Question 1

Forward contracts in FX are typically written for periods exceeding 6 months.

Accepted Answer

False

Question 2

To a Canadian trader of foreign currencies, a direct quote indicates Canadian dollars received for each one unit of the foreign currency.

Accepted Answer

A direct quote for a Canadian trader shows the amount of Canadian dollars needed to purchase one unit of a foreign currency.

Question 3

FX trading income is derived only from profit (or loss) on the FI's speculative currency positions.

Accepted Answer

FX trading income for financial institutions (FIs) can also come from commissions, spreads, and fees charged on currency transactions, in addition to profits or losses from speculative positions.

Question 4

A positive net exposure position in FX implies the FI is net short in a currency.

Accepted Answer

A positive net exposure position in FX implies the FI is net long in a currency, not net short.

Question 5

A positive net exposure position in FX implies an FI has purchased more foreign currency than it has sold.

Accepted Answer

A positive net exposure position in FX means that an FI holds more foreign currency than its domestic currency. This can occur through purchasing more foreign currency than it has sold or through other means such as receiving foreign currency payments for exports or investments.

Question 6

As the Canadian dollar appreciates against the Japanese yen, Japanese goods sold in Canada become less expensive to the Canadian consumer.

Accepted Answer

When the Canadian dollar appreciates against the Japanese yen, it means that one Canadian dollar can purchase more Japanese yen. This makes Japanese goods sold in Canada less expensive for the Canadian consumer.

Question 7

The spot foreign exchange market is where forward and futures contracts and swap agreements are transacted.

Accepted Answer

The spot foreign exchange market is where immediate exchange of currencies takes place, without any agreements for future exchange. Forward and futures contracts and swap agreements are transacted in the forward and futures markets.

Question 8

The underlying cause of foreign exchange volatility reflects fluctuations in the demand and supply of a country's currency.

Accepted Answer

Foreign exchange rates are mainly determined by market forces of supply and demand. If the demand for a currency exceeds its supply, its value will appreciate, and if the supply of a currency exceeds its demand, its value will depreciate. Various economic, political and financial factors affect the demand and supply of a currency, which cause fluctuations in foreign exchange rates.

Question 9

Average daily turnover in the FX market has recently been over $4 trillion.

Accepted Answer

According to the Bank for International Settlements, the average daily turnover in the global foreign exchange market was $6.6 trillion in 2019, surpassing $4 trillion for the first time.

Question 10

The FX markets of the world have become one of the largest of all financial markets.

Accepted Answer

According to various sources, including the Bank for International Settlements, the FX markets are one of the largest financial markets in the world.

Question 11

Most profits or losses on foreign trading come from taking an open position in currencies.

Accepted Answer

When traders take an open position in currencies, they are essentially betting on the relative strength or weakness of one currency against another. Changes in currency exchange rates can have a significant impact on the profitability of the trade, leading to either profits or losses. Therefore, most profits or losses on foreign trading come from taking an open position in currencies.

Question 12

Most nonbank FIs have foreign exchange risk exposure that is smaller than the exposure of the large Canadian banks.

Accepted Answer

Nonbank financial institutions typically have less foreign exchange exposure compared to large banks, which engage in more international transactions and hold more foreign currency assets and liabilities.

Question 13

The foreign exchange market in Tokyo is the largest FX trading market.

Accepted Answer

The largest FX trading market is in London, not Tokyo. London has historically been at the center of the foreign exchange market, facilitating the majority of global FX transactions.

Question 14

An FI can eliminate its currency risk exposure by matching its foreign currency assets to its foreign currency liabilities.

Accepted Answer

The answer of An FI can eliminate its currency risk...

Question 15

As the Canadian dollar appreciates against the Japanese yen, Canadian goods become less expensive to Japanese consumers.

Accepted Answer

As the Canadian dollar appreciates against the Japanese yen, Canadian goods become more expensive to Japanese consumers because they need more yen to buy the same amount of Canadian dollars.

Question 16

FX trading risk exposure continues into the night until all FI operations are closed.

Accepted Answer

FX trading risk exposure can continue 24 hours a day due to the global nature of the foreign exchange market, which operates across different time zones and can be accessed outside of traditional FI (Financial Institution) operating hours.

Question 17

The greater the volatility of foreign exchange rates given any net exposure position, the greater the fluctuations in value of the foreign exchange portfolio.

Accepted Answer

The statement is true. When foreign exchange rates are volatile, there is a higher likelihood of significant fluctuations in the value of a foreign exchange portfolio. This can lead to greater risk for investors and traders with foreign exchange exposure.

Question 18

The exposure to foreign exchange risk by Canadian FIs has decreased with the growth of the various derivative markets.

Accepted Answer

The answer of The exposure to foreign exchange risk by...

Question 19

The market in which foreign currency is traded for future delivery is the forward foreign exchange market.

Accepted Answer

The forward foreign exchange market deals with the trading of foreign currency for future delivery at a predetermined exchange rate.

Question 20

Canadian pension funds invest approximately one percent (1%) of their portfolios in foreign securities.

Accepted Answer

Canadian pension funds actually invest significantly more than one percent of their portfolios in foreign securities. According to a report by the Canadian Pension Plan Investment Board, as of March 31, 2021, their total investments in foreign assets amounted to CAD 333.0 billion, which represented approximately 59.2% of their total assets under management.

Quiz 13: Foreign Exchange Risk