Question 1

Exports of goods and services by the United States by 2008 total more than _________ of gross domestic product.

Accepted Answer

A

Question 2

When the home currency price of a certain fixed quantity of the foreign currency is quoted,it is referred to as the

Accepted Answer

Direct quotation is used when the price of a fixed quantity of foreign currency is quoted in terms of the home currency. For example, if the direct quotation for 1 US dollar is 70 Indian rupees, it means that you can buy 1 US dollar for 70 Indian rupees. This is the most common type of quotation used for currency exchange rates. Indirect quotation, on the other hand, is used when the price of a fixed quantity of home currency is quoted in terms of the foreign currency. European and American quotations are not related to currency exchange rates.

Question 3

When an importer goes long in the forward market,they would be

Accepted Answer

Going long in the forward market means the importer is buying currency for future delivery at an agreed-upon exchange rate. This helps the importer to lock in a price for the currency and hedge against fluctuations in the exchange rate, ensuring that they can fulfill their obligations without incurring significant financial losses.

Question 4

overwhelming majority of foreign exchange transactions involve

Accepted Answer

The overwhelming majority of foreign exchange transactions involve banks buying and selling foreign exchange. This includes both commercial banks and central banks. While multinational corporations, importers and exporters, and governments may also participate in forex trading, the volume of transactions by banks far exceeds these other groups.

Question 5

Traders on the foreign exchange market use ___________ to eliminate or cover the risk of loss on export or import orders denominated in foreign currencies.

Accepted Answer

Forward contracts allow traders to lock in an exchange rate for a future date, thus hedging against the risk of currency fluctuations. Currency options and currency futures contracts also serve a similar purpose, but they may be more complex and not as widely used in this context. Money-market hedges are a type of short-term borrowing used by corporations to cover cash flow needs, and are not directly relevant to currency risk management in FX trading.

Question 6

The spot and 30-day forward rates for the Dutch euro are $1.4757 and $1.48,respectively.The guilder is said to be selling at a forward

Accepted Answer

To find out whether the guilder is selling at a premium or a discount, we need to calculate the difference between the 30-day forward rate and the spot rate, and then divide that difference by the spot rate.

($1.48 - $1.4757) / $1.4757 = 0.0022 or 0.22%

Since the result is positive, we know that the guilder is selling at a premium. To convert this premium to a percentage, we need to multiply by 100.

0.22% x 100 = 2.2%

Therefore, the guilder is selling at a premium of 2.2%, which corresponds to choice B (premium of 3.5%).

Question 7

world's largest currency trading market is

Accepted Answer

London is the largest currency trading market in the world, with average daily trading volumes exceeding $2.2 trillion.

Question 8

When exchange rates are quoted as the number of U.S.dollars per unit of foreign currency,it is referred to as

Accepted Answer

When exchange rates are quoted as the number of U.S. dollars per unit of foreign currency, it is referred to as American terms. In contrast, European terms quote the number of units of foreign currency per U.S. dollar. Fixed-exchange terms refer to a fixed exchange rate between two currencies, while spot-market terms refer to the immediate exchange of currencies for delivery within two business days.

Question 9

What is the name of the foreign bank account that a trader maintains in a foreign bank and from which they would request transfer of currency to the account of another trader with whom they have concluded a transaction?

Accepted Answer

A nostro account is a foreign bank account that a trader maintains in a foreign currency and is used for settling transactions with other traders in that same foreign currency. The trader would request a transfer of funds from their nostro account to the settlement account of the other trader with whom they have concluded a transaction. The other options are not specifically related to this type of transaction.

Question 10

Suppose the spot direct quotes for the pound sterling and euro are $1.3981?89 and $.1230?33,respectively.What is the direct quote for the pound in Paris?

Accepted Answer

To find the direct quote for the pound in Paris, we need to use the cross rate between the euro and pound sterling. 
Euro/pound cross rate = Euro/dollar rate divided by pound/dollar rate 
= 0.1230/0.8989 
= 0.1369 
Now, to find the direct quote for the pound in Paris, we multiply the euro/pound cross rate by the pound/dollar rate: 
0.1369 x 1.3981 
= 0.1919 
Therefore, the direct quote for the pound in Paris is €1.1919/£, which can be simplified to €1.1339-73/£.

