Question 1

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.

Accepted Answer

Speculators in the foreign exchange market seek all of their profit from exchange rate changes, while arbitrageurs seek to profit from simultaneous exchange rate differences in different markets. The other choices (A, B, and D) do not accurately describe the roles of participants in the foreign exchange market.

Question 2

While trading in foreign exchange takes place worldwide, the major currency trading centers are located in:

Accepted Answer

The major currency trading centers are located in London, New York, and Tokyo. These cities are often referred to as the "forex triangle" due to the constant trading that takes place between these three locations.

Question 3

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

Accepted Answer

The volume of foreign exchange currency transactions varies throughout the 24-hour day, peaking during the overlap of major financial markets' operating hours, such as when the London and New York markets are both open.

Question 4

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.

Accepted Answer

A foreign exchange transaction is specifically an agreement to exchange one currency for another at a specified rate. The other options do not necessarily involve currency exchange. Eurodollar transactions refer to U.S. dollars held in foreign banks, import/export exchanges could involve payment in the same currency, and interbank market transactions could involve any type of financial instrument.

Question 5

Which of the following may be participants in the foreign exchange markets?

Accepted Answer

All of the options mentioned are participants in the foreign exchange markets. Bank and nonbank foreign exchange dealers facilitate the buying and selling of currencies, central banks and treasuries participate on behalf of their governments or to manage their national currency, and speculators and arbitrageurs engage in currency trading for profit.

Question 6

The authors identify two tiers of foreign exchange markets:

Accepted Answer

The authors identify two tiers of foreign exchange markets as interbank and client markets. This refers to the trading that occurs between banks and financial institutions in the interbank market and the trading between these institutions and their clients in the client market. The other choices are either too broad or not specific enough to describe these tiers of foreign exchange markets.

Question 7

Which of the following is NOT true regarding the market for foreign exchange?

Accepted Answer

The answer of Which of the following is NOT true...

Question 8

Banks, and a few nonbank foreign exchange dealers, operate ONLY in the interbank markets.

Accepted Answer

Banks and nonbank foreign exchange dealers operate in both the interbank market and the retail market, serving a variety of clients including corporations, governments, and individuals.

Question 9

________ are agents who facilitate trading between dealers without themselves becoming principals in the transaction.

Accepted Answer

Foreign exchange brokers are intermediaries who help facilitate trades between dealers without themselves taking a position in the transaction. They earn commissions for their services in bringing buyers and sellers together. Central banks, arbitrageurs, and foreign exchange dealers all take on positions in foreign exchange trades.

Question 10

Foreign exchange markets are a relatively recent phenomenon, beginning with the agreement at Bretton Woods.

Accepted Answer

Foreign exchange markets have existed for centuries, dating back to ancient times when traders exchanged different currencies to facilitate international trade. However, the Bretton Woods agreement in 1944 established a fixed exchange rate system and laid the foundation for the modern foreign exchange market.

Question 11

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.

Accepted Answer

The description of earning a profit through a bid-ask spread matches with the role of foreign exchange dealers. On the other hand, the description of earning a commission on each sale and purchase matches with the role of foreign exchange brokers. Therefore, choice B (dealers; brokers) is the correct answer.

Question 12

Business firms in countries with exchange controls, for example, China (mainland), often must surrender foreign exchange earned from exports to the central bank at the daily fixing price.

Accepted Answer

This statement is true. Business firms in countries with exchange controls like China (mainland) are required to surrender foreign exchange earned from exports to the central bank at the fixing price which is determined on a daily basis. This policy helps the government to control the flow of currency in and out of the country.

Question 13

The foreign exchange market provides the physical and institutional structure through which three typical functions are accomplish. List and explain three functions of the foreign exchange market.

Accepted Answer

The answer of The foreign exchange market provides the physical...

Question 14

The ________ is the mechanism by which participants transfer purchasing power between countries, obtain or provide credit for international trade transactions, and minimize exposure to the risks of exchange rate changes.

Accepted Answer

The foreign exchange market allows for the exchange of currencies between countries and provides a means for international trade transactions to occur. It also allows for the hedging of exchange rate risks through various financial instruments. The futures market, federal open market, and LIBOR are not directly related to the mechanism of transferring purchasing power between countries or international trade transactions.

Question 15

It is characteristic of foreign exchange dealers to:

Accepted Answer

Foreign exchange dealers act as market makers, which means they are willing to buy and sell currencies in which they specialize. They do not typically hold an inventory of currency for resale, and they may trade with clients in both the retail and wholesale foreign exchange markets.

Question 16

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

Accepted Answer

Currency trading is actually one of the most profitable areas of business for large commercial and investment banks. These banks often have dedicated currency trading desks and employ a large number of traders to handle currency trading operations. While it is true that currency trading is also offered as a service to corporate and institutional customers, it is still a highly profitable business for banks.

Question 17

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

Accepted Answer

Dealers in foreign exchange departments at large international banks act as market makers and maintain inventories of the securities in which they specialize. This allows them to facilitate trades and provide liquidity to the market.

Question 18

Which of the following is NOT a motivation identified by the authors as a function of the foreign exchange market?

Accepted Answer

All of the options (A, B, and C) were identified by the author as motivations or functions of the foreign exchange market, so D is not the correct answer.

Question 19

________ 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.

Accepted Answer

Speculators and arbitrageurs are traders who enter the foreign exchange market with the sole purpose of making a profit from the fluctuations in exchange rates. They are not engaged in any commercial or investment transaction and view foreign exchange as a tradable asset. Foreign exchange brokers, central banks, and treasuries all have different roles in the foreign exchange market.

Question 20

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

Accepted Answer

The primary motive of foreign exchange activities by most central banks is not profit, but rather to maintain stable exchange rates and ensure orderly functioning of the currency markets. Profit may be a secondary consideration or byproduct of these activities.

Quiz 5: The Foreign Exchange Market

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.