Question 1

Foreign-exchange risk ________.

Accepted Answer

Foreign-exchange risk refers to the risk that the value of a currency may change adversely, leading to a loss for investors or businesses involved in international transactions. It is a significant consideration for participants in the international financial markets and can affect an investor's return after adjusting for changes in the exchange rate. It can also impact the effective value of cash payments owed to investors in foreign currency denominated issues.

Question 2

In regards to the perspective of a U.S. investor, which of the below statements is FALSE?

Accepted Answer

The statement "...expose the investor to uncertainty as to the actual level of the cash flow measured in that foreign currency" is false because the level of cash flows measured in a foreign currency should be certain, unless something unexpected or outside the investor's control happens. This is because the cash flows are denominated in a fixed amount of the foreign currency. However, the amount of cash flows measured in U.S. dollars is subject to uncertainty due to changes in the exchange rate between the foreign currency and the U.S. dollar. The other statements (A, B, and C) are all true.

Question 3

The exchange rate between the U.S. dollar and the euro can be quoted as ________.

Accepted Answer

The exchange rate between the U.S. dollar and the euro can be quoted as the amount of U.S. dollars needed to acquire one euro, and this is the dollar price of one euro.

Question 4

The countries of the European Union electing to be members of the Economic and Monetary Union (EMU) are subject to a ________ conversion rate against their national currencies and relative to the euro, but the value of the euro against all other currencies ________ according to market conditions.

Accepted Answer

EMU countries have a fixed conversion rate against their national currencies and relative to the euro, but the value of the euro against all other currencies can fluctuate according to market conditions.

Question 5

A ________ is the number of units of a local currency exchangeable for one unit of a foreign currency, while an ________ is the number of units of a foreign currency that can be exchanged for one unit of a local currency.

Accepted Answer

A direct quote is the price of a unit of foreign currency in the local currency, while an indirect quote is the price of a unit of local currency in the foreign currency. Therefore, C is the correct choice as it defines both.

Question 6

Given a direct quote, we can obtain an indirect quote (which is simply the reciprocal of the direct quote), and vice versa. For example, on March 9, 2009, a U.S. investor is given a direct quote of 1.2674 U.S. dollars for one euro. That is, the price of a euro is $1.2674. What would be the indirect quote for the U.S. investor; that is, one U.S. dollar can be exchanged for how many euros (which is the euro price of a U.S. dollar)?

Accepted Answer

The answer of Given a direct quote, we can obtain...

Question 7

Which of the below statements is TRUE?

Accepted Answer

An indirect quote for a non-U.S. participant is when the exchange rate is expressed as the amount of U.S. dollars per unit of their own currency.

Question 8

The ________ is the market for settlement of a foreign-exchange transaction within two business days.

Accepted Answer

The spot exchange rate market is the market where foreign-exchange transactions are settled within two business days. The forward exchange rate market is for settlement at a future date, while the futures exchange rate market involves buying or selling currency at a future date based on a standardized contract. The current exchange rate market is not a commonly used term in foreign exchange trading.

Question 9

The birth of the euro on January 4, 1999, was smooth and uneventful in terms of both market volatility and operations. Several notable outcomes resulted from this event including: ________.

Accepted Answer

The birth of the euro also gave birth to a large public and corporate capital market denominated in the euro. This market has grown significantly since the inception of the euro, leading to increased efficiency and ease of cross-border transactions. Option A and B are not true as the birth of the euro was smooth and uneventful. Option D is incomplete and does not provide a clear outcome/result directly connected to the birth of the euro.

Question 10

The fundamental fact of international finance is that different countries issue different currencies, and the relative values of those currencies may change ________.

Accepted Answer

The relative values of currencies can change quickly, substantially, and without warning due to a variety of factors including economic developments and political events, even those that may not initially seem to make economic sense.

Question 11

In general, an exchange rate is defined ________.

Accepted Answer

An exchange rate is the value of one currency expressed in terms of another currency, or in other words, the amount of one currency that can be exchanged for a unit of another currency. This definition applies to all currencies and is not limited to the US dollar or the Japanese yen.

Question 12

A key factor affecting the expectation of changes in a country's exchange rate with another currency is the relative ________ of the two countries.

Accepted Answer

The expected inflation rate is a key factor affecting the expectation of changes in a country's exchange rate with another currency. If a country is expected to experience higher inflation than its trading partner, its currency will likely weaken in relation to the partner's currency. This is because inflation erodes the purchasing power of a currency and makes imports more expensive, resulting in a decrease in demand for that currency. Conversely, if a country has lower expected inflation, its currency is likely to appreciate.

Question 13

Quoting in terms of U.S. dollars per unit of foreign currency is called ________ terms, while quoting in terms of the number of units of the foreign currency per U.S. dollar is called ________ terms.

Accepted Answer

The terms are commonly referred to as American terms (quoting in USD per unit of foreign currency) and European terms (quoting in units of foreign currency per USD). This is because the practice originated in the US, hence the reference to "American" terms.

