Deck 13: Foreign Exchange Risk

Question 1

As of June 2015,U.S.banks were net short British pounds.

Answer 1

False

Question 2

To a U.S.trader of foreign currencies,a direct quote indicates U.S.dollars received for each one unit of the foreign currency.

Answer 2

True

Question 3

As the U.S.dollar appreciates against the Japanese yen,U.S.goods become less expensive to Japanese consumers.

Answer 3

False

Question 4

The greater the volatility of foreign exchange rates given any net exposure position,the greater the fluctuations in value of the foreign exchange portfolio.

Question 5

A positive net exposure position in FX implies an FI has more foreign currency assets than foreign currency liabilities.

Question 6

An immediate exchange of currencies occurs in the spot foreign exchange market.

Question 7

A positive net exposure position in FX implies the FI is net short in a currency.

Question 8

The market in which foreign currency is traded for future delivery is the forward foreign exchange market.

Question 9

The exposure to foreign exchange risk by U.S.FIs has decreased with the growth of the various derivative markets.

Question 10

Most nonbank FIs have foreign exchange risk exposure that is smaller than the exposure of the large U.S.money-center banks.

Question 11

An indirect quote of a foreign currency indicates the amount of foreign currency received for one unit of the domestic currency.

Question 12

To transact all cross-currency trades,one must first convert both currencies into U.S.dollars.

Question 13

U.S.pension funds invest approximately one percent (1%)of their portfolios in foreign securities.

Question 14

The underlying cause of foreign exchange volatility reflects fluctuations in the demand and supply of a country's currency.

Question 15

As the U.S.dollar appreciates against the Japanese yen,Japanese goods sold in the U.S.become less expensive to the U.S.consumer.

Question 16

An FI can eliminate its currency risk exposure by matching its foreign currency assets to its foreign currency liabilities.

Question 17

Forward contracts in FX are typically written for a period of one-,three-,or six-months.

Question 18

The spot foreign exchange market is where forward and futures contracts and swap agreements are transacted.

Question 19

U.S.life insurance companies generally hold less than ten percent (10%)of their portfolios in foreign securities.

Question 20

Historically,to exchange Swiss francs into Chinese yuan,a trader had to first exchange the francs into U.S.dollars.

Question 21

The reason an FI receives a fee when purchasing foreign currencies that allow customers to complete international transactions is because the FI assumes some FX risk.

Question 22

Directly matching foreign asset and liability books in the same FX currency will allow an FI to hedge or lock in a profit spread regardless of future changes in exchange rates.

Question 23

Violation of the interest rate parity theorem would allow arbitrage profits.

Question 24

The foreign exchange market in Tokyo is the largest FX trading market.

Question 25

The use of an exchange rate forward contract assures the FI of the opportunity to buy (or sell)the foreign currency at a future time at a known price.

Question 26

During 2012,the top four banks that operate in foreign currency trading comprised almost half of the market.

Question 27

Interest rate parity implies that the discounted spread between interest rates in two currencies should equal the percentage spread between forward and spot exchange rates.

Question 28

Most profits and losses in foreign currency markets come from taking an open position or speculating in currencies.

Question 29

Since forward contracts are negotiated over-the-counter and the parties have maximum flexibility when setting the terms and conditions,credit and counterparty risk does not exist.

Question 30

Most profits or losses on foreign trading come from taking an open position in currencies.

Question 31

On-balance-sheet hedging involves making changes in the on-balance-sheet assets and liabilities to protect FI profits from FX risk without the use of derivative securities.

Question 32

An FI can control its FX risk exposure by on-balance-sheet and off-balance-sheet hedging.

Question 33

FX trading risk exposure continues into the night until all FI operations are closed.

Question 34

The total FX risk for a domestic bank that is making a one-year loan in a foreign currency is that the interest income expected on the loan is exposed to a depreciation of the foreign currency.

Question 35

Purchasing power parity is based on the difference in productive output (GDP)that exists between two countries.

Question 36

The real interest rate reflects the underlying real sector demand and supply for funds denominated in the domestic currency.

Question 37

Off-balance-sheet hedging involves taking a position in FX forward or other derivative securities even though no FX assets or liabilities are on the balance sheet.

Question 38

Average daily turnover in the FX market has recently been over $5 trillion.

