Question 1

Robben Inc.converts $1,000,000 into euros when the exchange rate is $1 = €0.75.After three months,the company converts this back into dollars when the exchange rate is $1 = €0.80.Which of the following is the outcome of this transaction?

Accepted Answer

Currency speculation typically involves the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates. In the first transaction, the company receives €750,000. These euros when converted back into dollars yield only $937,500 (€750,000 ÷ 0.80). Net loss = $1,000,000 - $937,500.

Question 2

The speculative element of the carry trade is that its success is based upon a belief that:

Accepted Answer

The carry trade relies on borrowing in a low-interest-rate currency and investing in a high-interest-rate currency, with the expectation that the exchange rate will remain stable or appreciate, allowing the investor to profit from the interest rate differential. However, there is always a risk that exchange rates will move against the investor, resulting in losses. Therefore, the success of the carry trade is based on a belief that there will be no adverse movement in exchange rates or interest rates.

Question 3

How are spot exchange rates determined?

Accepted Answer

Spot exchange rates are determined by the interaction between demand and supply of a currency relative to other currencies. This means that as the demand for a currency increases, its value goes up relative to other currencies, thus increasing its spot exchange rate. Conversely, if the supply of a currency increases, its value goes down relative to other currencies, thus decreasing its spot exchange rate. The spot exchange rate is essentially a reflection of the market's assessment of the relative value of a currency at a given moment in time.

Question 4

Which of the following transactions is used to move out of one currency into another for a limited period without incurring foreign exchange risk?

Accepted Answer

Currency swap is used to move out of one currency into another for a limited period and without incurring foreign exchange risk by swapping principal and interest payments with another party. It involves two parties exchanging currencies for a specified period and then reversing the exchange at a later date specified in the contract. This allows companies and investors to borrow in one currency and lend in another currency without being exposed to foreign exchange risk.

Question 5

Which of the following instances indicates that the dollar is selling at a premium on the 30-day forward market?

Accepted Answer

When the 30-day forward rate is higher than the current spot rate, it indicates that the dollar is selling at a premium. In this case, the 30-day forward rate is ¥130, which is higher than the current spot rate of ¥120, indicating that the dollar is selling at a premium.

Question 6

A(n)_____ occurs when two parties agree to exchange currency and execute the deal at some specific date in the future.

Accepted Answer

A forward exchange is a contract between two parties to exchange currencies at a future date at an agreed-upon exchange rate. This allows both parties to lock in a specific exchange rate, which can help manage exchange rate risk. Spot exchange refers to the exchange of currencies at the current exchange rate, while a carry trade involves borrowing in a low-interest-rate currency and investing in a high-interest-rate currency. A currency swap involves the exchange of both principal and interest payments on a loan denominated in one currency for equivalent payments in another currency. Arbitrage refers to the exploitation of price differences between markets to make a profit.

Question 7

Assume that the dollar is selling at a premium on the 30-day dollar/euro forward market.Which of the following is true of the foreign exchange dealers' market's expectations about the dollar over the next 30 days?

Accepted Answer

If the dollar is selling at a premium on the 30-day forward market, it means that the market is willing to pay more for a dollar in the future than its current value. This suggests that the market expects the dollar to appreciate against the euro in the next 30 days. Therefore, option C is the correct answer. Option E is also true, but it is not directly related to the expectations of the foreign exchange dealers' market.

Question 8

An American company imports laptop computers from Japan.The company knows that after a shipment arrives,it must pay in yen to the Japanese supplier within 30 days.In a particular exchange,the American company must pay the Japanese supplier ¥150,000 for each computer at the current dollar/yen spot exchange rate of $1 = ¥110.The company intends to resell the computers the day they arrive for $1,600 each but it does not have the funds to pay the Japanese supplier until the computers have been sold.Which of the following will happen if the exchange rate after 30 days is $1 = ¥90?

Accepted Answer

First, we need to calculate the cost of each laptop in USD using the current exchange rate:

¥150,000 ÷ 110 = $1363.64

Therefore, each laptop costs $1363.64 for the American company to import.

If the company sells each laptop for $1600, they make a profit of:

$1600 - $1363.64 = $236.36

However, if the exchange rate changes to $1 = ¥90, then the cost of each laptop in USD becomes:

¥150,000 ÷ 90 = $1666.67

This means that if the American company sells each laptop for $1600, they will now be incurring a loss of:

$1600 - $1666.67 = -$66.67

Therefore, the importer will incur a loss of approximately $67 per computer (option D).

Question 9

When a firm insures itself against foreign exchange risk,it is said to be engaging in _____.

