Deck 11: Foreign Exchange and Global Capital Markets

Question 1

All transactions that involve a settlement date after the spot date are forward FX contracts.

Answer 1

True

Question 2

Importers prefer a low exchange rate (i.e.a low value for the domestic currency).

Answer 2

False

Question 3

A spot FX contract is settled immediately.

Answer 3

False

Question 4

Forward exchange rates are based on the spot rate.

Question 5

An exchange rate indicates the value of one currency in terms of another.

Question 6

When measured by daily turnover, the FX market is about the same size as the bond market.

Question 7

The problem with floating exchange rates is their volatility.

Question 8

If AUD/USD is equal to 0.50 then 1 USD is buying 2 AUD.

Question 9

Foreign exchange markets facilitate cross-currency payments.

Question 10

A company wishes to sell USD for AUD.Given the AUD is quoted as the commodity currency, the company will be looking to transact at the lowest offer quote available.

Question 11

The value of the Australian dollar is always measured against the US dollar.

Question 12

An increase in an exchange rate indicates that the terms currency has appreciated.

Question 13

Expectations about future spot exchange rates do not determine forward exchange rates.

Question 14

A one-month forward contract is settled one month after the trade.

Question 15

The term 'cross rates' has a range of meanings.

Question 16

A floating exchange rate means the FX markets determine the price of the currency.

Question 17

FX dealers hold their reserves of foreign currency in low risk securities.

Question 18

Dealers quote forward rates as 'points' representing the difference between the forward rate and the spot rate.

Question 19

FX dealers hold their inventories of foreign currencies as shares and other liquid investments.

Question 20

The NZD is quoted as a direct quote against the USD

Question 21

Most forward contracts are established as part of an FX swap.

Question 22

When the interest rate for the commodity currency exceeds the interest rate for the terms currency, the forward rate will be a premium to the spot rate.

Question 23

A buy/sell swap for AUD/USD is when the AUD is first bought with the agreement to sell it back later at an agreed price and date.

Question 24

Movements in the exchange rate can have adverse effects on importers, exporters, those that lend or invest overseas and those that borrow offshore.

Question 25

FX is traded in Australia on a 24/7 basis.

Question 26

There is only one reason for a currency to trade at a forward premium - it has a lower interest rate than the terms currency.

Question 27

If interest rates are 2 per cent in the US and 3.5 per cent in Australia, the AUD will trade at an annualised forward discount of approximately 1.5 per cent.

Question 28

The forward FX rate is the future value of the spot FX rate.

Question 29

Most FX trading is conducted by telephone.

Question 30

The swap points are always greater than the forward points.

Question 31

The dealer's source of income on forward trades is the spread between their forward rates and their spot rates.

Question 32

Trading in the Australian FX market is concentrated in the hands of the major banks and leading international banks.

Question 33

Where a borrower of foreign currency funds hedges its FX risk with an FX swap, the borrower's effective interest rate will be the domestic interest rate.

Question 34

An FX swap is an exchange of currencies for an agreed period.

Question 35

Hedging an FX risk exposure with a forward contract will always provide a better outcome than not hedging the exposure.

Question 36

Australian banks borrow large amounts offshore to take advantage of the lower interest rates available in some countries.

Question 37

Being a dealer market, the FX market lacks transparency.

Question 38

The FX market has two segments: inter-dealer trading and dealers trading with counterparties.

Question 39

The introduction of electronic broking systems has reduced the cost of trading FX.

Question 40

If the swap points for the AUD/USD are 0.0050, a buy/sell FX swap will produce a FX profit.

Question 41

The market for the AUD operates globally.

Question 42

'Carry trades' are investments in relatively high interest rate foreign currency securities that are hedged with forward FX contracts

Question 43

Turnover in the Australian FX market has plateaued since the GFC due to lower economic activity and trade globally.

Question 44

LIBOR refers to the level of UK interest rates as determined by London's banking system.

Question 45

The expectation that Australia's interest rates will remain relatively high may contribute to the strength of the AUD.

Question 46

Since the value of a currency is its purchasing power, currencies with high inflation rates will depreciate steadily over time.

Question 47

The RBA's current approach to exchange rate intervention is often described as 'testing and smoothing'.

Question 48

Singapore is an important financial centre for USD funds.

Question 49

Some currency speculators believe the AUD is responsive to sentiment regarding the global economic outlook.

Question 50

Australian banks raise funds in overseas markets to take advantage of the lower interest rates in those countries.

Question 51

A current account deficit in the first half of the year should place downward pressure on the exchange rate in the second half of the year.

Question 52

According to the theory of expected interest rate parity, the currency of a high-interest-rate country should appreciate over time because it attracts foreign investment.

Question 53

The RBA controls the exchange rate through its trading in the FX market.

Question 54

Eurocurrency markets arrange financing in euros.

Question 55

World commodity prices play an important role in Australia's terms of trade because commodity exports dominate commodity imports.

Question 56

In Australia, trades between non-AUD currencies are known as 'third-currency' transactions.

Question 57

Japanese investors are assured of higher returns when they invest in Australian Treasury bonds because these bonds pay a much higher coupon rate than Japanese government bonds.

Question 58

Forecasting the movements in the exchange rate can be achieved by using inflation rates, interest rates and terms-of-trade data.

Question 59

An Australian bank issuing euro denominated bonds in Paris is an example of a eurobond.

Question 60

Foreign companies can gain access to US share markets by arranging the issue of American depository receipts (ADRs).

