Question 1

The most active market makers in the market for spot foreign exchange are the major investment banks, such as Salomon Smith Barney and Goldman Sachs.

Accepted Answer

The major market makers are the large commercial banks.

Question 2

American terms state the dollar value of one unit of foreign currency, such as $0.0085/¥.

Accepted Answer

This statement is true. American terms are quoted in dollars per unit of foreign currency.

Question 3

In the forward currency markets, trades are made for future delivery according to an agreed-upon delivery date, exchange rate, and amount.

Accepted Answer

This statement accurately describes how forward currency markets operate.

Question 4

Eurocurrency transactions in the external credit market fall outside the jurisdiction of any single nation.

Accepted Answer

Eurocurrency transactions involve the use of currencies deposited in banks outside the country that issued the currency. Therefore, they are not subject to the regulations and jurisdiction of any single nation.

Question 5

For the most actively traded currencies, national credit markets are operationally more efficient than the Eurocurrency markets.

Accepted Answer

Eurocurrency markets are generally more operationally efficient.

Question 6

In the spot market, trade is conducted in a single spot or location.

Accepted Answer

Trade is conducted at commercial banks worldwide.

Question 7

Volume in the foreign exchange markets averages about one billion dollars per day.

Accepted Answer

Interbank trading volume averages over one trillion dollars daily.

Question 8

If the current spot rate is S₀^$/C$ = $0.8839/C$ and the one-year forward rate is F₁^$/C$ = $0.8754/C$, then the U.S. dollar is selling at a forward premium.

Accepted Answer

Conversely, the Canadian dollar in the denominator is at a forward discount.

Question 9

A bank that is making a market in lira stands ready to buy lira at its offer price and sell lira at its bid price.

Accepted Answer

The bank will buy at the bid and sell at the offer price.

Question 10

Eurocurrency markets are highly liquid and relatively unencumbered by government regulation, resulting in borrowing and lending rates that are generally more favorable to large retail customers than domestic rates.

Accepted Answer

Eurocurrency markets are known for their high liquidity and relatively low government regulation, which often results in more favorable borrowing and lending rates for large retail customers compared to domestic rates.

Question 11

Capital markets are markets for financial assets and liabilities with maturities greater than one year.

Accepted Answer

Capital markets include stocks, bonds, and other long-term securities, making them markets for financial assets and liabilities with maturities greater than one year.

Question 12

European terms state the foreign currency price of one U.S. dollar (for example C$1.1054/$).

Accepted Answer

European terms quote the amount of foreign currency needed to purchase one U.S. dollar, as opposed to American terms which quote the amount of U.S. dollars needed to purchase one unit of foreign currency.

Question 13

External credit markets trade interest rate contracts denominated in a currency but traded outside the borders of the country issuing that currency.

Accepted Answer

This is true. External credit markets, also known as offshore credit markets, trade interest rate contracts denominated in a currency but traded outside the country issuing that currency. This allows investors to diversify their portfolios and access different interest rate environments. Examples of external credit markets include the Eurodollar market and the Samurai market.

Question 14

Money markets are markets for financial assets and liabilities of short maturity, considered to be less than one year.

Accepted Answer

Money markets typically deal with financial instruments that have a maturity of less than one year, such as commercial paper, treasury bills, and certificates of deposit.

Question 15

If the current spot rate is S₀^$/C$ = $0.8839/C$ and the one-year forward rate is F₁^$/C$ = $0.8754/C$, then the Canadian dollar is selling at a forward premium.

Accepted Answer

The Canadian dollar (in the denominator of the quote) is selling at a forward discount.

Question 16

Currency risk is the risk of unexpected changes in foreign currency values.

Accepted Answer

Currency risk refers to the potential financial loss from exchange rate movements. For example, if a company does business in multiple currencies, fluctuations in exchange rates can impact their profits and cash flows. Therefore, unexpected changes in foreign currency values can lead to currency risk.

Question 17

Liquidity refers to the ease with which you can exchange one asset for another of equal value.

Accepted Answer

Liquidity refers to the ability to convert an asset into cash quickly and easily without any loss of value. The higher the liquidity of an asset, the easier it is to buy or sell it in the market.

Question 18

A bank offers you the following quote: "$0.8841/C$ BID and $0.8852/C$ ASK." The bank will buy U.S. dollars at $0.8841/C$ or sell U.S. dollars at $0.8852/C$.

Accepted Answer

Banks quote foreign currency in order to make a profit. The bank will buy C$ (and sell $) at $0.8841/C$ or sell C$ (and buy $) at $0.8852/C$.

Question 19

Internal credit markets are markets for deposits and loans by local residents and hence are governed by the rules and institutional conventions of the local government.

Accepted Answer

Internal credit markets are primarily influenced and governed by the local residents and the institutional conventions and regulations of the local government.

Question 20

International commercial banks are the major market makers in the currency markets.

Accepted Answer

International commercial banks are the primary players in the currency markets, accounting for a significant percentage of the daily trading volume. They act as market makers by setting bid-ask prices and providing liquidity to the market.

Quiz 3: Foreign Exchange and Eurocurrency Markets