Question 1

Which of the following is not a method of forecasting exchange rate volatility?
A) using the volatility of historical exchange rate movements
B) using a time series of volatility patterns in previous periods
C) using the volatility of future exchange rate movements
D) using the exchange rate's implied standard deviation

Accepted Answer

It is not possible to use the volatility of future exchange rate movements as a method of forecasting exchange rate volatility as future movements cannot be accurately predicted. The other options - using the volatility of historical exchange rate movements, using a time series of volatility patterns in previous periods, and using the exchange rate's implied standard deviation - are commonly used methods of forecasting exchange rate volatility.

Question 2

Which of the following statements is incorrect?
A) Central banks often consider adjusting a currency's value to influence economic conditions.
B) If the U.S. central bank wishes to stimulate the economy, it could weaken the dollar.
C) A weaker dollar could cause U.S. inflation by reducing foreign competition.
D) Direct intervention occurs when the central bank influences the factors that determine the dollar's value.

Accepted Answer

D

Question 3

____ forecasting involves the use of historical exchange rate data to predict future values.
A) Technical
B) Fundamental
C) Market-based
D) Mixed

Accepted Answer

Technical forecasting uses past market data, such as historical exchange rate patterns, to predict future values. Fundamental forecasting, on the other hand, analyzes economic and financial data to predict changes in exchange rates. Market-based forecasting uses information from financial markets, such as interest rates and stock prices, to predict exchange rate movements. Mixed forecasting uses a combination of technical, fundamental, and market-based analysis to make predictions.

Question 4

When a government influences factors, such as inflation, interest rates, or income, in order to affect currency's value, this is an example of
A) direct intervention.
B) indirect intervention.
C) a freely floating system.
D) a pegged system.

Accepted Answer

Indirect intervention occurs when a government uses economic policies, like adjusting inflation rates, interest rates, or income levels, to influence the value of its currency indirectly, rather than directly buying or selling the currency in the foreign exchange market.

Question 5

If a commercial bank expects the euro to appreciate against the dollar, it may take a ____ position in euros and a ____ position in dollars.
A) short; short
B) long; short
C) short; long
D) long; long

Accepted Answer

If a commercial bank expects the euro to appreciate against the dollar, it may take a long position in euros (buy euros) and a short position in dollars (sell dollars). This way, the bank can profit from the expected appreciation of the euro against the dollar. Therefore, choice B is the correct answer.

Question 6

The Bretton Woods era was the era
A) of free-floating exchange rates.
B) of floating rates without boundaries, but subject to government intervention.
C) in which governments maintained exchange rates within 1 percent of a specified rate.
D) in which exchange rates were maintained within 10 percent of a specified rate.

Accepted Answer

The Bretton Woods era was characterized by the fixed exchange rate system, in which governments maintained their currency within 1 percent of a specified rate. This system was in place from 1944 to 1971, when the US abandoned the gold standard and allowed the dollar to float freely against other currencies. Therefore, choice C is the best answer.

Question 7

A system whereby exchange rates are market determined without boundaries but subject to government intervention is called
A) a dirty float.
B) a free float.
C) the gold standard.
D) the Bretton Woods era.

Accepted Answer

A dirty float refers to a system where exchange rates are determined by the market forces of supply and demand but can be subject to government intervention in the form of buying or selling currencies to influence their value. This intervention can be considered "dirty" as it is not a completely free float but still allows for some government influence.

Question 8

If the forward rate of a foreign currency ____ the existing spot rate, the forward rate will exhibit a ____.
A) exceeds; discount
B) is below; premium
C) is below; discount
D) A and B

Accepted Answer

If the forward rate of a foreign currency is below the existing spot rate, it will exhibit a discount. Therefore, option C is the correct choice. Option A is incorrect as an exceeds forward rate indicates a premium. Option B is also incorrect as the forward rate being below the spot rate indicates a discount. Therefore, A and B are wrong.

Question 9

Currency futures contracts differ from forward contracts in that they
A) are an obligation.
B) are not an obligation.
C) are standardized.
D) can specify any amount and maturity date.

Accepted Answer

Currency futures contracts are standardized contracts traded on exchanges, which means that the terms and conditions of the contract, such as the amount and maturity date, are predetermined and uniform for all parties involved. In contrast, forward contracts are customized agreements between two parties that can specify any amount, maturity date, and other terms. Additionally, currency futures contracts are obligations to buy or sell the underlying currency at the specified expiration date, while forward contracts are generally obligations unless both parties agree to unwind the contract.

