Deck 3: Foreign Exchange and Eurocurrency Markets

Question 1

The most active market makers in the market for spot foreign exchange are the major investment banks, such as Salomon Smith Barney and Goldman Sachs.

Answer 1

False

Question 2

American terms state the dollar value of one unit of foreign currency, such as $0.0085/¥.

Answer 2

True

Question 3

In the forward currency markets, trades are made for future delivery according to an agreed-upon delivery date, exchange rate, and amount.

Answer 3

True

Question 4

Eurocurrency transactions in the external credit market fall outside the jurisdiction of any single nation.

Question 5

For the most actively traded currencies, national credit markets are operationally more efficient than the Eurocurrency markets.

Question 6

In the spot market, trade is conducted in a single spot or location.

Question 7

Volume in the foreign exchange markets averages about one billion dollars per day.

Question 8

If the current spot rate is S₀^$/C$ = $0.8839/C$ and the one-year forward rate is F₁^$/C$ = $0.8754/C$, then the U.S. dollar is selling at a forward premium.

Question 9

A bank that is making a market in lira stands ready to buy lira at its offer price and sell lira at its bid price.

Question 10

Eurocurrency markets are highly liquid and relatively unencumbered by government regulation, resulting in borrowing and lending rates that are generally more favorable to large retail customers than domestic rates.

Question 11

Capital markets are markets for financial assets and liabilities with maturities greater than one year.

Question 12

European terms state the foreign currency price of one U.S. dollar (for example C$1.1054/$).

Question 13

External credit markets trade interest rate contracts denominated in a currency but traded outside the borders of the country issuing that currency.

Question 14

Money markets are markets for financial assets and liabilities of short maturity, considered to be less than one year.

Question 15

If the current spot rate is S₀^$/C$ = $0.8839/C$ and the one-year forward rate is F₁^$/C$ = $0.8754/C$, then the Canadian dollar is selling at a forward premium.

Question 16

Currency risk is the risk of unexpected changes in foreign currency values.

Question 17

Liquidity refers to the ease with which you can exchange one asset for another of equal value.

Question 18

A bank offers you the following quote: "$0.8841/C$ BID and $0.8852/C$ ASK." The bank will buy U.S. dollars at $0.8841/C$ or sell U.S. dollars at $0.8852/C$.

Question 19

Internal credit markets are markets for deposits and loans by local residents and hence are governed by the rules and institutional conventions of the local government.

Question 20

International commercial banks are the major market makers in the currency markets.

Question 21

Commercial banks' lending rates in the Eurocurrency market are usually higher than their prime lending rates in their domestic credit markets.

Question 22

Electronic fund transfers between international banks are accomplished through the ______.

A) Association of International Fund Transfers
B) Clearing House Interbank Payments System
C) International Monetary Fund
D) Society for Worldwide Interbank Financial Transactions
E) World Bank

Question 23

Eurocurrency markets are regulated by the governments whose currencies are traded in the market.

Question 24

Electronic fund transfers between commercial banks are executed through SWIFT.

Question 25

The euro depreciates 17% against the dollar. How much has the dollar appreciated against the euro?

A) 16.31%
B) 17.00%
C) 17.54%
D) 20.48%
E) 34.00%

Question 26

MNCs and financial institutions with access to Eurocurrency markets usually can obtain lower cost funds and store funds at higher interest rates than in domestic credit markets.

Question 27

One basis point is equal to one percentage point (e.g., one percent of a dollar).

Question 28

LIBOR is the rate a Euromarket bank is willing to pay to attract a Eurocurrency deposit.

Question 29

The foreign exchange desks of commercial banks typically make their profits through ______.

A) arbitrage
B) government subsidies
C) investment banking
D) market making
E) speculation

Question 30

A bank's bid price for one currency is its offer price for another currency.

Question 31

Domestic interest rates typically lie inside the LIBID/LIBOR interest rate band.

Question 32

When foreigners decide to purchase additional U.S. government bonds, ______.

A) the demand for dollars rises
B) the federal government budget deficit declines
C) the supply of dollars rises
D) the trade deficit declines
E) None of the above

Question 33

Eurodollar deposits typically have fixed rate pricing.

Question 34

Suppose S₀^£/$ = £0.6361/$ and F₁^£/$ = £0.6352/$. The dollar is selling at a forward premium of 9 basis points.

