Question 1

Fully convertible currencies are also called ________.

Accepted Answer

Fully convertible currencies are also called hard currencies, which are currencies that are widely accepted in international trade and can easily be exchanged for other currencies without any restrictions or limitations.

Question 2

Explain the concept of cross rates.Include the description of a vehicle currency and the role it plays in the foreign exchange market.

Accepted Answer

The answer of Explain the concept of cross rates.Include the...

Question 3

International banks participate in the swap market by acting as broker or by undertaking half of a swap for its own account.

Accepted Answer

International banks can participate in the swap market by acting as a broker, bringing together two parties interested in a swap, or by undertaking half of a swap for its own account.

Question 4

Currency speculation is the purchase or sale of a currency with the expectation that its value will remain fluctuate.

Accepted Answer

Currency speculation involves buying or selling a currency with the expectation that its value will fluctuate, allowing the trader to make a profit. It is based on the belief that the value of a currency can be predicted based on economic and political factors, and thus, traders often try to take advantage of the fluctuations in the currency market.

Question 5

Scenario: Trader's Paradise
Trader's Paradise is a global merchant that sells a variety of products. The company operates in forty-eight different countries (some developed, some developing) and some former communist countries. The company faces substantial risks given the differing conditions in foreign exchange markets.
-If Trader's Paradise purchases and sells the euros simultaneously in different markets for profit,it would be engaging in currency ________.

Accepted Answer

Engaging in simultaneous purchase and sale of a currency in different markets for profit is known as arbitrage. This is because the trader is taking advantage of price discrepancies between different markets to make a profit. Currency swaps involve exchanging one currency for another to manage risk or interest rate exposure. Currency speculation involves buying or selling a currency with the hope of making a profit from changes in exchange rates. Currency hedging involves taking actions to offset the potential risks associated with fluctuations in exchange rates.

Question 6

An exchange rate requiring delivery of the traded currency within two business days is called a cross rate.

Accepted Answer

A cross rate is actually an exchange rate between two currencies that do not involve the US dollar. The term "spot rate" is used to refer to an exchange rate that requires delivery of the traded currency within two business days.

Question 7

Forward rates represent the expectations of currency traders and bankers regarding a currency's future spot rate.

Accepted Answer

Forward rates are based on expectations of the future spot rate and are used by traders and bankers to manage foreign exchange risk.

Question 8

Scenario: Trader's Paradise
Trader's Paradise is a global merchant that sells a variety of products. The company operates in forty-eight different countries (some developed, some developing) and some former communist countries. The company faces substantial risks given the differing conditions in foreign exchange markets.
-If Trader's Paradise purchases euros expecting the value to rise and generate a profit for the company,it is engaging in currency ________.

Accepted Answer

Trader's Paradise is engaging in currency speculation as they are purchasing euros with the expectation that its value will rise, in order to generate profit. Currency hedging involves taking measures to protect against potential losses from currency fluctuations, while currency swaps and arbitrage involve exchanging one currency for another at a pre-determined rate and taking advantage of price differences between markets, respectively.

Question 9

If an individual is traveling to another country and wants to exchange currencies at his bank before departing,he will be quoted the spot rate since he is exchanging that will be delivered to him with two business days.

Accepted Answer

The spot rate is the current exchange rate for a currency, and if an individual is exchanging currencies at his bank, he will be quoted the spot rate. Additionally, the delivery of the currency will generally take two business days for settlement.

Question 10

Two firms participating in a swap must use the same currency.

Accepted Answer

In a swap, two firms can exchange different currencies, interest rates, or other financial instruments, allowing for flexibility in managing currency exposure, interest rate risk, or other financial needs.

Question 11

________ in the foreign exchange market specialize in currency futures and options transactions.

Accepted Answer

Securities exchanges specialize in currency futures and options transactions, providing a formal trading environment for these financial instruments.

Question 12

In any exchange rate,the quoted currency is always the numerator.

Accepted Answer

In an exchange rate, the quoted currency is the currency that is being bought or sold. It is always placed in the numerator of the fraction.

Question 13

Governments impose currency restrictions in their countries to ________.

Accepted Answer

Currency restrictions are imposed by governments in their countries to protect their currencies from speculators seeking to make a profit by manipulating exchange rates. This is done by limiting the amount of foreign currency that can be purchased or sold, controlling the flow of capital in and out of the country, and closely monitoring foreign exchange transactions. By limiting the amount of speculation in the currency markets, governments hope to stabilise their currencies and prevent sharp fluctuations that can harm their economies.

Question 14

Identify and explain the types of currency instruments used in the forward market.

Accepted Answer

The answer of Identify and explain the types of currency...

Question 15

Scenario: ABC Software
ABC Software is a producer of educational software for children below the age of twelve. The company has operations in Switzerland and would like to expand its foreign operations with a new facility in China.
-If ABC Software holds a currency option to purchase Swiss francs at SF 1.67/$ in 30 days,at the end of which the exchange rate is SF1.70/$,then ABC Software ________.

Accepted Answer

If the exchange rate is SF1.70/$ at the end of 30 days, then it would be more favorable for ABC Software to not exercise its currency option, as they can simply purchase the Swiss francat the current exchange rate of SF1.70/$ without incurring any additional costs. Therefore, Choice D would be the best choice.

Question 16

Exchange rate risk is the risk of fluctuation in exchange rates.

Accepted Answer

Exchange rate risk refers to the possibility of losses that occur due to the fluctuation in exchange rates. This risk is faced by individuals, companies, and investors who deal with foreign currencies. Therefore, the statement is true.

Question 17

Which of the following is used by governments for the convertibility of currencies in their countries?

Accepted Answer

The answer of Which of the following is used by...

Question 18

________ is a decentralized exchange encompassing a global computer network of foreign exchange traders and other market participants.

Accepted Answer

The answer of ________ is a decentralized exchange encompassing a...

Question 19

Explain the function of spot rates and the spot market.

Accepted Answer

The answer of Explain the function of spot rates and...

Question 20

Scenario: Trader's Paradise
Trader's Paradise is a global merchant that sells a variety of products. The company operates in forty-eight different countries (some developed, some developing) and some former communist countries. The company faces substantial risks given the differing conditions in foreign exchange markets.
-To insure against potential losses that result from adverse changes in exchange rates,Trader's Paradise should use currency ________.

Accepted Answer

To insure against potential losses that result from adverse changes in exchange rates, Trader's Paradise should use currency hedging. Hedging is a risk management strategy that involves reducing or offsetting the risk of adverse price movements in an asset or investment. Currency hedging allows Trader's Paradise to lock in a specific exchange rate for future transactions, thereby reducing their exposure to fluctuations in foreign currency markets. Swaps, speculation, and arbitrage are not appropriate as they do not necessarily involve reducing or offsetting the risk of adverse price movements in foreign currency markets.

Quiz 9: International Financial Markets