Question 10

If the demand for British pounds ____, the pound will ____, other things being equal.
A) increases; appreciate
B) decreases; appreciate
C) increases; depreciate
D) B and C

Accepted Answer

If the demand for British pounds increases, it means there is a higher demand for goods and services denominated in pounds, which leads to an increased demand for pounds in the foreign exchange market. This would cause the pound to appreciate in value relative to other currencies, assuming all else remains constant.

Question 11

At any given point in time, the price at which banks will buy a currency is ____ the price at which they sell it.
A) higher than
B) lower than
C) the same as
D) none of the above

Accepted Answer

Banks make a profit on the difference between the buying and selling price of a currency, which is called the spread. Therefore, the selling price of a currency is higher than the buying price.

Question 12

____ in the supply of euros for sale will cause the euro to ____.
A) increase; appreciate
B) increase; depreciate
C) decrease; depreciate
D) none of the above

Accepted Answer

An increase in the supply of euros for sale will cause the euro to depreciate because more euros are available, reducing its value relative to other currencies.

Question 13

Which of the following are most likely to provide currency forward contracts to their customers?
A) commercial banks
B) international mutual funds
C) brokerage firms
D) insurance companies

Accepted Answer

Commercial banks are the most likely to provide currency forward contracts to their customers as they have the resources and expertise to manage foreign exchange risk. International mutual funds may invest in foreign currencies, but they typically do not offer currency forward contracts to their investors. Brokerage firms and insurance companies may offer foreign exchange services, but currency forward contracts are not their primary focus.

Question 14

Which of the following statements is incorrect?
A) Forward contracts are contracts typically negotiated with a commercial bank that allow the purchase or sale of a specified amount of a particular foreign currency at a specified exchange rate on a specified future date.
B) The forward market is located in New York City.
C) Many of the commercial banks that offer foreign exchange on a spot basis also offer forward transactions for the widely traded currencies.
D) Forward contracts can hedge a corporation's risk that a currency's value may appreciate over time.

Accepted Answer

The forward market is not located in a specific physical location like a stock exchange. It is an over-the-counter market, meaning that transactions take place directly between the buyer and seller and are not traded on a centralized exchange.

Question 15

Generally, a ____ home currency can ____ domestic economic growth.
A) weak; dampen
B) strong; stimulate
C) strong; dampen
D) A and B

Accepted Answer

A strong home currency can make exports more expensive and imports cheaper, potentially reducing domestic economic growth by decreasing demand for domestically produced goods.

Question 16

S. interest rates suddenly become much higher than European interest rates (and if this does not cause concern about higher inflation in the United States), the U.S. demand for euros would____, and the supply of euros to be exchanged for dollars would ____, other factors held constant.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Accepted Answer

If U.S. interest rates become much higher than European interest rates, U.S. investors will invest more in U.S. assets instead of European assets. This means that demand for euros will decrease and the supply of euros to be exchanged for dollars will increase, leading to a decrease in the value of the euro relative to the dollar.

Question 17

If the U.S. government imposed trade restrictions on U.S. imports, this would ____ the U.S. demand for foreign currencies and would place ____ pressure on the values of foreign currencies (withrespect to the dollar).
A) increase; upward
B) increase, downward
C) limit; upward
D) limit; downward

Accepted Answer

If the U.S. government imposes trade restrictions on U.S. imports, it limits the U.S. demand for foreign currencies as fewer imports would be purchased from foreign countries. This would place downward pressure on the values of foreign currencies (with respect to the dollar), as the demand for them decreases.

Question 18

Purchasing power parity suggests that the exchange rate will on average change by a percentage that reflects the ____ differential between two countries.
A) income
B) interest rate
C) inflation
D) tax

Accepted Answer

Purchasing power parity suggests that exchange rate changes are based on the inflation differential between two countries. This is because purchasing power parity assumes that the same basket of goods should have the same price in different countries, and thus any difference in inflation rates will lead to a change in exchange rates.

Question 19

If the spot rate of the British pound is $2, and the 180-day forward rate is $2.05, what is the annualized premium or discount?
A) 2.5 percent discount
B) 2.5 percent premium
C) 10 percent premium
D) 5 percent discount
E) 5 percent premium

Accepted Answer

The annualized premium for the forward rate is calculated as ((Forward Rate - Spot Rate) / Spot Rate) * (360 / Number of days) = ((2.05 - 2) / 2) * (360 / 180) = 0.025 * 2 = 5 percent premium.

