Deck 4: The Market for Foreign Exchange

Question 1

Exchange rates are quoted on American terms if:

A) The US dollar is quoted directly
B) The US dollar is quoted indirectly
C) The US dollar is not quoted
D) The US dollar is quoted in the denominator

Answer 1

A

Question 2

The foreign exchange market closes:

A) Never
B) 4:00 p.m. EST (New York time)
C) 4:00 p.m. GMT (London time)
D) 4:00 p.m. (Tokyo time)

Answer 2

A

Question 3

The world's largest foreign exchange trading center is:

A) New York
B) Tokyo
C) London
D) Hong Kong

Answer 3

C

Question 4

Most foreign exchange transactions are for:

A) intervention
B) speculation or arbitrage
C) retail trade
D) purchase of currencies

Question 5

If the $/£ bid and ask prices are $1.50 and 1.51,respectively,the corresponding £/$ bid and ask prices are:

A) £0.6667 and £0.6623
B) $1.51 and $1.50
C) £0.6623 and £0.6667
D) cannot be determined with the information given

Question 6

Which of the following is true if one year forward rate is F = 1.81$/£; current spot rate is S = 1.83$/£; and interest rates are i = 3%,and i* = 3.5% (where exchange rates are quoted in $/£,i is the interest rate in the U.S.and i* is the interest rate in the U.K.)?

A) Arbitrage is not possible
B) Arbitrage is possible and arbitrage strategy involves borrowing $
C) Arbitrage is possible and arbitrage strategy involves borrowing £
D) Arbitrage is possible; however, there is not enough information to pick one of the answers above.

Question 7

Participants in the interbank foreign exchange markets include the following except:

A) international banks
B) foreign exchange brokers
C) nonbank dealers
D) credit unions

Question 8

The US dollar is quoted directly against the Canadian dollar (US$/C$)and indirectly against the yen (¥/US$).In order to get the yen - Canadian dollar cross rate you need to:

A) divide the first exchange rate by the second exchange rate
B) divide the second exchange rate by the first exchange rate
C) multiply the first exchange rate by the second exchange rate
D) multiply the first exchange rate by the inverse of the second exchange rate

Question 9

If F/S < (1 + i)/(1 + i*)(where exchange rates are quoted in $/£,i is the interest rate in the U.S.and i* is the interest rate in the U.K.),which of the following is true?

A) Arbitrage is not possible
B) Arbitrage is possible and arbitrage strategy involves borrowing $.
C) Arbitrage is possible and arbitrage strategy involves borrowing £.
D) Arbitrage is possible; however, there is not enough information to pick one of the answers above.

Question 10

Which of the following is true given the following quotes for foreign exchange: 1.69-1.71$/£; 1.44-1.46$/€; 1.14-1.16€/£

A) Triangular arbitrage is not possible
B) Triangular arbitrage is possible and it involves exchanging $ for £
C) Triangular arbitrage is possible and it does not involve exchanging £ for $
D) Triangular arbitrage is possible and it involves exchanging £ for $, $ for € and € for $

Question 11

Intervention in the foreign exchange market is the process of:

A) A central bank requiring the commercial banks of that country to trade at a set price Difficulty.
B) Commercial banks in different countries coordinating efforts in order to stabilize one or more currencies.
C) A central bank buying or selling its currency in order to influence its value.
D) The government of a country prohibiting transactions in one or more currencies.

Question 12

The foreign exchange market is:

A) an organized exchange with trading floors around the world
B) an over-the-counter market
C) a market with a central market place
D) non existent

Question 13

Which of the following is true given the following quotes for foreign exchange: 1.68-1.70$/£; 1.43-1.45$/€; 1.13-1.15€/£

A) Triangular arbitrage is not possible
B) Triangular arbitrage is possible and it involves exchanging $ for £
C) Triangular arbitrage is possible and it involves exchanging £ for $
D) None of these

Question 14

The S$/$ spot exchange rate is 1.60,the C$/$ spot rate is 1.33 and the S$/C$ 1.15.Determine the triangular arbitrage profit that is possible if you have $1,000,000.

A) $44,063 profit
B) $46,093 loss
C) No profit is possible
D) $46,093 profit

Question 15

The SF/$ spot exchange rate is 1.25 and the 180 forward exchange rate is 1.30.Assuming 360 days in a year,the forward premium (discount)is:

A) The dollar is trading at an 8% premium to the Swiss franc for delivery in 180 days.
B) The dollar is trading at a 4% premium to the Swiss franc for delivery in 180 days.
C) The dollar is trading at an 8% discount to the Swiss franc for delivery in 180 days.
D) The dollar is trading at a 4% discount to the Swiss franc for delivery in 180 days.

Question 16

If F/S > (1 + i)/(1 + i*)(where exchange rates are quoted in $/£,i is the interest rate in the U.S.and i* is the interest rate in the U.K.),which of the following is true?

A) Arbitrage is not possible
B) Arbitrage is possible and arbitrage strategy involves buying £ forwards.
C) Arbitrage is possible and arbitrage strategy involves selling £ forwards.
D) Arbitrage is possible; however, there is not enough information to pick one of the answers above.

