading at a premium in the forward market.
B)the currency is trading at a discount in the forward market.
C)then you should buy at the spot,hold on to it and sell at the forward-it's a built-in arbitrage.
D)All of the options-it really depends if you're talking American or European quotes.

Question 69

The current spot exchange rate is $1.50/€ and the three-month forward rate is $1.55/€.Based on your analysis of the exchange rate,you are confident that the spot exchange rate will be $1.62/€ in three months.Assume that you would like to buy or sell €1,000,000.What actions do you need to take to speculate in the forward market? What is the expected dollar profit from speculation?

A)Sell €1,000,000 forward for $1.50/€.
B)Buy €1,000,000 forward for $1.55/€.
C)Wait three months,if your forecast is correct buy €1,000,000 at $1.62/€.
D)Buy €1,000,000 today at $1.50/€; wait three months,if your forecast is correct sell €1,000,000 at $1.62/€.

Question 70

The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€.Based on your analysis of the exchange rate,you are confident that the spot exchange rate will be $1.62/€ in three months.Assume that you would like to buy or sell €1,000,000.What actions do you need to take to speculate in the forward market? What is the expected dollar profit from speculation?

A)Sell €1,000,000 forward for $1.50/€.
B)Buy €1,000,000 forward for $1.50/€.
C)Wait three months,if your forecast is correct buy €1,000,000 at $1.52/€.
D)Buy €1,000,000 today at $1.55/€; wait three months,if your forecast is correct sell €1,000,000 at $1.62/€.

Question 71

The current spot exchange rate is $1.45/€ and the three-month forward rate is $1.55/€.Based upon your economic forecast,you are pretty confident that the spot exchange rate will be $1.50/€ in three months.Assume that you would like to buy or sell €100,000.What actions would you take to speculate in the forward market? How much will you make if your prediction is correct?

A)Take a short position in a forward.If you're right you will make $15,000.
B)Take a long position in a forward contract on euro.If you're right you will make $5,000.
C)Take a short position in a forward contract on euro.If you're right you will make $5,000.
D)Take a long position in a forward contract on euro.If you're right you will make $15,000.

Question 72

When a currency trades at a premium in the forward market

A)the exchange rate is more than one dollar .
B)the exchange rate is less than one dollar.
C)the forward rate is less than the spot rate.
D)the forward rate is more than the spot rate.

Question 73

Relative to the spot price,the forward price is

A)usually less than the spot price.
B)usually more than the spot price.
C)usually equal to the spot price.
D)usually less than or more than the spot price more often than it is equal to the spot price.

Question 74

Which of the following are correct?

A) (j / k)=
B) (j / k)=
C) (k / j)=
D)all of the options

Question 75

Which of the following are correct?

A) (k / j)=
B) (k / j)=
C) (k / j)=
D)all of the options

Question 76

A recent survey of U.S.foreign exchange traders measured traders' perceptions about how fast news events that cause movements in exchange rates actually change the exchange rate.The survey respondents claim that the bulk of the adjustment to economic announcements regarding unemployment,trade deficits,inflation,GDP,and the Federal funds rate takes place within

A)ten seconds.
B)one minute.
C)five minutes.
D)one hour.

Question 77

The $/CD spot bid-ask rates are $0.7560-$0.7625.The 3-month forward points are 12-16.Determine the $/CD 3-month forward bid-ask rates.

A)$0.7548-$0.7609
B)$0.7572-$0.7641
C)$0.7512-$0.7616
D)Cannot be determined with the information given.

Question 78

Which of the following are correct?

A) (j / k)=
B) (j / k)=
C) (j / k)=
D)all of the options

Question 79

Restate the following one-,three-,and six-month outright forward American term bid-ask quotes in forward points:

A)
B)
C)
D)none of the options

Question 80

The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€.Based on your analysis of the exchange rate,you are confident that the spot exchange rate will be $1.52/€ in three months.Assume that you would like to buy or sell €1,000,000.What actions do you need to take to speculate in the forward market?

A)Take a long position in a forward contract on €1,000,000 at $1.50/€.
B)Take a short position in a forward contract on €1,000,000 at $1.50/€.
C)Buy euro today at the spot rate,sell them forward.
D)Sell euro today at the spot rate,buy them forward.