Question 20

A speculator who expects the euro to appreciate might:
A) Purchase euros forward; when they are received, sell them in the spot market.
B) Sell euros forward, and then purchase them in the spot market just before fulfilling the forward obligation.
C) Sell futures contracts on euros, and then purchase euros in the spot market just before fulfilling the futures obligation.
D) all of the above

Accepted Answer

If a speculator expects the euro to appreciate, they would want to purchase euros forward at a lower price and sell them in the spot market when the euro has appreciated in value. This would allow them to profit from the difference in price. Selling euros forward (as in option B) would only make sense if the speculator expects the euro to depreciate, while selling futures contracts (as in option C) does not take into account the timing of the purchase and sale, which is crucial in currency speculation.

Quiz 16: Foreign Exchange Derivative Markets

Which of the following is not a method of forecasting exchange rate volatility?

Which of the following statements is incorrect?

____ forecasting involves the use of historical exchange rate data to predict future values.

When a government influences factors, such as inflation, interest rates, or income, in order to affect currency's value, this is an example of

If a commercial bank expects the euro to appreciate against the dollar, it may take a position in euros and a position in dollars.

The Bretton Woods era was the era

A system whereby exchange rates are market determined without boundaries but subject to government intervention is called

If the forward rate of a foreign currency the existing spot rate, the forward rate will exhibit a .

Currency futures contracts differ from forward contracts in that they

If the demand for British pounds , the pound will , other things being equal.

At any given point in time, the price at which banks will buy a currency is ____ the price at which they sell it.

in the supply of euros for sale will cause the euro to .

Which of the following are most likely to provide currency forward contracts to their customers?

Which of the following statements is incorrect?

Generally, a home currency can domestic economic growth.

S. interest rates suddenly become much higher than European interest rates (and if this does not cause concern about higher inflation in the United States) , the U.S. demand for euros would, and the supply of euros to be exchanged for dollars would , other factors held constant.

If the U.S. government imposed trade restrictions on U.S. imports, this would the U.S. demand for foreign currencies and would place pressure on the values of foreign currencies (withrespect to the dollar) .

Purchasing power parity suggests that the exchange rate will on average change by a percentage that reflects the ____ differential between two countries.

If the spot rate of the British pound is $2, and the 180-day forward rate is $2.05, what is the annualized premium or discount?

A speculator who expects the euro to appreciate might:

Quiz 16: Foreign Exchange Derivative Markets

Which of the following is not a method of forecasting exchange rate volatility?

Which of the following statements is incorrect?

____ forecasting involves the use of historical exchange rate data to predict future values.

When a government influences factors, such as inflation, interest rates, or income, in order to affect currency's value, this is an example of

If a commercial bank expects the euro to appreciate against the dollar, it may take a ____ position in euros and a ____ position in dollars.

The Bretton Woods era was the era

A system whereby exchange rates are market determined without boundaries but subject to government intervention is called

If the forward rate of a foreign currency ____ the existing spot rate, the forward rate will exhibit a ____.

Currency futures contracts differ from forward contracts in that they

If the demand for British pounds ____, the pound will ____, other things being equal.

At any given point in time, the price at which banks will buy a currency is ____ the price at which they sell it.

____ in the supply of euros for sale will cause the euro to ____.

Which of the following are most likely to provide currency forward contracts to their customers?

Which of the following statements is incorrect?

Generally, a ____ home currency can ____ domestic economic growth.

S. interest rates suddenly become much higher than European interest rates (and if this does not cause concern about higher inflation in the United States) , the U.S. demand for euros would____, and the supply of euros to be exchanged for dollars would ____, other factors held constant.

If the U.S. government imposed trade restrictions on U.S. imports, this would ____ the U.S. demand for foreign currencies and would place ____ pressure on the values of foreign currencies (withrespect to the dollar) .

Purchasing power parity suggests that the exchange rate will on average change by a percentage that reflects the ____ differential between two countries.

If the spot rate of the British pound is $2, and the 180-day forward rate is $2.05, what is the annualized premium or discount?

A speculator who expects the euro to appreciate might:

If a commercial bank expects the euro to appreciate against the dollar, it may take a position in euros and a position in dollars.

If the forward rate of a foreign currency the existing spot rate, the forward rate will exhibit a .

If the demand for British pounds , the pound will , other things being equal.

in the supply of euros for sale will cause the euro to .

Generally, a home currency can domestic economic growth.

S. interest rates suddenly become much higher than European interest rates (and if this does not cause concern about higher inflation in the United States) , the U.S. demand for euros would, and the supply of euros to be exchanged for dollars would , other factors held constant.

If the U.S. government imposed trade restrictions on U.S. imports, this would the U.S. demand for foreign currencies and would place pressure on the values of foreign currencies (withrespect to the dollar) .