Deck 5: The Foreign Exchange Market

Question 1

________ 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

Answer 1

Speculators and arbitragers

Question 2

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.

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

The foreign exchange market is NOT efficient because

A) market participants do not compete with one another due to the fact that trading 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 5

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 6

The greatest amount of foreign exchange trading takes place in which of 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 7

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 8

Liquidity seekers profit of the profit seekers because

A) profit seekers are usually much better informed about the market and share that information with liquidity seekers.
B) profit seekers simply wish to secure enough of currency for their transactions.
C) profit seekers are inducing exceptional growth of the foreign exchange market.
D) None of the above. Profit seekers generally profit from liquidity seekers.

Question 9

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.

Question 10

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 11

What are the typical functions of money?

A) a unit of account, a store of value, a medium of exchange
B) a substitute for debt, symbol of purchasing power
C) instrument for payment of goods and services
D) None of the above

Question 12

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

Question 13

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 14

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

Question 15

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 16

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 17

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

Question 18

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 19

________ 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 20

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

Question 21

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 22

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 23

Although the "big three" (dollar, euro, and yen) continue to dominate global trades, it will probably not be long before a fourth, not yet on the map-the Chinese renminbi-will move into greater prominence.

Question 24

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 25

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 26

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

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

Question 27

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 28

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 29

NDFs are traded and settled outside the country of the subject currency, and therefore are beyond the control of the country's government.

Question 30

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 31

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 32

The three currencies that dominate foreign exchange trading are

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

Question 33

Most foreign exchange transactions are through the U.S. dollar. If the transaction is expressed as the foreign currency per dollar this is 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 34

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 35

Forward exchange rates are normally quoted for value date of

A) two days.
B) one, two, three, six and twelve months.
C) two years.
D) do not have specific maturity date.

Question 36

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

Question 37

Daily trading volume of foreign exchange had actually decreased in 2010 from the levels reported in 2007.

Question 38

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 39

According to the Bank for International Settlements,

A) the Financial Crisis of 2008 has significantly decreased the Global Foreign Exchange Market Turnover.
B) FX options and other derivates percentage share of FX market has significantly declined compared to traditional market instruments.
C) the primary driver behind market rapid growth is electronic trading and easier market access.
D) None of the above

Question 40

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

Question 41

TABLE 5.1
Use the table to answer the following question(s).

Refer to Table 5.1. The ask price for the two-year swap for a British pound is

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

Question 42

TABLE 5.1
Use the table to answer the following question(s).

Refer to Table 5.1. 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 43

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 44

Given the following exchange rates, which of the following 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 45

Identify and explain the three functions of the foreign exchange market.

Question 46

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 47

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

Question 48

TABLE 5.1
Use the table to answer the following question(s).

Refer to Table 5.1. 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 "188.10" (using the mid rates).
D) are all of the above.

Question 49

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 50

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

Question 51

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 52

The U.S. dollar suddenly changes in value against the euro moving from an exchange rate of $0.8909/euro to $0.8709/euro. Thus, the dollar has ________ by ________.

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

Question 53

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 54

TABLE 5.1
Use the table to answer the following question(s).

Refer to Table 5.1. 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 55

TABLE 5.1
Use the table to answer the following question(s).

Refer to Table 5.1. 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 56

In a standard forward terminology, "Pips" stands for

A) vulture profit seekers.
B) the last two digits of the typical forward rate.
C) a difference between the swap and forward rate.
D) a difference between the swap and the spot rate.

Question 57

The foreign exchange market has expanded significantly in the last 20 years. What is the volume of swap, forward, and spot transactions in the market as of the most recent survey data (April 2013)?

Question 58

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

Question 59

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 60

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 61

Foreign exchange quotes are often confusing. Define these terms and then identify the types of quotes that follow. Direct quote, indirect quote, American terms, European terms.
EUR0.686 = USD1, this quote found in Frankfurt, Germany
USD1.4577 = EUR1.0, this quote found in San Francisco, California