Question 39

The FX markets of the world have become one of the largest of all financial markets.

Question 40

FX trading income is derived only from profit (or loss)on the FI's speculative currency positions.

Question 41

The decline in European FX volatility during the last decade has been offset in part by

A)the greater volatilities of Asian currencies.
B)a reduction in inflation rates in European countries.
C)the fixing of exchange rates among European countries.
D)the replacement of domestic currencies with the euro.

Question 42

The reasons nondepository FIs have less FX risk than major money center banks include

A)Smaller asset sizes.
B)Prudent person concerns.
C)Regulations.
D)All of the options.

Question 43

A positive net exposure position in FX implies that the FI is

A)net long in a currency and exposed to depreciation of the foreign currency.
B)net short in a currency and exposed to depreciation of the foreign currency.
C)net long in a currency and exposed to appreciation of the foreign currency.
D)net short in a currency and exposed to appreciation of the foreign currency.

Question 44

When purchasing and selling foreign currencies to allow customers to take positions in foreign real and financial investments,the FI

A)acts defensively as a hedger.
B)acts aggressively as a speculator.
C)assumes the FX risk itself.
D)acts as an agent.

Question 45

The decrease in European FX volatility during the last decade has occurred because of

A)the stabilizing force of the euro.
B)reduction in inflation rates in European countries.
C)the reduced volatility in many emerging-market countries.
D)the greater volatilities of Asian currencies.
E)the stabilizing force of the euro and reduction in inflation rates in European countries.

Question 46

If foreign currency exchange rates are highly positively correlated,how can a FI reduce its exchange rate risk exposure?

A)By taking net long positions in all currencies.
B)By taking net short positions in all currencies.
C)By taking opposing net short and net long positions in different currencies.
D)By maximizing net FX exposure in each currency,independently.

Question 47

Foreign exchange trading has been called the fairest market in the world because

A)no single institution can control the direction of the market.
B)trading may take place at any time during a 24-hour period.
C)the volume of trading is very large and liquid.
D)trading may take place anywhere as there is no central location for foreign exchange trading.
E)all of the options are correct.

Question 48

The FI is acting as a FX market agent for its customers when it

A)buys or sells currency to balance the FI's net exposure.
B)takes a nonzero net position in a particular currency.
C)processes an exporter's transaction in a foreign currency.
D)makes a market in its domestic currency.

Question 49

Which of the following FX trading activities is used to hedge FX risk?

A)The purchase and sale of foreign currencies for the purpose of profiting from forecasting or anticipating future movements in FX rates.
B)The purchase and sale of foreign currencies to allow customers to partake in and complete international commercial trade transactions.
C)The purchase and sale of foreign currencies for the purpose of offsetting customer exposure in any given currency.
D)The purchase and sale of foreign currencies to allow customers to take positions in foreign real and financial investments.

Question 50

As of 2015,which of the following FX "markets" is the largest?

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

Question 51

A negative net exposure position in FX implies that the FI is

A)net long in a currency and exposed to depreciation of the foreign currency.
B)net short in a currency and exposed to depreciation of the foreign currency.
C)net long in a currency and exposed to appreciation of the foreign currency.
D)net short in a currency and exposed to appreciation of the foreign currency.

Question 52

Long-term violations of the interest rate parity relationship may occur if imperfections in the international financial markets are allowed to exist.

Question 53

The FI is acting as a speculator when it

A)buys or sells currency to balance the FI's net exposure.
B)takes a nonzero net position in a particular currency.
C)processes an exporter's transaction in a foreign currency.
D)makes a market in a currency.

Question 54

The FI is acting as a hedger when it

A)buys or sells currency to balance the FI's net exposure.
B)takes a nonzero net position in a particular currency.
C)processes an exporter's transaction in a foreign currency.
D)makes a market in a currency.

Question 55

In which of the following FX trading activities does the FI not assume FX risk?

A)The purchase and sale of foreign currencies for the purpose of profiting from forecasting or anticipating future movements in FX rates.
B)The purchase and sale of foreign currencies to allow customers to partake in and complete international commercial trade transactions.
C)The purchase and sale of foreign currencies for the purpose of offsetting customer exposure in any given currency.
D)The purchase and sale of foreign currencies to allow customers to take positions in foreign real and financial investments.
E)The purchase and sale of foreign currencies to allow customers to partake in and complete international commercial trade transactions and to take positions in foreign real and financial investments.

