Question 1

A German firm is attempting to determine the euro/pound exchange rate and has the following exchange rate information: USD/pound = $1.5509/£ and the USD/euro rate = $1.2194/€.Therefore,the euro/pound rate must be:

Accepted Answer

To find the euro/pound rate, we need to convert both currencies into USD and then compare.

$1 = €/$1.2194 = €0.8201 (the cost of 1 euro in USD)
$1 = £/$1.5509 = £0.6454 (the cost of 1 pound in USD)

Now we can find the cost of 1 euro in terms of pounds:

€1 = €0.8201 x £1.2719 = £1.0216
So, the euro/pound exchange rate is €1.2719/£.

Question 2

Given the following exchange rates,which of the multiple-choice choices represents a potentially profitable intermarket arbitrage opportunity? ¥129.87/$
€1)1226/$
€0)00864/¥

Accepted Answer

To determine if an intermarket arbitrage opportunity exists, we need to convert one currency to another using different exchange rates and see if the result is profitable. Therefore, let's convert 1 Euro to Japanese Yen using the given exchange rates:

1 Euro → $1.226 → ¥129.87

Now, let's convert 1 Euro to Japanese Yen using the other exchange rate:

1 Euro → ¥114.96

If we convert 1 Euro to Yen using the first method, we get ¥129.87. If we use the second method, we get ¥114.96. Therefore, we could make a profit by buying 1 Euro (for $1.226) and converting it to Yen using the second exchange rate (¥114.96).

Profit = ¥129.87 - ¥114.96 = ¥14.91

Therefore, option B is a potentially profitable intermarket arbitrage opportunity.

Question 3

A confusing "quirk" of international exchange rates occurs when calculating the percentage change in spot rates from one period to another.The percent change in the spot rate from one period to another when quoted using foreign currency terms is always greater than the percent changes quoted when using home currency terms.

Accepted Answer

The percentage change in the spot rate from one period to another will be the same magnitude but opposite in sign, whether quoted in foreign currency terms or home currency terms, due to the reciprocal nature of exchange rates.

Question 4

The most commonly quoted currency exchange is that between the U.S.dollar and the European euro.For example,a quotation of EUR/USD 1.2174.The euro is the base currency and the dollar the price currency.

Accepted Answer

This statement is true. The currency pair EUR/USD is one of the most frequently traded currency pairs in the world, with the euro as the base currency and the US dollar as the price currency.

Question 5

The U.S.dollar suddenly changes in value against the euro moving from an exchange rate of 0.8909/€ to $0.8709/€.Thus,the dollar has ________ by ________.

Accepted Answer

CThe U.S. dollar has appreciated because it now takes fewer dollars to buy a euro (from 0.8909 to 0.8709). The percentage change can be calculated as (0.8909 - 0.8709) / 0.8909 = 0.0224 or 2.24%.

Question 6

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 discrepancies in exchange rates offered by three different currencies. If the cross rate between two currencies offered by two banks differs from the exchange rate offered by a third bank, then there is a discrepancy that can be exploited through this method of arbitrage.

Question 7

The European and American terms for foreign currency exchange are square roots of one another.

Accepted Answer

The European term for foreign currency exchange is the direct quotation where the price of the foreign currency is expressed in terms of the domestic currency. The American term for foreign currency exchange is the indirect quotation where the price of the domestic currency is expressed in terms of the foreign currency. The two terms are not square roots of each other.

Question 8

A bid is the price in one currency at which a dealer will buy another currency.An ask is the price at which a dealer will sell the other currency.Dealers bid (buy)at one price and ask (sell)at a slightly higher price,making their profit from the spread between the prices.List and explain three reasons/factors that could make the spread small.

Accepted Answer

The answer of A bid is the price in one...

Question 9

Since in the U.S.the home currency is the dollar and the foreign currency is the euro,in New York USD 1.2174 = EUR 1.00 would be a direct quote on the euro and an indirect quote on the dollar.

Accepted Answer

In a direct quote, the home currency is the base currency and the foreign currency is the quote currency. In an indirect quote, the foreign currency is the base currency and the home currency is the quote currency. So in this case, USD 1.2174 = EUR 1.00 is a direct quote on the euro and an indirect quote on the dollar.

Quiz 5: The Foreign Exchange Market

A German firm is attempting to determine the euro/pound exchange rate and has the following exchange rate information: USD/pound = $1.5509/£ and the USD/euro rate = $1.2194/€.Therefore,the euro/pound rate must be:

Given the following exchange rates,which of the multiple-choice choices represents a potentially profitable intermarket arbitrage opportunity? ¥129.87/$ €1) 1226/$ €0) 00864/¥

The most commonly quoted currency exchange is that between the U.S.dollar and the European euro.For example,a quotation of EUR/USD 1.2174.The euro is the base currency and the dollar the price currency.

The U.S.dollar suddenly changes in value against the euro moving from an exchange rate of 0.8909/€ to $0.8709/€.Thus,the dollar has by .

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.

The European and American terms for foreign currency exchange are square roots of one another.

Since in the U.S.the home currency is the dollar and the foreign currency is the euro,in New York USD 1.2174 = EUR 1.00 would be a direct quote on the euro and an indirect quote on the dollar.