Question 1

For arbitrage opportunities to be practical,

Accepted Answer

For arbitrage opportunities to be practical, participants must have instant access to quotes and executions. Additionally, bank traders must be able to execute the arbitrage trades without an initial sum of money relying on their bank's credit standing. Therefore, all of the above must be true.

Question 2

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?

Accepted Answer

The answer of What are some of the reasons central...

Question 3

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

Accepted Answer

The answer of New York City has the greatest volume...

Question 4

Most transactions in the interbank foreign exchange trading are primarily conducted via telecommunication techniques and little is conducted face-to-face.

Accepted Answer

Interbank foreign exchange trading is predominantly conducted electronically, with most transactions being carried out through telecommunication techniques such as electronic trading platforms and messaging systems. While some trading may still occur via voice communication or in-person meetings, this represents a diminishing portion of the overall market activity.

Question 5

Given the following exchange rates, which of the multiple-choice choices represents a potentially profitable intermarket arbitrage opportunity?
¥129.87/$
Euro 1.1226/$
Euro 0.00864/¥

Accepted Answer

To check for arbitrage opportunities, we need to calculate the cross exchange rate between the two currencies.

Cross rate between EUR and JPY = (EUR/USD) ÷ (JPY/USD)

= 1.1226 ÷ 129.87

= 0.00863

The actual exchange rate between EUR and JPY is given as 0.00864, which means that the euro is overvalued relative to the yen.

To exploit this mispricing, we need to buy yen with euros.

Let's say we have €1,000.

Sell €1,000 for USD at a rate of 1.1226.

Buy JPY with the USD at a rate of 129.87.

Finally, buy euros back with the JPY at a rate of 0.00864.

We get back €1,000.30, which represents a profit of €0.30 or JPY 34.46.

The only answer that represents a potentially profitable intermarket arbitrage opportunity is B, which gives a cross rate of ¥114.96/euro, indicating that the euro is undervalued relative to the yen.

Question 6

TABLE 6.1
Use the table to answer following question(s).
 
-Refer to Table 6.1. The current spot rate of dollars per pound as quoted in a newspaper is ________ or ________.

Accepted Answer

The spot rates in Table 6.1 indicate that the current rate is $1.4484/£ or £0.6904/$. Therefore, option C is the correct choice as it presents these rates in the correct order.

Question 7

The U.S. dollar suddenly changes in value against the euro moving from an exchange rate of $0.8909/euro to $0.08709/euro. Thus, the dollar has ________ by ________.

Accepted Answer

The answer of The U.S. dollar suddenly changes in value...

Question 8

The article in the text about an intern's first day on the job as a currency trader relates how what he/she had learned in business school had very little to do with how trading decisions were made on the floor of the exchange.

Accepted Answer

The article states that the intern's experience on the trading floor was different from what he/she had learned in business school, indicating that what he/she had learned in school had very little to do with trading decisions on the floor.

Question 9

Given the following quotations (where the dollar is the home currency), what is the annualized forward premium (discount) on the U.S. dollar?
Spot rate: $1.305/euro 6-month forward rate: $1.335/euro

Accepted Answer

The answer of Given the following quotations (where the dollar...

Question 10

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

Accepted Answer

The answer of Define spot, forward, and swap transactions in...

Question 11

Given the following pair wise exchange rates, estimate the cross-rate of pounds per euro.
$0)8410/£ $1.2223/euro

Accepted Answer

To find the cross-rate of pounds per euro, we need to use the given pair wise exchange rates to convert each currency into a common currency (either dollars or euros) and then divide the pound amount by the euro amount. 
Let's convert pounds to dollars using the first exchange rate: 
1£ = $0.8410 
Now, let's convert euros to dollars using the second exchange rate: 
1€ = $1.2223 
We can solve for £/€: 
1£ = $0.8410 = (1£/$0.8410)($1.2223/€) = €1.4982/£ 
Therefore, the cross-rate of pounds per euro is £0.6639/euro (the reciprocal of €1.4982/£). 
The best choice is C.