Question 56

FX risk exposure of an FI essentially relates to which of the following activities?

A)Purchase and sale of foreign currencies to allow customers to participate in and complete international commercial trade transactions.
B)Purchase and sale of foreign currencies to allow customers to take positions in foreign real and financial investments.
C)Purchase and sale of foreign currencies for hedging purposes to offset customer exposure in any given currency.
D)Purchase and sale of foreign currencies for speculative purposes through forecasting or anticipating future movements in FX rates.

Question 57

The market in which foreign currency is traded for immediate delivery is the

A)spot market.
B)forward market.
C)futures market.
D)currency swap market.

Question 58

Which of the following is NOT a source of foreign exchange risk?

A)Trading foreign currencies.
B)Making domestic-currency loans to foreign corporations.
C)Buying foreign-issued securities.
D)Issuing foreign currency-denominated debt.

Question 59

Which of the following FX trading activities is used for purposes of speculation?

A)The purchase and sale of foreign currencies for the purpose of profiting from forecasting or anticipating future movements in FX rates.
B)The purchase and sale of foreign currencies to allow customers to partake in and complete international commercial trade transactions.
C)The purchase and sale of foreign currencies for the purpose of offsetting customer exposure in any given currency.
D)The purchase and sale of foreign currencies to allow customers to take positions in foreign real and financial investments.

Question 60

U.S.pension funds hold approximately _______ of their assets in foreign securities,while British pension funds have traditionally invested over _______ of their funds in foreign assets.

A)20 percent;5 percent
B)15 percent;20 percent
C)0 percent;30 percent
D)30 percent;10 percent

Question 61

The nominal interest rate is equal to the

A)real interest rate minus the inflation premium.
B)real interest rate minus the trailing inflation rate.
C)real interest rate plus the expected interest rate increase.
D)real interest rate plus the expected inflation rate.

Question 62

The Federal Reserve estimates that _______ financial institutions are active market makers in foreign currencies in the U.S. ,of which _______ are commercial and investment banks.

A)200;50
B)60;15
C)100;10
D)200;25

Question 63

The following are the net currency positions of a U.S.FI (stated in U.S.dollars). $\begin{array}{lrrrr}\text { Currency} &\text { Assets } & \text { Liabilities } & \text { FX Bought } & \text { FX Sold } \\\text { British pound} &24,600 & 70,000 & 170,400 & 321,000 \\\text { Yen} &31,000 & 20,400 & 250,000 & 220,000 \\\text { Swiss franc} &10,200 & 9,800 & 8,000 & 10,800\end{array}$ What is the FI's net exposure in the Japanese yen?

A)+30,000.
B)+40,600.
C)-19,400.
D)-40,600.

Question 64

The following are the net currency positions of a U.S.FI (stated in U.S.dollars). $\begin{array}{lrrrr}\text { Currency} &\text { Assets } & \text { Liabilities } & \text { FX Bought } & \text { FX Sold } \\\text { British pound} &24,600 & 70,000 & 170,400 & 321,000 \\\text { Yen} &31,000 & 20,400 & 250,000 & 220,000 \\\text { Swiss franc} &10,200 & 9,800 & 8,000 & 10,800\end{array}$ What is the FI's net exposure in British pounds?

A)-45,400.
B)-150,600.
C)-196,000.
D)+105,200.

Question 65

The following are the net currency positions of a U.S.FI (stated in U.S.dollars).
Note: Net currency positions are foreign exchange bought minus foreign exchange sold restated in U.S.dollar terms.
$\begin{array}{l}\begin{array}{lll}\text {Currency}\\\text {Canaclian Dollay}\\\text {Euro}\\\text {Japane se Yen}\\\text {SWiss: Fiadc}\\\text {British Pound.}\\\end{array}\begin{array}{lll}\text {Net Position}\\\text {+U.S. \$ 1,200}\\\text {-U.S. \$ 245,900}\\\text {+U.S. \$ 505,000 }\\\text {-U.S. \$ 36,700}\\\text {+U.S. \$447,900}\\\end{array}\end{array}$
How would you characterize the FI's risk exposure to fluctuations in the Euro to dollar exchange rate?

