Question 1

If a Citibank dealer expects the Swiss franc to appreciate against the U.S.dollar, then she will attempt to lower both bid and offer rates for the franc to persuade other dealers to buy francs from Citibank and dissuade other dealers from selling francs to Citibank.

Accepted Answer

The question is about the Swiss franc, but the figure and information provided are about the Euro. Therefore, there is not enough information to determine the accuracy of the statement.

Question 2

Most foreign exchange trading is carried out in the forward market.

Accepted Answer

Most foreign exchange trading is carried out in the spot market, where currencies are bought and sold for immediate delivery.

Question 3

Most foreign exchange transactions are conducted between commercial banks and household customers.

Accepted Answer

Most foreign exchange transactions are conducted between commercial banks and other financial institutions rather than with household customers, as they are primarily for trading, investment, and hedging purposes.

Question 4

If it takes $0.18544 to purchase 1 French franc, then it takes 5.3926 francs to purchase $1.

Accepted Answer

To find out how many francs it takes to purchase $1, we divide $1 by the exchange rate of francs per dollar:

$1 ÷ 0.18544 francs = 5.3926 francs

Therefore, it takes 5.3926 francs to purchase $1.

Question 5

If Citibank quoted bid and offer rates for the Swiss franc at $.4850/$.4854, then the bank would be prepared to buy, say, 1 million francs for $485,000 and sell them for $485,400.

Accepted Answer

This statement accurately describes bid and offer rates in a foreign exchange market.

Question 6

If Chase Manhattan Bank quotes bid and offer rates for the Swiss franc at $.5250/$.5260, then the bank would realize profits of $1,000 on the purchase and sale of 1 million francs.

Accepted Answer

To calculate the potential profit, we need to use the cross rate formula: 
1 USD/CHF bid rate = 1/0.5250 = CHF 1.9048 per USD
1 USD/CHF ask rate = 1/0.5260 = CHF 1.9026 per USD
The midpoint between the bid and ask rates is (1.9048 + 1.9026) / 2 = CHF 1.9037 per USD
If Chase Manhattan Bank purchases 1 million CHF at the bid rate of CHF 1.9048 per USD, they would need to pay 1 million x 1.9048 = USD 1,904,800
If they then sell the 1 million CHF at the ask rate of CHF 1.9026 per USD, they would receive 1 million x 1.9026 = USD 1,902,600
Their profit would be USD 1,902,600 - USD 1,904,800 = USD -2,200 (a loss)
Therefore, the statement is false.

Question 7

The bid rate refers to the price at which a bank is willing to sell a unit of foreign currency; the offer rate is the price at which a bank is willing to buy a unit of foreign currency.

Accepted Answer

The bid rate is the price at which a bank is willing to BUY a unit of foreign currency, while the offer rate is the price at which a bank is willing to SELL a unit of foreign currency.

Question 8

If it takes $1.5515 to buy 1 pound and $0.6845 to buy 1 franc, then it takes 2.27 francs to buy 1 pound.

Accepted Answer

To find out how many francs it takes to buy one pound, we need to divide the dollar-pound exchange rate by the dollar-franc exchange rate:
$\frac{1.5515\,dollars}{1\,pound} \div \frac{0.6845\,dollars}{1\,franc} = 2.27\,francs$
Therefore, it takes 2.27 francs to buy 1 pound, making the statement true.

Question 9

If a Citibank dealer expects the Swiss franc to depreciate in the future, then he will lower bid and offer rates for the franc in order to discourage other dealers from selling francs to Citibank and persuade other dealers to buy francs from Citibank.

Accepted Answer

If a Citibank dealer expects the Swiss franc to depreciate in the future, then he will lower bid and offer rates for the franc in order to discourage other dealers from selling francs to Citibank and persuade other dealers to buy francs from Citibank. This is because the dealer anticipates that the franc will be worth less in the future, so buying francs at a lower rate now means that the bank can sell them later for a higher profit. By lowering the bid and offer rates, Citibank can make itself a more attractive counterparty for dealers looking to buy francs.

Question 10

Similar to stock and commodity exchanges, the foreign exchange market is an organized structure with a central meeting place and formal licensing requirements.

Accepted Answer

The foreign exchange market is decentralized and does not have a central meeting place or formal licensing requirements. Trades are conducted electronically and over-the-counter.

Question 11

The "spread" is a bank's profit margin on foreign exchange trading and equals the difference between the bid rate and the offer rate.

Accepted Answer

The statement is true. The spread is indeed a bank's profit margin on foreign exchange trading and is calculated as the difference between the bid rate and the offer rate.

Question 12

A speculator engages in a short position by initially selling a currency (that she does not own) at a high price and then buying it back later at a low price.

Accepted Answer

This is an accurate description of how a speculator engages in a short position. By selling a currency at a high price and buying it back later at a low price, the speculator profits from the currency's decline in value.

Question 13

"Futures" currency contracts are issued by commercial banks and are tailored in size to the needs of the exporter or importer, while "forward" currency contracts are issued by the International Monetary Market in standardized round lots.

Accepted Answer

"Futures" currency contracts are standardized contracts traded on exchanges like the International Monetary Market and are available in round lots, while "forward" currency contracts are over-the-counter agreements between commercial banks and their clients, tailored to the specific needs of the exporter or importer.

Question 14

A person needing foreign exchange immediately would purchase it on the spot market.

Accepted Answer

The spot market is where immediate exchanges of currency take place, so someone needing foreign exchange immediately would purchase it on the spot market.

Question 15

The euro shows a forward discount against the dollar (the forward rate is less than the spot rate) when interest rates in Europe are lower than those in the United States.

Accepted Answer

The answer of The euro shows a forward discount against...

Question 16

A speculator takes a long position by initially buying a currency at a low price and then selling it at a higher price later on.

Accepted Answer

This statement accurately describes the behavior of a speculator taking a long position in a currency market.

Question 17

Swap transactions among commercial banks involve the conversion of one currency to another at one point with an agreement to reconvert it back into the original currency at some point in the future.

Accepted Answer

This statement accurately describes swap transactions among commercial banks.

Question 18

Foreign-exchange brokers help commercial banks carry out foreign exchange trading and maintain desired balances of foreign exchange.

Accepted Answer

Foreign-exchange brokers do help commercial banks with foreign exchange trading and maintaining desired balances of foreign exchange.

Question 19

If it takes 113.28 yen to buy $1, then it takes $.009624 to buy 1 yen.

Accepted Answer

To convert yen to dollars, you need to divide the yen by the exchange rate (e.g. 113.28). Therefore, to convert 1 yen to dollars, you need to divide 1 by 113.28, which gives you approximately $0.00884. This means it takes approximately $0.00884 to buy 1 yen, not $.009624.

Question 20

A commercial bank profits from foreign-exchange trading when its bid rate exceeds its offer rate.

Accepted Answer

A commercial bank profits from foreign-exchange trading when its offer rate (the price at which it sells a currency) exceeds its bid rate (the price at which it buys a currency).

Quiz 11: Foreign Exchange