Question 1

Although the foreign exchange market offers some insurance against foreign exchange risk,it cannot provide complete insurance.

Accepted Answer

Although the foreign exchange market offers some insurance against foreign exchange risk,it cannot provide complete insurance.It is not unusual for international businesses to suffer losses because of unpredicted changes in exchange rates.

Question 2

Assume that the currency of Country A falls sharply in value against the currency of Country B. This exchange rate movement will boost Country B's exports to Country A.

Accepted Answer

When Country A's currency falls in value against Country B's currency, goods from Country B become more expensive for consumers in Country A, potentially reducing Country B's exports to Country A.

Question 3

Assume that current dollar/yen spot exchange rate is $1 = $\times$110.If the 30-day forward exchange rate for converting dollars into yen is $1 = $\times$105,we say the dollar is selling at a discount on the 30-day forward market.

Accepted Answer

The dollar is selling at a discount because it is worth less than on the spot market.

Question 4

A common kind of swap is spot against forward.

Accepted Answer

Swaps are transacted between international businesses and their banks,between banks,and between governments when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange risk.A common kind of swap is spot against forward.

Question 5

If the euro gains against the dollar,we say that the euro is strengthening,from a dollar perspective.However,the reverse observation that the dollar is weakening against the euro need not be true from a euro perspective.

Accepted Answer

The euro gains against the dollar,so the euro is strengthening,or becoming dearer,from a dollar perspective.Meanwhile,the same observation indicates its mirror image that the dollar is weakening,becoming cheaper against the euro,from a euro perspective.

Question 6

The British pound used to be second in importance to the dollar as a vehicle currency,but its importance has diminished in recent years.This has resulted in London losing its leading position in the global foreign exchange market.

Accepted Answer

The British pound used to be second in importance to the dollar as a vehicle currency,but its importance has diminished in recent years.Despite this,London has retained its leading position in the global foreign exchange market.

Question 7

Even though the foreign exchange market is critical to an economy as a whole,it does not have a direct impact on the sales,profits,and strategy of a multinational enterprise.

Accepted Answer

What happens in the foreign exchange market can have a fundamental impact on the sales,profits,and strategy of an enterprise.

Question 8

Assume that the euro/dollar exchange rate is €1 = $1.20.If it costs $36 to buy a European product,the stated price of the product would be €30.

Accepted Answer

Since the euro/dollar exchange rate is €1 = $1.20,30 euros would be equal to 36 dollars (30 x 1.2).

Question 9

When a German tourist in Seoul goes to a bank to convert her euros into Korean wons,the exchange rate used is the spot exchange rate for that day.

Accepted Answer

The spot exchange rate is the rate at which a foreign exchange dealer converts one currency into another currency on a particular day.

Question 10

When companies wish to convert currencies,they typically enter the foreign exchange market directly.

Accepted Answer

When companies wish to convert currencies,they typically go through their own banks rather than entering the market directly.

Question 11

Foreign exchange risk refers to the risk of not getting paid for a product that is exported from one country to another.

Accepted Answer

One function of the foreign exchange market is to provide some insurance against the risks that arise from such volatile changes in exchange rates,commonly referred to as foreign exchange risk.

Question 12

Carry trade has a speculative element attached to it.

Accepted Answer

The speculative element of the carry trade is that its success is based upon a belief that there will be no adverse movement in exchange rates (or interest rates for that matter)that will make the trade unprofitable.

Question 13

Companies indulge in currency speculation in order to get minimal but assured returns from idle cash.

Accepted Answer

Speculation by definition is a very risky business.

Question 14

By 2007,forward instruments accounted for 85 percent of all foreign exchange transactions,while spot exchanges accounted for 15 percent.

Accepted Answer

By April 2007,the latest date for which information is available,forward instruments accounted for some 69 percent of all foreign exchange transactions,while spot exchanges accounted for 31 percent.

Question 15

The integration of financial centers implies there can be no significant difference in exchange rates quoted in the foreign exchange trading centers.

Accepted Answer

High-speed computer linkages between trading centers around the globe have effectively created a single market.The integration of financial centers implies there can be no significant difference in exchange rates quoted in the trading centers.