A)The FI is net short in the Euro and therefore faces the risk that the Euro will rise in value against the U.S.dollar.
B)The FI is net short in the Euro and therefore faces the risk that the Euro will fall in value against the U.S.dollar.
C)The FI is net long in the Euro and therefore faces the risk that the Euro will fall in value against the U.S.dollar.
D)The FI is net long in the Euro and therefore faces the risk that the Euro will rise in value against the U.S.dollar.

Question 66

The following are the net currency positions of a U.S.FI (stated in U.S.dollars).
Note: Net currency positions are foreign exchange bought minus foreign exchange sold restated in U.S.dollar terms.
$\begin{array}{l}\begin{array}{lll}\text {Currency}\\\text {Canaclian Dollay}\\\text {Euro}\\\text {Japane se Yen}\\\text {SWiss: Fiadc}\\\text {British Pound.}\\\end{array}\begin{array}{lll}\text {Net Position}\\\text {+U.S. \$ 1,200}\\\text {-U.S. \$ 245,900}\\\text {+U.S. \$ 505,000 }\\\text {-U.S. \$ 36,700}\\\text {+U.S. \$447,900}\\\end{array}\end{array}$
What is the portfolio weight of the Euro in this FI's portfolio of foreign currency?

A)+0.18 percent.
B)-36.62 percent.
C)+75.20 percent.
D)-5.47 percent.

Question 67

In 2015,approximately _______ of the daily foreign exchange transactions occurred outside of the spot market?

A)35 percent
B)60 percent
C)15 percent
D)75 percent

Question 68

In recent years,average daily trading volume at foreign exchange markets has been ______ the average daily trading volume of the NYSE?

A)one-half
B)20 times
C)40 times
D)70 times

Question 69

Which of the following is an example of interest rate parity?

A)The Japanese yen trades at the same exchange rate as the Swiss franc.
B)U.S.dollar rates on one year U.S.Treasury securities equal 1 year Japanese government bond rates.
C)U.S.dollar rates on one year U.S.Treasury securities equal 1 year Japanese government bond rates,restated in dollars.
D)British pound 2 year forward rates equal 2 year Swiss franc forward rates.

Question 70

Most profits or losses on foreign trading for FIs come from

A)open positions or speculation.
B)market making.
C)acting as agents for retail customers.
D)acting as agents for wholesale customers.

Question 71

The following are the net currency positions of a U.S.FI (stated in U.S.dollars). $\begin{array}{lrrrr}\text { Currency} &\text { Assets } & \text { Liabilities } & \text { FX Bought } & \text { FX Sold } \\\text { British pound} &24,600 & 70,000 & 170,400 & 321,000 \\\text { Yen} &31,000 & 20,400 & 250,000 & 220,000 \\\text { Swiss franc} &10,200 & 9,800 & 8,000 & 10,800\end{array}$ How would you characterize the FI's risk exposure to fluctuations in the yen/dollar exchange rate?

A)The FI is net short in the yen and therefore faces the risk that the yen will rise in value against the U.S.dollar.
B)The FI is net short in the yen and therefore faces the risk that the yen will fall in value against the U.S.dollar.
C)The FI is net long in the yen and therefore faces the risk that the yen will fall in value against the U.S.dollar.
D)The FI is net long in the yen and therefore faces the risk that the yen will rise in value against the U.S.dollar.

Question 72

The following are the net currency positions of a U.S.FI (stated in U.S.dollars). $\begin{array}{lrrrr}\text { Currency} &\text { Assets } & \text { Liabilities } & \text { FX Bought } & \text { FX Sold } \\\text { British pound} &24,600 & 70,000 & 170,400 & 321,000 \\\text { Yen} &31,000 & 20,400 & 250,000 & 220,000 \\\text { Swiss franc} &10,200 & 9,800 & 8,000 & 10,800\end{array}$ What is the FI's net exposure in the Swiss franc?

A)+2,400.
B)+400.
C)-2,800.
D)-2,400.

Question 73

The following are the net currency positions of a U.S.FI (stated in U.S.dollars). $\begin{array}{lrrrr}\text { Currency} &\text { Assets } & \text { Liabilities } & \text { FX Bought } & \text { FX Sold } \\\text { British pound} &24,600 & 70,000 & 170,400 & 321,000 \\\text { Yen} &31,000 & 20,400 & 250,000 & 220,000 \\\text { Swiss franc} &10,200 & 9,800 & 8,000 & 10,800\end{array}$ How would you characterize the FI's risk exposure to fluctuations in the Swiss franc/dollar exchange rate?

