Deck 33: The Market for Foreign Exchange and Risk Control Instruments

Question 1

An indirect quote is the:

A) Number of units of foreign currency needed to acquire one unit of the local currency.
B) Number of units of local currency needed to acquire one unit of the foreign currency.
C) Reciprocal of a direct quote.
D) a and c only.
E) None of the above.

Answer 1

a and c only.

Question 2

The price of one currency in terms of another currency is called:

A) Exchange rate.
B) Currency rate.
C) Conversion rate.
D) Direct quote.
E) Indirect quote.

Answer 2

Exchange rate.

Question 3

If the Swiss franc price of the dollar increases:

A) The Swiss franc appreciated.
B) The dollar appreciated.
C) The Swiss franc depreciated.
D) b and c only.
E) None of the above.

Answer 3

b and c only.

Question 4

The risk that a currency's value may change adversely is called:

A) Volatility.
B) Currency fluctuation.
C) Currency risk.
D) Price risk.
E) None of the above.

Question 5

The spot exchange rate market is:

A) A cash market.
B) Market for immediate settlement.
C) Market for settlement of a foreign exchange transaction within two business days.
D) All of the above.
E) a and b only.

Question 6

When the theoretical cross rate differs from the actual cross rate quoted by dealers, a riskless arbitrage opportunity arises called:

A) Index arbitrage.
B) Locational arbitrage.
C) Triangular arbitrage.
D) Credit arbitrage.
E) None of the above.

Question 7

Dealers in the foreign exchange market realize revenue from:

A) The bid-ask spread.
B) Trading commissions.
C) Trading profits.
D) All of the above.
E) None of the above.

Question 8

Since the introduction of the euro on January 1, 1999, the single European currency against the U.S. dollar has:

A) Strengthened.
B) Weakened.
C) Remained unchanged.
D) Cannot be determined.
E) None of the above.

Question 9

Members of the European Monetary Union are said to be part of:

A) Europe.
B) Euroland.
C) The Euro zone.
D) B and c only.
E) All of the above.

Question 10

Monetary policy for member countries of the European Union is administered by the:

A) Bundesbank.
B) European Central Bank.
C) Federal Reserve.
D) Bank of England.
E) None of the above.

Question 11

To protect against adverse foreign exchange rate movements, borrowers and investors can use:

A) Currency forward contracts.
B) Currency futures.
C) Currency options.
D) Currency swaps.
E) All of the above.

Question 12

Forward exchange rates are determined by:

A) The spot exchange rate.
B) The interest rate in two countries.
C) The income growth rate.
D) a and b only.
E) All of the above.

Question 13

Covered interest arbitrage is the process that:

A) Ensures the same domestic return whether investing domestically or in a foreign country.
B) Forces interest rate parity.
C) Increases currency risk.
D) a and b only.
E) All of the above.

Question 14

An investor seeking covered interest arbitrage will accomplish it with short-term borrowing and lending in the:

A) Domestic money market.
B) Eurocurrency market.
C) Foreign money market.
D) Treasury market.
E) None of the above.

Question 15

Currency futures do not provide a good vehicle for hedging:

A) Long-dated foreign exchange exposure.
B) Currency exposure in the British pound.
C) Short-term currency exposure.
D) Anticipated currency exposure.
E) None of the above.

Question 16

In the U.S., currency futures contracts are traded on the:

A) New York Stock Exchange.
B) Big Board.
C) International Monetary Market.
D) Chicago Board of Trade.
E) None of the above.

Question 17

The underlying instrument in a currency option is the:

A) Spot currency.
B) Foreign currency futures contract.
C) Currency forward contract.
D) a and b only.
E) All of the above.

Question 18

A currency swap is:

A) Simply a package of currency forward contracts.
B) More transactionally efficient than futures or forwards.
C) More suitable for hedging long-dated foreign exchange exposure.
D) All of the above.
E) a and b only.

Question 19

Currency options traded in the over-the-counter market are:

A) Standardized options.
B) Customized options.
C) Liquid options.
D) Common options.
E) None of the above.

Question 20

The foreign exchange market is a(n)

A) Interbank market.
B) Dealer market.
C) Over-the-counter market.
D) All of the above.
E) a and c only.

Question 21

Currency values changes in response to economic developments or political events.

Question 22

Spot exchange rate adjust to compensate for the relative inflation rate.

Question 23

An indirect quote is also referred to as an American term.

Question 24

Long-dated forward contracts have relatively large bid-ask spreads.

Question 25

The relationship among the spot exchange rate, the interest rates in two countries. And the forward rate is called purchasing power parity.

Question 26

What is triangular arbitrage?

Question 27

What are the major differences between currency forwards, futures, and options?