Question 12

Currency trading increased tremendously between 2004 and 2007 with daily trading volume jumping from $1.9 trillion to $3.2 trillion. Which of the following do experts think was a major driving force behind the increased daily volume?

Accepted Answer

Experts believe that all of the above factors contributed to the significant increase in daily currency trading volume between 2004 and 2007. Specialized investment groups such as hedge funds became more active, institutional investors held more internationally diversified portfolios, and there was an increased use of technical computer-based trading in the currency markets.

Question 13

The Continuous Linked Settlement system (CLS) links with the Real-Time Gross Settlement (RTGS) systems and is expected to eventually result in same-day settlement rather than the current two-day settlement required for foreign exchange spot market transactions.

Accepted Answer

This statement is true. The CLS system links with RTGS systems and is expected to eventually result in same-day settlement for foreign exchange spot market transactions.

Question 14

TABLE 6.1
Use the table to answer following question(s).
 
-Refer to Table 6.1. The one-month forward bid price for dollars as denominated in Japanese yen is ________.

Accepted Answer

The one-month forward bid price for dollars as denominated in Japanese yen is given in row 2 and column 3 of Table 6.1, which is ¥129.62/$.

Question 15

TABLE 6.1
Use the table to answer following question(s).
 
-Refer to Table 6.1. Cross rates

Accepted Answer

(A) The table is an example of cross rates presented in the form of a matrix. 
(B) Cross rates can be used to identify arbitrage opportunities between different currency pairs. 
(C) The spot rate for GBP/EUR cross rate is 1.8810 (calculated as GBP/USD ÷ EUR/USD using the mid rates provided in the table). 
Therefore, all options are correct.

Question 16

Global daily foreign exchange turnover (combined swaps, spot, and forward transactions) has declined from roughly $1,500 billion in 2001, to $1,200 in 2004, to $1,000 in 2007.

Accepted Answer

The statement is false. Global daily foreign exchange turnover (combined swaps, spot, and forward transactions) has actually increased from roughly $1,500 billion in 2001, to $2,000 in 2004, to $3,200 in 2007.

Question 17

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.

Accepted Answer

Triangular arbitrage involves exploiting the difference in exchange rates offered by three different currencies. If the cross rate offered by two banks differs from the exchange rate offered by a third bank, it creates an opportunity for triangular arbitrage.

Question 18

TABLE 6.1
Use the table to answer following question(s).
 
-Refer to Table 6.1. 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.)

Accepted Answer

The answer of TABLE 6.1
Use the table to answer following...

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.

Accepted Answer

Dealers make money on currency exchanges by the difference between the bid price, or the price they offer to pay, and the ask price, or the price at which they offer to sell the currency.

Question 20

TABLE 6.1
Use the table to answer following question(s).
 
-Refer to Table 6.1. The ask price for the two-year swap for a British pound is ________.

Accepted Answer

The ask price for the two-year swap for a British pound is $1.4257 per pound, as indicated in the table. Choices C and D are not applicable as they do not relate to the given information in the table. Choice A is incorrect as it does not match the given ask price in the table.

Quiz 5: The Foreign Exchange Market

For arbitrage opportunities to be practical,

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?

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

Most transactions in the interbank foreign exchange trading are primarily conducted via telecommunication techniques and little is conducted face-to-face.

Given the following exchange rates, which of the multiple-choice choices represents a potentially profitable intermarket arbitrage opportunity? ¥129.87/$ Euro 1.1226/$ Euro 0.00864/¥

TABLE 6.1 Use the table to answer following question(s) . -Refer to Table 6.1. The current spot rate of dollars per pound as quoted in a newspaper is or .

The U.S. dollar suddenly changes in value against the euro moving from an exchange rate of $0.8909/euro to $0.08709/euro. Thus, the dollar has by .

The article in the text about an intern's first day on the job as a currency trader relates how what he/she had learned in business school had very little to do with how trading decisions were made on the floor of the exchange.