Question 61

FX markets do NOT:

A)facilitate cross-currency payments
B)organise direct financing
C)reveal the value of a currency
D)have retail and wholesale market components
E)arrange the transfer of FX risks.

Question 62

Given a spot rate of AUD/USD0.5740, and 180-day rates in Australia of 5.1% p.a.and in the US of 4.5%, calculate the 180-day forward rate.(Use a 360-day year for the US.)

A)0.5723
B)0.5725
C)0.5740
D)0.5755
E)None of these are correct.

Question 63

A dealer quotes AUD/EUR0.9845-65.

A)The dealer will buy AUD at 0.9845.
B)The dealer will sell AUD at 0.9845.
C)The dealer will buy EUR at 0.9845.
D)The dealer will sell EUR at 0.9865.
E)More than one of these answers is correct.

Question 64

If the spot rate is USD/CAN1.67 and the 1-month forward rate is USD/CAN1.70:

A)the Canadian dollar is trading at a forward premium
B)the Canadian dollar is trading at a forward discount
C)the US dollar is trading at a forward discount
D)the US dollar is trading at a forward premium
E)the USD is at a forward premium and the CAN is at a forward discount.

Question 65

A floating exchange rate does NOT:

A)establish the domestic currency value of foreign assets and liabilities
B)perform price discovery
C)reduce short-term volatility
D)establish the price of goods and services sold and purchased in foreign currencies
E)help economies adjust to changing economic circumstances.

Question 66

The value of currencies is most commonly expressed in terms of:

A)the USD
B)the EUR
C)the CNY
D)the AUD
E)a trade weighted index.

Question 67

The trading of forward FX contracts by FX dealers:

A)exposes them to FX risk
B)exposes them to interest rate risk
C)requires they borrow funds to invest in securities in the currencies they supply
D)requires they borrow funds in the currencies they supply
E)requires they predict future movements in FX spot prices.

Question 68

The value of the AUD can be measured in terms of:

A)the USD
B)the EUR
C)the CNY
D)a trade weighted index.
E)Any of these.

Question 69

Dealers in foreign currency do NOT:

A)need to hold amounts of foreign currency
B)hold their FX reserves in foreign currency cash and shares
C)make many deals each trading day
D)calculate daily the net amount of FX they require in the future to settle their FX obligations
E)hold high-quality securities denominated in foreign currencies.

Question 70

In a foreign exchange market:

A)exporters are exposed to the risk of an appreciation of the domestic currency
B)domestic companies can borrow in a foreign currency
C)importers sell foreign currency
D)investors in foreign assets are exposed to the risk of an appreciation in the foreign currency
E)investors can buy foreign securities.

Question 71

Which of the following statements is correct?

A)When the interest rate is lower in the commodity currency, it is offered at a forward premium.
B)When the interest rate is higher in the commodity currency, it is offered at a forward premium.
C)When the interest rate is higher in the terms currency, the commodity currency is offered at a forward discount.
D)When the interest rate is higher in the terms currency, it is offered at a forward premium.
E)When the interest rate is lower in the terms currency, it is offered at a forward discount.

Question 72

An Australian fund manager intends to convert AUD to USD now to invest in USD securities for three months.Given they wish to avoid FX risk, which type of FX contract is most suitable?

A)Spot purchase of USD
B)Spot sale of USD in three months
C)Forward sale of AUD
D)Buy/sell FX swap
E)Sell/buy FX swap

Question 73

Who trades forward FX contracts with the aim of making a profit from a favourable movement in the spot rate?

A)Speculators
B)Spot FX dealers
C)Forward FX dealers
D)Banks
E)All of these.

Question 74

Suppose that yesterday AUD/USD was 0.9334 and today AUD/USD is 0.9566.

A)AUD is the terms currency and the AUD appreciated.
B)AUD is the commodity currency and the USD appreciated.
C)USD is the terms currency and the USD depreciated.
D)USD is the commodity currency and the AUD depreciated.
E)AUD is the commodity currency and the AUD depreciated.

Question 75

If an Australian investor buys 2500 IBM shares at a price of USD 50 per share when the exchange rate is AUD/USD0.8, what is the investor's AUD cost of this investment?

A)125 000 AUD
B)100 000 AUD
C)156 250 AUD
D)150 000 AUD
E)None of these.

Question 76

If 1 AUD is buying 0.42 GBP, then 1 GBP buys:

A)2.38 AUD
B)0.42 AUD
C)1.42 AUD
D)0.58 AUD
E)2.40 AUD

Question 77

A forward contract in foreign currencies is an agreement to exchange:

A)currencies in the future, at an unspecified date, at an exchange rate agreed when the contract is traded
B)currencies in the future, at a specified date, at whatever the spot rate is at that future date
C)currencies in the future, at an unspecified date, at an unknown exchange rate
D)a product for foreign currency, in the future, at a specified date
E)currencies in the future, at a specified date, at an exchange rate agreed when the contract is traded.

Question 78

A contract to exchange currencies in two business days is a ____ contract.

A)tod
B)tom
C)spot
D)forward
E)swap

Question 79

The spot exchange rate is AUD/MYR2.3550 and 90-day interest rates are 5.25% p.a.in Australia and 12% in Malaysia.Calculate 90-day forward AUD/MYR.Use 365-day years for both countries.

A)2.4520
B)2.3169
C)2.3937
D)2.3550
E)None of these are correct.

Question 80

The term, 'cross rates' can refer to:

A)non-USD rates
B)non-Euro rates
C)non-AUD rates
D)non-domestic currency rates.
E)All of these.