Question 35

In order to boost the value of the euro relative to the dollar, the U.S. Federal Reserve should ______.

A) sell dollars for euros and buy dollars with euros
B) sell dollars for euros and buy euros with dollars
C) sell euros for dollars and buy euros with dollars
D) sell euros for dollars and sell dollars for euros
E) More than one of the above

Question 36

The majority of the volume in the forward market for foreign exchange is conducted on the floor of the Chicago Mercantile Exchange (CME).

Question 37

Foreign currency deposits held in the United States are called Eurodollars.

Question 38

Which of the following is NOT a function of the currency and Eurocurrency markets?

A) foreign currency speculation
B) hedging foreign exchange risk
C) provision of credit
D) transfer of purchasing power
E) Each of the above is a function of the foreign exchange market

Question 39

Commercial banks always quote foreign exchange rates with the domestic currency in the denominator of the quote.

Question 40

Government regulation is nearly absent in the internal markets for long-term debt capital.

Question 41

The spot rate is $1.00/€ and the one-year forward rate is $1.10/€. What is the forward premium (or discount) on the euro?

A) 0.10 basis point
B) 1 basis point
C) 10 basis points
D) 100 basis points
E) 1,000 basis points

Question 42

The value of the euro against the U.S. dollar when it began public trading on January 1, 2002 was $0.89139/€. Ten years later on January 1, 2012 the exchange rate was $1.29568/€. What was the average annual change in the value of the U.S. dollar over this 10-year period?

A) less than or equal to 0%
B) more than 0% and less than or equal to 5%
C) more than 5% and less than or equal to 10%
D) more than 10% and less than or equal to 15%
E) more than 15%

Question 43

Characteristics of the Eurocurrency market include which of the following?

A) no interest rate regulations on Euromarket transactions
B) no regulations influencing credit allocation decisions
C) no reserve requirements on Euromarket transactions
D) no withholding taxes on Euromarket transactions
E) All of the above

Question 44

International electronic fund transfers are accomplished through the ______.

A) Association of International Fund Transfers
B) Clearing House Interbank Payments System
C) International Monetary Fund
D) Society for Worldwide Interbank Financial Transactions
E) World Bank

Question 45

A forward foreign exchange contract ______.

A) allows a transfer of purchasing power from one currency to another on a predetermined date and at a predetermined exchange rate
B) is a long (or forward) position in a foreign currency
C) is a type of option that can be used to hedge against unfavorable changes in foreign currency values at the discretion of the option holder
D) is priced to equal the spot exchange rate
E) None of the above

Question 46

A random walk has each of the following properties EXCEPT

A) a constant variance
B) a positive mean
C) equally likely to rise or fall
D) independence over time
E) All of the above are properties of a random walk

Question 47

The value of the euro against the U.S. dollar when it began public trading on January 1, 2002 was $0.89139/€. Ten years later on January 1, 2012 the exchange rate was $1.29568/€. What was the average annual change in the value of the euro over this 10-year period?

A) less than or equal to 0%
B) more than 0% and less than or equal to 5%
C) more than 5% and less than or equal to 10%
D) more than 10% and less than or equal to 15%
E) more than 15%

Question 48

The biggest traders in the foreign exchange markets are ______.

A) commercial banks
B) corporations
C) government agencies
D) governments
E) individual investors

Question 49

The spot rate is $1.00/€ and the one-year forward rate is $1.10/€. What is the percentage forward premium (or discount) on the dollar?

A) less than 0%
B) 0%
C) 10 percent
D) more than 10%
E) None of the above

Question 50

Which of the following statements regarding nominal exchange rate forecasts is FALSE?

A) Forward exchange rates perform better than spot exchange rates as the forecasting horizon is extended beyond one year.
B) The current spot rate is a useful forecast of future exchange rates for horizons of up to one year.
C) The variability of nominal exchange rates is large relative to forward premiums and discounts.
D) The variability of nominal exchange rates is large relative to inflation differentials.
E) The variability of forward premiums/discounts is large relative to interest rate differentials.

Question 51

The spot rate is $1.00/€ and the one-year forward rate is $1.10/€. What is the percentage forward premium (or discount) on the euro?

A) less than 0%
B) 0%
C) 10 percent
D) more than 10%
E) None of the above