Deck 13: The Foreign-Exchange Market

Question 1

A is a transaction in which both a spot transaction and a forward transaction are agreed upon simultaneously.

A) arbitrage
B) call
C) swap
D) put

Answer 1

C

Question 2

The rate represents the difference between the spot and forward price.

A) profit
B) swap
C) spread
D) risk

Answer 2

B

Question 3

Riskless transactions to take advantage of profit opportunities due to a price differential or a yield differential in excess of transaction costs are called

A) differential actions.
B) cash transactions.
C) arbitrage.
D) forward transactions.

Answer 3

C

Question 4

In swap transactions, the trader is interested in

A) the difference between spot and forward rates.
B) only the spot rate.
C) only the forward rate.
D) both the spot and deposit interest rate.

Question 5

A gain can be made by the holder of a call option when the current exchange rate

A) exceeds the exercise price.
B) exceeds the forward price.
C) is less than the futures price.
D) falls to zero.

Question 6

The most common type of transaction in the foreign exchange market is a

A) forward transaction.
B) spot transaction.
C) swap transaction.
D) None of the above.

Question 7

The exchange rate is kept the same across geographically-separate markets by

A) hedging.
B) speculation.
C) government regulation.
D) arbitrage.

Question 8

The essential feature of a is that it immediately fixes the rate at which a specified amount of one currency is to be delivered in exchange for a specific amount of another at a future date.

A) forward contract
B) spot contract
C) money contract
D) bid contract

Question 9

In the case where the spot and forward rates are equal, the currency is said to be selling.

A) profitably.
B) flat.
C) normal.
D) risky.

Question 10

If a foreign exchange speculator expects the spot rate of the dollar nine months from today to be lower than today's forward rate on the dollar for delivery in nine months, she may

A) buy dollars in the spot market nine months from today.
B) sell dollars in the spot market nine months from today.
C) sell dollars forward today and buy them in the spot market nine months from today.
D) buy dollars forward today and resell them in the spot market nine months from today.

Question 11

The difference between bid (buying) rates and ask (selling) rates is called the

A) profit.
B) arbitrage.
C) spread.
D) forward transaction.

Question 12

Suppose in London £/$ = 0.5 while in New York £/SF = 0.2. The corresponding cross rate (SF/$) is

A) 2.5.
B) 0.1.
C) 0.4.
D) 0.3.

Question 13

An increase in the exchange rate from $2.00 = 1 € to $2.20 = 1 € is a

A) 10% depreciation of the euro with respect to the dollar.
B) 10% depreciation of the dollar with respect to the euro.
C) 10% appreciation of the dollar with respect to the euro.
D) None of the above.

Question 14

Central banks intervene in the foreign exchange market

A) to smooth out currency fluctuations.
B) to facilitate the transfer of goods and services internationally.
C) to conduct foreign exchange operations for central governments.
D) All of the above.

Question 15

Suppose that in the free market, where the supply of the foreign currency is equal to demand for that currency, the peso-dollar exchange rate is 4 pesos = $1. Assume the central bank sets an official exchange rate at 3 pesos = $1, we can say that in the official market the dollar is

A) overvalued.
B) undervalued.
C) appreciated.
D) None of the above.

Question 16

The reduction or covering of a foreign exchange risk is called

A) hedging.
B) speculation.
C) intervention.
D) arbitrage.

Question 17

A European option differs from an American option in that it may be exercised

A) only on the spot date.
B) only on the expiration date.
C) only on the future date.
D) on any date.

Question 18

An important feature of a is that the holder has the right, but not the obligation, to buy or sell currency.

A) swap
B) foreign exchange arbitrage
C) foreign exchange option
D) futures market contract

Question 19

If the bank is selling euros for $0.89, then what is the implied euro price of the dollar?

A) 2.0
B) 1.999
C) 2.323
D) 1.123

Question 20

The euro is said to be selling at a if the spot dollar price is $1.18 and the nine- month forward rate is $1.16.

A) forward discount
B) forward premium
C) forward spread
D) none of the above

Question 21

The U.S. and the Canadian currencies are the only two in the world that are called "dollars."

Question 22

In the case of an appreciating domestic currency, central banks often sell foreign currencies in exchange for domestic currency to stop the appreciation.

Question 23

Speculation is the opposite of hedging.

Question 24

If one dollar buys 10 pesos, then one peso buys ten cents of a dollar.

Question 25

Today's forward rate will equal the future spot rate.

Question 26

Foreign exchange activity is dominated by the spot and swaps markets.

Question 27

The size of the spread that a dealer will quote for a foreign exchange transaction will vary depending on

A) the degree of market volatility at the time.
B) the degree of risk associated with a particular currency.
C) the size of the market for the currency being traded.
D) All of above.

Question 28

Both a parallel market and a black market are free markets permitted to coexist with the official market.

Question 29

An investor can write any size contract in both forward and futures markets as long as the other party involved is in agreement.

Question 30

In the Brokers market, a broker reveals the names of the banks making bids or offers to the trading banks before the trade has been agreed upon.

Question 31

There is no limit for domestic central bank intervention.

Question 32

Why is it true that exchange rates tend to be equal worldwide? Briefly explain.

Question 33

If the spot exchange rate between dollars and pounds is equal to 2 dollars for one pound and the forward exchange rate equals 2.10 dollars for one pound, then

A) the dollar is trading at a forward premium.
B) the pound is trading at a forward discount.
C) the pound is trading at a forward premium.
D) the market presents an opportunity for arbitrage.

Question 34

The most common tool of analysis in international finance for measuring the average value of a currency relative to several other currencies is

A) bilateral exchange rates.
B) cross exchange rates.
C) exchange rate indexes.
D) All of above.

Question 35

The market where currencies may be bought and sold for delivery in a future period is known as

A) the forward exchange market.
B) the spot exchange market.
C) the purchasing power market.
D) the futuristic exchange market.

Question 36

Which of the following is not true regarding "exchange rate indexes?"

A) They will all show the same general trends (i.e., appreciation or depreciation).
B) Neither economic theory nor practice gives a clear indication of which exchange rate is best.
C) For short-term movements, there can be large differences across exchange rate indexes.
D) Exchange rate indexes are used to measure the average value of a currency relative to several other currencies.

Question 37

In general, the lower the exercise price relative to the current spot rate price of the currency, the more valuable

A) the put option.
B) the call option.
C) the arbitrage operation.
D) the triangular arbitrage.

Question 38

Because of the threat of arbitrage, the forward rate must equal the spot rate at all times.

Question 39

The European option can only be exercised on the final day, the expiration date.

Question 40

Exchange rates (for instance, the dollar price of yen) tend to be different worldwide at any point in time because of different tastes for currencies in each country.