Question 17

Which of the following is true if one year forward rate is F = 1.83$/£; current spot rate is S = 1.81$/£; and interest rates are i = 3.5%,and i* = 3% (where exchange rates are quoted in $/£,i is the interest rate in the U.S.and i* is the interest rate in the U.K.)?

A) Arbitrage is not possible
B) Arbitrage is possible and arbitrage strategy involves buying £ forwards
C) Arbitrage is possible and arbitrage strategy involves selling £ forwards
D) Arbitrage is possible; however, there is not enough information to pick one of the answers above.

Question 18

The $/CD spot bid-ask rates are $0.7560-$0.7625.The 3-month forward points are 12-16.Determine the $/CD 3-month forward bid-ask rates.

A) $0.7548-$0.7609
B) $0.7572-$0.7641
C) $0.7512-$0.7616
D) cannot be determined with the information given

Question 19

On average,worldwide daily trading of foreign exchange is:

A) $15.95 billion
B) impossible to estimate
C) $362 billion
D) $3.73 trillion

Question 20

The AUD/$ spot exchange rate is 1.60 and the SF/$ is 1.25.The AUD/SF cross exchange rate is:

A) 0.7813
B) 2.0000
C) 1.2800
D) 0.3500

Question 21

Given the following information:
a)What kind of arbitrage is possible?
b)If you have SF100,000 for the arbitrage,what arbitrage profit can be made?
c)At what exchange rate at the Credit Suisse would there be no arbitrage (assume that the other two exchange rates don't change)?

Question 22

All of the following are key elements of a forward contract except:

A) forward rate
B) maturity
C) settlement date
D) settlement function

Question 23

If CIBC posts 1.10 CA$/US$ - 1.14 CA$/US$ bid-ask exchange rates,Scotiabank posts 1.12 CA$/US$ - 1.15 CA$/US$ bid-ask exchange rates,and RBC posts 1.13 CA$/US$-1.16 CA$/US$ bid-ask exchange rates,which of the following statements is correct:

A) You can make an arbitrage by exchanging CA$ for US$ at CIBC and then exchanging US$ for CA$ at RBC
B) You can make an arbitrage by exchanging US$ for CA$ at CIBC and then exchanging CA$ for US$ at RBC
C) You can make an arbitrage but none of these strategies allows you to make the arbitrage
D) Arbitrage is not possible

Question 24

The 3 month forward rate between British pound and the Swiss franc is £0.5/SF.The current spot rate is £0.51/SF.Assuming 360 days in a year,what is the correct statement from the below?

A) The Swiss franc is trading at a 1.96% premium to the British pound for delivery in 90 days.
B) The Swiss franc is trading at a 7.84% premium to the British pound for delivery in 90 days.
C) The Swiss franc is trading at a 1.96% discount to the British pound for delivery in 90 days.
D) The Swiss franc is trading at a 7.84% discount to the British pound for delivery in 90 days.

Question 25

The 3 month forward rate between British pound and the Swiss franc is £0.5.A speculator predicts the spot rate in three months to be £0.51 and has £1,000,000 for speculation.The speculator should not

A) get a long position on British pounds
B) get a short position on Swiss francs
C) speculate
D) get a long position on Swiss francs

Question 26

If the speculator's predictions prove correct,the speculator will make a profit of

A) £10,000
B) £20,048
C) SF 10,000
D) SF 20,048

Question 27

If CIBC posts 1.10 CA$/US$ - 1.14 CA$/US$ bid-ask exchange rates,Scotiabank posts 1.12 CA$/US$ - 1.15 CA$/US$,and Bank of America posts 0.88 US$/CA$ - 0.9 US$/CA$ exchange rates,what is the maximum amount of CA$ can you get for 1 US$?

A) 1.100
B) 1.111
C) 1.120
D) 1.136

Question 28

The current spot exchange rate is $1.6/euro and the 6-months forward rate is $1.63/euro.You think that the spot rate will be $1.62/euro in six months.Assume that you can buy or sell euro 100,000.
a)What would be your expected profit from speculating in the forward market?
b)What would be you profit if the actual spot rate in 6 months is $1.60/euro?

Question 29

Assume the following quotes:
1)Bank A: $1.5400/pound
2)Bank B: EURO 1.6000/pound
3)Bank C: $0.9700/EURO
a)Can a trader make a profit on these quotes?
b)Assume that the trader has $1,000,000 or the equivalent in another currency available for the transaction.What profit can the trader make?

Question 30

If the speculator's predictions prove wrong and the actual spot rate in 3 months is £0.52 speculator will make a loss of

A) £20,000
B) £38,461
C) SF 20,000
D) SF 38,461

Question 31

The following rates are given:
Determine the bid and ask rate and the spread on the SF against the dollar.

Question 32

The speculator

A) Should sell the British pound forward
B) Should sell the Swiss franc forward
C) Cannot make any speculative profit
D) Can make a guaranteed profit

Question 33

The following quotes are given for the Euro against the US dollar: 0.9075 - 85,15-10,22-11,30-15 for the spot,one month,three months and six months forward contracts.
a)Calculate the outright quotations and the spread for each maturity.
b)Is the dollar at a forward premium or discount?
c)Where are the interest rates higher?