A)The FI is net short in the franc and therefore faces the risk that the franc will rise in value against the U.S.dollar.
B)The FI is net short in the franc and therefore faces the risk that the franc will fall in value against the U.S.dollar.
C)The FI is net long in the franc and therefore faces the risk that the franc will fall in value against the U.S.dollar.
D)The FI is net long in the franc and therefore faces the risk that the franc will rise in value against the U.S.dollar.

Question 74

The following are the net currency positions of a U.S.FI (stated in U.S.dollars). $\begin{array}{lrrrr}\text { Currency} &\text { Assets } & \text { Liabilities } & \text { FX Bought } & \text { FX Sold } \\\text { British pound} &24,600 & 70,000 & 170,400 & 321,000 \\\text { Yen} &31,000 & 20,400 & 250,000 & 220,000 \\\text { Swiss franc} &10,200 & 9,800 & 8,000 & 10,800\end{array}$ How would you characterize the FI's risk exposure to fluctuations in the British pound to dollar exchange rate?

A)The FI is net short in the British pound and therefore faces the risk that the British pound will rise in value against the U.S.dollar.
B)The FI is net short in the British pound and therefore faces the risk that the British pound will fall in value against the U.S.dollar.
C)The FI is net long in the British pound and therefore faces the risk that the British pound will fall in value against the U.S.dollar.
D)The FI is net long in the British pound and therefore faces the risk that the British pound will rise in value against the U.S.dollar.

Question 75

In 2011,during the financial crisis,which country was viewed as a safe haven and saw its currency appreciate in value relative to other currencies because of the demand for the currency?

A)Australia.
B)Dubai.
C)Canada.
D)Argentina.
E)Switzerland.

Question 76

On May 31,2016,the exchange rate of U.S.dollars for Bitcoins was Ƀ535.592.Three months later on August 31,2016,the exchange rate was Ƀ572.187.If a Learjet 85 carries a price of $21 million,what is the difference in price a purchaser would pay in Bitcoins if the jet were purchased on August 31 rather than May 31,2016?

A)$2,508,000
B)(Ƀ2,508)
C)($2,508,000)
D)(Ƀ36.6)

Question 77

The following are the net currency positions of a U.S.FI (stated in U.S.dollars).
Note: Net currency positions are foreign exchange bought minus foreign exchange sold restated in U.S.dollar terms.
$\begin{array}{l}\begin{array}{lll}\text {Currency}\\\text {Canaclian Dollay}\\\text {Euro}\\\text {Japane se Yen}\\\text {SWiss: Fiadc}\\\text {British Pound.}\\\end{array}\begin{array}{lll}\text {Net Position}\\\text {+U.S. \$ 1,200}\\\text {-U.S. \$ 245,900}\\\text {+U.S. \$ 505,000 }\\\text {-U.S. \$ 36,700}\\\text {+U.S. \$447,900}\\\end{array}\end{array}$
What is the FI's total FX investment?

A)U.S.$671,500.
B)U.S.$1,236,700.
C)-U.S.$671,500.
D)-U.S.$1,236,700.

Question 78

On January 1,2016,the exchange rate of U.S.dollars for Australian dollars was 0.730 USD/AUD.On January 15,2016,the exchange rate was 0.6863 USD/AUD.If a mining company had a net exposure to Australian dollars of 9,750,000 AUD,what is the company's U.S.dollar gain or loss during this two week period?

A)Gain of 620,829 USD
B)Loss of 620,829 USD
C)Loss of 426,075 AUD
D)Gain of 426,075 AUD
E)Loss of 426,075 USD

Question 79

Deviations from the international currency parity relationships may occur because of

A)free capital movements across national boundaries.
B)barriers to cross-border financial flows.
C)perfect rationality of market participants.
D)differences in each country's productive capacity.

Question 80

According to purchasing power parity (PPP),foreign currency exchange rates between two countries adjust to reflect changes in each country's

A)unemployment rates.
B)export competitiveness.
C)inflation rates.
D)foreign exchange reserves.