Question 11

The risk that a central bank will not make the necessary transfer of foreign currency to complete a currency settlement is known as ________ risk.

Accepted Answer

Herstatt risk is specifically associated with the risk that a central bank will fail to complete a foreign currency transaction, named after the German bank Herstatt that failed in 1974, leading to a type of settlement risk in foreign exchange transactions.

Question 12

Suppose it is 1990 and the spot direct quotes for the Swedish krona and French franc are $.1395-99 and $.1130-33,respectively.What is the direct quote for the krona in Paris?

Accepted Answer

The answer of Suppose it is 1990 and the spot...

Question 13

Suppose pound sterling is quoted at $1.4419-36,and the Swiss franc is quoted at $0.6250-67.What is the direct quote for the pound in Zurich?

Accepted Answer

To find the direct quote for the pound in Zurich, you divide the quote for the pound sterling by the quote for the Swiss franc. Using the highest quote for the pound ($1.4436) and the lowest quote for the franc ($0.6250), you get 1.4436 / 0.6250 = 2.30976. Using the lowest quote for the pound ($1.4419) and the highest quote for the franc ($0.6267), you get 1.4419 / 0.6267 = 2.3008. Therefore, the direct quote range is approximately 2.3008-2.30976, which rounds to 2.3008-98, making option C the correct answer.

Question 14

international currency transactions are conducted by

Accepted Answer

Major banks are the primary participants in international currency transactions due to their ability to offer a wide range of currency-related services, including trading, hedging, and financing. While the other options may also participate in such transactions, they are not the primary players. Arbitrageurs engage in buying and selling (or similar activities) in different markets in order to profit from differences in prices, while speculators seek to profit from predictions about exchange rate movements. Hedgers use financial instruments such as futures contracts or options to manage currency risk.

Question 15

Hedgers,mostly _____________,engage in forward contracts on the foreign exchange markets to protect the home currency value of various foreign currency-denominated assets and liabilities on their balance sheets.

Accepted Answer

Multinational corporations often have assets and liabilities denominated in foreign currencies, which can expose them to currency risk. To mitigate this risk, they may use forward contracts on the foreign exchange market to lock in a specific exchange rate for future transactions, thereby protecting the value of their assets and liabilities in their home currency. Commercial banks and public utilities may also engage in hedging activities, but they are less likely to use foreign exchange forwards as a significant part of their hedging strategies. Speculators, on the other hand, do not use forwards for hedging purposes but instead engage in these contracts to bet on the direction of currency movements for potential profit.

Question 16

American terms refers to the

Accepted Answer

American terms refer to the number of U.S. dollars per unit of foreign currency, indicating how much of the U.S. currency is needed to purchase one unit of foreign currency.

Question 17

currency transactions are channeled through the worldwide ________ market which accounts for _______ of foreign exchange transactions.

Accepted Answer

Interbank market accounts for the majority of foreign exchange transactions, estimated to be around 95%. Stock market and internet market are not generally used for currency transactions, and 30% is a significantly lower estimate than the actual proportion of transactions taking place in the interbank market.

Question 18

Trading on the foreign exchange market is

Accepted Answer

Foreign exchange trading is a decentralized market that operates through an electronically linked network of banks, brokers, and dealers. There is no physical location for the foreign exchange market, and it is not traded through an organized exchange or by licensed brokers from the London stock exchange.

Question 19

A ___________ between a bank and a customer calls for a fixed delivery date,at a fixed exchange rate for a specified amount of one currency against another currency payment.

Accepted Answer

A forward contract is an agreement between a bank and a customer to exchange a specified amount of one currency for another currency at a fixed exchange rate on a future date, also known as the delivery date. The delivery date and exchange rate are agreed upon at the time the contract is made, and the customer is obligated to make the payment in the agreed upon currency. The forward contract is used to hedge against currency volatility and to lock in a favorable exchange rate.

Question 20

Suppose it is 1995 and the following direct quotes are received for spot and one-month French francs in New York: .1160-684-6.Then the outright 30- day forward quote for the French franc was:

Accepted Answer

The answer of Suppose it is 1995 and the following...

Quiz 7: The Foreign Exchange Market