Question 14

The three currency pairs (and their abbreviations) that are most commonly traded are ________.

Accepted Answer

The most commonly traded currency pairs are the major currencies, which include the U.S. dollar, euro, Japanese yen, British pound, Swiss franc, Canadian dollar, and Australian dollar. Among these, the most traded pairs are the U.S. dollar against Japanese yen (USD/JPY), euro against U.S. dollar (EUR/USD), and British pound against U.S. dollar (GBP/USD). Therefore, the correct answer is B.

Question 15

In regards to the perspective of a U.S. investor, which of the below statements is FALSE?

Accepted Answer

A) is false because it describes the perspective of a French investor, not a U.S. investor. The question asks for a statement that is false in regards to the perspective of a U.S. investor.

Question 16

To qualify as a participating country in the Economic and Monetary Union (EMU) requires that a country satisfy certain economic standards. These standards include: ________.

Accepted Answer

All of these standards are required to qualify as a participating country in the EMU. A country must keep its annual fiscal deficit to no more than 3% of GDP and its total outstanding government debt to no more than 60% of GDP. Additionally, approval by popular referendum is required for countries seeking membership in the EMU.

Question 17

The most traded currency pair is ________, which has captured about 30% of the global turnover. The ________ and ________ represent about 20% and 11%, respectively.

Accepted Answer

According to the given information, the currency pair with the highest global turnover is EUR/USD, which is followed by USD/JPY and GBP/USD. Therefore, the best choice is option C, which includes all three currency pairs in the correct order.

Question 18

Since the early 1970s, exchange rates among major currencies have been free to float, with ________ determining the relative value of a currency. Thus, each day a currency's price relative to that of another freely floating currency may stay the ________.

Accepted Answer

Since the early 1970s, exchange rates among major currencies have been free to float, with market forces determining the relative value of a currency. Thus, each day a currency's price relative to that of another freely floating currency may stay the same, increase, or decrease depending on the market forces. Therefore, choice D is the best answer. Choice A is incorrect because risk/beta forces do not determine the value of a currency. Choice B is incorrect because the currency's price may decline due to market forces. Choice C is incorrect because risk/beta forces do not determine the value of a currency, and the currency's price may decline due to market forces.

Question 19

If the number of units of a foreign currency that can be obtained for one dollar (the price of a dollar in that currency or indirect quotation) rises, the dollar is said to ________ relative to the currency, and the currency is said to ________. Thus, appreciation means a decline in the ________ quotation.

Accepted Answer

When the number of units of a foreign currency that can be obtained for one dollar rises, it means the dollar is appreciating (becoming more valuable) relative to that foreign currency, which in turn is depreciating (becoming less valuable). Appreciation of a currency means a decline in the direct quotation of that currency, not the indirect quotation.

Question 20

Which of the below statements is FALSE?

Accepted Answer

Currency quotations are generally given relative to the US dollar, not the euro. Therefore, statement C is false.

Quiz 32: The Market for Foreign Exchange and Risk Control Instruments

Foreign-exchange risk ________.

In regards to the perspective of a U.S. investor, which of the below statements is FALSE?

The exchange rate between the U.S. dollar and the euro can be quoted as ________.

The countries of the European Union electing to be members of the Economic and Monetary Union (EMU) are subject to a conversion rate against their national currencies and relative to the euro, but the value of the euro against all other currencies according to market conditions.

A is the number of units of a local currency exchangeable for one unit of a foreign currency, while an is the number of units of a foreign currency that can be exchanged for one unit of a local currency.

Which of the below statements is TRUE?

The ________ is the market for settlement of a foreign-exchange transaction within two business days.

The birth of the euro on January 4, 1999, was smooth and uneventful in terms of both market volatility and operations. Several notable outcomes resulted from this event including: ________.

The fundamental fact of international finance is that different countries issue different currencies, and the relative values of those currencies may change ________.

In general, an exchange rate is defined ________.

A key factor affecting the expectation of changes in a country's exchange rate with another currency is the relative ________ of the two countries.

Quoting in terms of U.S. dollars per unit of foreign currency is called terms, while quoting in terms of the number of units of the foreign currency per U.S. dollar is called terms.

The three currency pairs (and their abbreviations) that are most commonly traded are ________.

In regards to the perspective of a U.S. investor, which of the below statements is FALSE?

To qualify as a participating country in the Economic and Monetary Union (EMU) requires that a country satisfy certain economic standards. These standards include: ________.

The most traded currency pair is , which has captured about 30% of the global turnover. The and represent about 20% and 11%, respectively.

Since the early 1970s, exchange rates among major currencies have been free to float, with determining the relative value of a currency. Thus, each day a currency's price relative to that of another freely floating currency may stay the .

If the number of units of a foreign currency that can be obtained for one dollar (the price of a dollar in that currency or indirect quotation) rises, the dollar is said to relative to the currency, and the currency is said to . Thus, appreciation means a decline in the quotation.

Which of the below statements is FALSE?