Question 1

It is characteristic of foreign exchange dealers to:

Accepted Answer

Foreign exchange dealers act as market makers, willing to buy and sell the currencies in which they specialize. They typically do not hold an inventory of currency for resale and may operate in both the retail and wholesale market for foreign exchange.

Question 2

Which of the following is NOT a motivation identified by the authors as a function of the foreign exchange market?

Accepted Answer

All of the options (A, B, and C) were identified as motivations for the functioning of the foreign exchange market, therefore D cannot be the correct answer as it contradicts this statement.

Question 3

Dealers in foreign exchange departments at large international banks act as market makers and maintain inventories of the securities in which they specialize.

Accepted Answer

This statement is true. Dealers in foreign exchange departments at large international banks act as market makers and maintain inventories of the securities in which they specialize.

Question 4

A/An ________ is an agreement between a buyer and seller that a fixed amount of one currency will be delivered at a specified rate for some other currency.

Accepted Answer

A foreign exchange transaction involves the exchange of one currency for another at an agreed-upon rate. It is a common way for businesses and individuals to manage their currency exposure when dealing with international transactions. The other options, Eurodollar transaction, import/export exchange, and interbank market transaction, are not specifically related to currency exchange agreements between buyers and sellers.

Question 5

Currency trading lacks profitability for large commercial and investment banks but is maintained as a service for corporate and institutional customers.

Accepted Answer

Currency trading can be highly profitable for large commercial and investment banks. They trade large volumes of currencies and make profits from the bid-ask spread, as well as from taking positions based on their own analysis and research. Currency trading is also a key part of their market-making activities, which generate revenue by providing liquidity to the market. While corporate and institutional customers are important clients for currency trading, the banks themselves derive significant profits from this business.

Question 6

________ seek to profit from trading in the market itself rather than having the foreign exchange transaction being incidental to the execution of a commercial or investment transaction.

Accepted Answer

Speculators and arbitrageurs are the market participants who seek to profit from trading in the foreign exchange market through speculation and arbitrage activities. They do not have any underlying commercial or investment transaction, and their main objective is to earn profit from fluctuations in currency exchange rates. Foreign exchange brokers, central banks, and treasuries are not primarily engaged in speculative activities.

Question 7

The authors identify two tiers of foreign exchange markets:

Accepted Answer

The authors identify interbank and client markets as the two tiers of foreign exchange markets. The interbank market refers to transactions between major banks and financial institutions, while the client market refers to transactions between these entities and their customers, including corporations, governments, and retail traders. This categorization is based on the type of market participants involved in each tier.

Question 8

While trading in foreign exchange takes place worldwide, the major currency trading centers are located in:

Accepted Answer

The major currency trading centers are London, New York, and Tokyo. These cities are the hubs for trading in the forex market, with trading activity happening round the clock due to the different time zones. Other cities may have some trading activity, but they are not considered major trading centers in the forex market.

Question 9

________ are agents who facilitate trading between dealers without themselves becoming principals in the transaction.

Accepted Answer

Foreign exchange brokers serve as intermediaries between dealers, helping to facilitate transactions without taking a direct position in the trade. This allows for greater ease of trading and liquidity in the foreign exchange market. Central banks and arbitrageurs may also play a role in the market, but they do not typically act as brokers. Foreign exchange dealers, on the other hand, are the primary participants in the market, buying and selling currencies for their own account or on behalf of clients.

Question 10

Banks, and a few nonbank foreign exchange dealers, operate ONLY in the interbank markets.

Accepted Answer

Banks and nonbank foreign exchange dealers operate in both the interbank market and the retail market, serving a variety of clients including corporations, governments, and individuals.

Question 11

Foreign exchange markets are a relatively recent phenomenon, beginning with the agreement at Bretton Woods.

Accepted Answer

Foreign exchange markets have existed for centuries, with evidence of currency trading found in ancient civilizations such as the Romans and Greeks. However, the modern structure of foreign exchange markets and the use of exchange rates as a tool for monetary policy began with the agreement at Bretton Woods in 1944.

Question 12

Which of the following may be participants in the foreign exchange markets?

Accepted Answer

All of the mentioned entities can participate in the foreign exchange markets. Bank and nonbank foreign exchange dealers facilitate the buying and selling of currencies between parties. Central banks and treasuries may participate in the forex market to manage their reserves or intervene in the market to influence exchange rates. Speculators and arbitrageurs aim to make a profit by taking advantage of price differences between currencies.

Question 13

The foreign exchange market provides the physical and institutional structure through which three typical functions are accomplish. List and explain three functions of the foreign exchange market.

Accepted Answer

The answer of The foreign exchange market provides the physical...

Question 14

Because the market for foreign exchange is worldwide, the volume of foreign exchange currency transactions is level throughout the 24-hour day.

Accepted Answer

The volume of foreign exchange currency transactions varies throughout the 24-hour day, peaking during the overlap of major financial markets' operating hours, such as when the London and New York markets are both open.

Question 15

Business firms in countries with exchange controls, for example, China (mainland), often must surrender foreign exchange earned from exports to the central bank at the daily fixing price.

Accepted Answer

Business firms in countries with exchange controls, such as China (mainland), have restrictions on the convertibility of their currency and must surrender foreign exchange earned from exports to the central bank at the daily fixing price. This is a measure taken by the government to manage the balance of payments and maintain the value of the national currency.

Question 16

Which of the following is NOT true regarding the market for foreign exchange?

Accepted Answer

The answer of Which of the following is NOT true...

Question 17

The primary motive of foreign exchange activities by most central banks is profit.

Accepted Answer

The primary motive of foreign exchange activities by most central banks is to maintain a stable currency and economy, not to generate profit. While central banks may make profits from foreign exchange transactions, it is not their primary objective.

Question 18

The ________ is the mechanism by which participants transfer purchasing power between countries, obtain or provide credit for international trade transactions, and minimize exposure to the risks of exchange rate changes.

Accepted Answer

The foreign exchange market is specifically designed for participants to transfer purchasing power between countries, obtain or provide credit for international trade transactions, and minimize exposure to the risks of exchange rate changes. The futures market deals with contracts for the future delivery of goods, while the federal open market is a mechanism used by the Federal Reserve to manage the money supply and interest rates in the U.S. economy. LIBOR (London Interbank Offered Rate) is an interest rate at which banks can borrow funds from other banks in the London interbank market.

Question 19

In the foreign exchange market, ________ seek all of their profit from exchange rate changes while ________ seek to profit from simultaneous exchange rate differences in different markets.

Accepted Answer

Speculators seek to profit solely from exchange rate changes, while arbitrageurs seek to profit from simultaneous exchange rate differences in different markets. Wholesalers and retailers are not relevant terms in the foreign exchange market, and while central banks and treasuries may participate in the market, their goals are typically not focused solely on making a profit from exchange rate changes. Dealers and brokers are also involved in the market but do not have the same profit-seeking motivations as speculators and arbitrageurs.

Question 20

Foreign exchange ________ earn a profit by a bid-ask spread on currencies they purchase and sell. Foreign exchange ________, on the other hand, earn a profit by bringing together buyers and sellers of foreign currencies and earning a commission on each sale and purchase.

Accepted Answer

Dealers are the ones who buy and sell currencies, earning a profit through the bid-ask spread, while brokers earn a commission by bringing together buyers and sellers of foreign currencies. Therefore, option B, which suggests that dealers earn through bid-ask spread and brokers earn through commission, is the correct choice. The other options are not relevant to the given scenario.

Quiz 5: The Foreign Exchange Market