Accepted Answer

When a firm insures itself against foreign exchange risk, it is engaging in hedging. Hedging involves taking a position, such as buying or selling currency, to offset the potential losses from adverse currency movements. It is a risk management strategy used by companies to protect themselves from currency fluctuations. The other options - currency speculation, carry trade, currency swap, and arbitrage - involve taking a position in the currency markets with the aim of making a profit.

Question 10

Which of the following caused a decline in the dollar-yen carry trade during 2008-09?

Accepted Answer

A decline in the dollar-yen carry trade during 2008-09 was caused by the decrease in interest rate differentials as the U.S. rates came down. This made the trade less attractive for investors who were seeking high returns through borrowing in low-interest currencies such as the yen and investing in higher-yielding currencies such as the dollar.

Question 11

Which of the following refers to carry trade?

Accepted Answer

Carry trade refers to borrowing in one currency where interest rates are low and then using the proceeds to invest in another currency where interest rates are high. This is done in order to profit from the interest rate differential between the two currencies.

Question 12

Carry trade,a kind of speculation,takes advantage of the:

Accepted Answer

Carry trade takes advantage of differences in interest rates between countries. Traders borrow in a low-interest-rate currency and invest in a high-interest-rate currency to earn profits from the interest rate difference. It is a form of speculative trading that aims to profit from fluctuations in currency values.

Question 13

Which of the following indicates that the dollar is selling at a discount on the 30-day forward market?

Accepted Answer

In the case where the current spot exchange rate is $1 = ¥120 and the 30-day forward rate is $1 = ¥110 after 30 days, it means that the dollar is selling at a discount because you would need fewer yen to purchase a dollar in 30 days than you would need currently.

Question 14

Steven converted $1,000 to ¥105,000 for a trip to Japan.However,he spent only ¥50,000.During this period,the value of the dollar weakened against the yen.Considering a current exchange rate of $1=¥100,how many dollars did Steven spend on the trip?

Accepted Answer

The answer of Steven converted $1,000 to ¥105,000 for a...

Question 15

When two parties agree to exchange currency and execute the deal immediately,the transaction is referred to as _____.

Accepted Answer

The transaction described in the question is known as spot exchange. In spot exchange, two parties agree to exchange currency at the current exchange rate and execute the deal immediately. Forward exchange involves an agreement to exchange currency at a future date, while countertrade involves the exchange of goods and services instead of currency. Arbitrage involves taking advantage of discrepancies in exchange rates between different markets. Currency swap involves exchanging one currency for another and then exchanging back at a later date.

Question 16

Which of the following refers to currency speculation?

Accepted Answer

Currency speculation refers to the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates. This involves buying and selling currencies based on market fluctuations to make a profit. The other answer choices refer to different concepts in the field of foreign exchange.

Question 17

_____ refers to the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.

Accepted Answer

A currency swap involves the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.

Question 18

The interest rate on borrowings in Rhodia is 2 percent and the interest rate on bank deposits in Maritia is 7.5 percent.In this scenario,a carry trade would be to:

Accepted Answer

The best choice would be to borrow money in Rhodian currency, convert it into Maritian currency and deposit it in a Maritian bank. This is because the interest rate on bank deposits in Maritia is higher than the interest rate on borrowings in Rhodia, which means that the interest earned on the deposit will be higher than the interest paid on the borrowing. This strategy will result in a positive carry, which means that the investor will earn a profit from the difference in interest rates.

Question 19

A French company wants to invest 20 million euros for three months.The company found that investing in a Thai money market account will give it a higher interest rate than domestic investments.Which of the following is true about this investment?

Accepted Answer

The investment is not risk-free because foreign currency movements can affect the profitability of the firm. Money market investments are generally considered less risky than other forms of investments, but they are not completely risk-free. The exchange rate between euros and Thai baht can fluctuate during the three-month investment period, which can affect the return on the investment. Therefore, the company must be aware of the potential risks and take appropriate measures to manage them.

Question 20

A U.S.company that imports laptop computers from Japan knows that in 30 days it must pay in yen to a Japanese supplier when a shipment arrives.The company will pay the Japanese supplier ¥150,000 for each computer,and the current dollar/yen spot exchange rate is $1 = ¥110.The importer can sell the computers the day they arrive for $1,600 each.However,the importer will not have the funds to pay the Japanese supplier until the computers have been sold.The importer enters into a 30-day forward exchange transaction with a foreign exchange dealer at $1 = ¥105.Which of the following will happen if the exchange rate after 30 days is $1 = ¥90?

Accepted Answer

The answer of A U.S.company that imports laptop computers from...

Quiz 10: The Foreign Exchange Market