Given the following quotations (where the dollar is the home currency) , what is the annualized forward premium (discount) on the U.S. dollar? Spot rate: $1.305/euro 6-month forward rate: $1.335/euro

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

Given the following pair wise exchange rates, estimate the cross-rate of pounds per euro. $0) 8410/£ $1.2223/euro

Currency trading increased tremendously between 2004 and 2007 with daily trading volume jumping from $1.9 trillion to $3.2 trillion. Which of the following do experts think was a major driving force behind the increased daily volume?

The Continuous Linked Settlement system (CLS) links with the Real-Time Gross Settlement (RTGS) systems and is expected to eventually result in same-day settlement rather than the current two-day settlement required for foreign exchange spot market transactions.

TABLE 6.1 Use the table to answer following question(s) . -Refer to Table 6.1. The one-month forward bid price for dollars as denominated in Japanese yen is ________.

TABLE 6.1 Use the table to answer following question(s) . -Refer to Table 6.1. Cross rates

Global daily foreign exchange turnover (combined swaps, spot, and forward transactions) has declined from roughly $1,500 billion in 2001, to $1,200 in 2004, to $1,000 in 2007.

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.

TABLE 6.1 Use the table to answer following question(s) . -Refer to Table 6.1. 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.)

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.

TABLE 6.1 Use the table to answer following question(s) . -Refer to Table 6.1. The ask price for the two-year swap for a British pound is ________.

Quiz 5: The Foreign Exchange Market

For arbitrage opportunities to be practical,

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?

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

Most transactions in the interbank foreign exchange trading are primarily conducted via telecommunication techniques and little is conducted face-to-face.

Given the following exchange rates, which of the multiple-choice choices represents a potentially profitable intermarket arbitrage opportunity? ¥129.87/$ Euro 1.1226/$ Euro 0.00864/¥

TABLE 6.1 Use the table to answer following question(s) . -Refer to Table 6.1. The current spot rate of dollars per pound as quoted in a newspaper is ________ or ________.

The U.S. dollar suddenly changes in value against the euro moving from an exchange rate of $0.8909/euro to $0.08709/euro. Thus, the dollar has ________ by ________.

The article in the text about an intern's first day on the job as a currency trader relates how what he/she had learned in business school had very little to do with how trading decisions were made on the floor of the exchange.

Given the following quotations (where the dollar is the home currency) , what is the annualized forward premium (discount) on the U.S. dollar? Spot rate: $1.305/euro 6-month forward rate: $1.335/euro

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

Given the following pair wise exchange rates, estimate the cross-rate of pounds per euro. $0) 8410/£ $1.2223/euro

Currency trading increased tremendously between 2004 and 2007 with daily trading volume jumping from $1.9 trillion to $3.2 trillion. Which of the following do experts think was a major driving force behind the increased daily volume?

The Continuous Linked Settlement system (CLS) links with the Real-Time Gross Settlement (RTGS) systems and is expected to eventually result in same-day settlement rather than the current two-day settlement required for foreign exchange spot market transactions.

TABLE 6.1 Use the table to answer following question(s) . -Refer to Table 6.1. The one-month forward bid price for dollars as denominated in Japanese yen is ________.

TABLE 6.1 Use the table to answer following question(s) . -Refer to Table 6.1. Cross rates

Global daily foreign exchange turnover (combined swaps, spot, and forward transactions) has declined from roughly $1,500 billion in 2001, to $1,200 in 2004, to $1,000 in 2007.

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.

TABLE 6.1 Use the table to answer following question(s) . -Refer to Table 6.1. 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.)

________ 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.

TABLE 6.1 Use the table to answer following question(s) . -Refer to Table 6.1. The ask price for the two-year swap for a British pound is ________.

TABLE 6.1 Use the table to answer following question(s) . -Refer to Table 6.1. The current spot rate of dollars per pound as quoted in a newspaper is or .

The U.S. dollar suddenly changes in value against the euro moving from an exchange rate of $0.8909/euro to $0.08709/euro. Thus, the dollar has by .

TABLE 6.1 Use the table to answer following question(s) . -Refer to Table 6.1. 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.)

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.