Question 16

Spot exchange rates and the 30-day forward rates are usually the same.

Accepted Answer

Differences in spot exchange rates and the 30-day forward rates are normal;they reflect the expectations of the foreign exchange market about future currency movements.

Question 17

Foreign exchange transactions that occur when a dealer wants to sell a nondollar currency and buy another rarely involve dollars.

Accepted Answer

Although a foreign exchange transaction can involve any two currencies,most transactions involve dollars on one side.This is true even when a dealer wants to sell a nondollar currency and buy another.

Question 18

The foreign exchange market is a market for converting the currency of one country into that of another country.

Accepted Answer

The foreign exchange market is a market for converting the currency of one country into that of another country.

Question 19

Tourists are the major participants in the foreign exchange market.

Accepted Answer

Tourists are minor participants in the foreign exchange market;companies engaged in international trade and investments are major ones.

Question 20

For most major currencies,forward exchange rates are usually quoted for 1 year,2 years,and 3 years into the future.

Accepted Answer

For most major currencies,forward exchange rates are quoted for 30 days,90 days,and 180 days into the future.

Quiz 9: The Foreign Exchange Market

Although the foreign exchange market offers some insurance against foreign exchange risk,it cannot provide complete insurance.

Assume that the currency of Country A falls sharply in value against the currency of Country B. This exchange rate movement will boost Country B's exports to Country A.

Assume that current dollar/yen spot exchange rate is $1 = $\times$ 110.If the 30-day forward exchange rate for converting dollars into yen is $1 = $\times$ 105,we say the dollar is selling at a discount on the 30-day forward market.

A common kind of swap is spot against forward.

If the euro gains against the dollar,we say that the euro is strengthening,from a dollar perspective.However,the reverse observation that the dollar is weakening against the euro need not be true from a euro perspective.

The British pound used to be second in importance to the dollar as a vehicle currency,but its importance has diminished in recent years.This has resulted in London losing its leading position in the global foreign exchange market.

Even though the foreign exchange market is critical to an economy as a whole,it does not have a direct impact on the sales,profits,and strategy of a multinational enterprise.

Assume that the euro/dollar exchange rate is €1 = $1.20.If it costs $36 to buy a European product,the stated price of the product would be €30.

When a German tourist in Seoul goes to a bank to convert her euros into Korean wons,the exchange rate used is the spot exchange rate for that day.

When companies wish to convert currencies,they typically enter the foreign exchange market directly.

Foreign exchange risk refers to the risk of not getting paid for a product that is exported from one country to another.

Carry trade has a speculative element attached to it.

Companies indulge in currency speculation in order to get minimal but assured returns from idle cash.

By 2007,forward instruments accounted for 85 percent of all foreign exchange transactions,while spot exchanges accounted for 15 percent.

The integration of financial centers implies there can be no significant difference in exchange rates quoted in the foreign exchange trading centers.

Spot exchange rates and the 30-day forward rates are usually the same.

Foreign exchange transactions that occur when a dealer wants to sell a nondollar currency and buy another rarely involve dollars.

The foreign exchange market is a market for converting the currency of one country into that of another country.

Tourists are the major participants in the foreign exchange market.

For most major currencies,forward exchange rates are usually quoted for 1 year,2 years,and 3 years into the future.

Quiz 9: The Foreign Exchange Market

Although the foreign exchange market offers some insurance against foreign exchange risk,it cannot provide complete insurance.

Assume that the currency of Country A falls sharply in value against the currency of Country B. This exchange rate movement will boost Country B's exports to Country A.

Assume that current dollar/yen spot exchange rate is $1 = ×\times× 110.If the 30-day forward exchange rate for converting dollars into yen is $1 = ×\times× 105,we say the dollar is selling at a discount on the 30-day forward market.

A common kind of swap is spot against forward.

If the euro gains against the dollar,we say that the euro is strengthening,from a dollar perspective.However,the reverse observation that the dollar is weakening against the euro need not be true from a euro perspective.

The British pound used to be second in importance to the dollar as a vehicle currency,but its importance has diminished in recent years.This has resulted in London losing its leading position in the global foreign exchange market.

Even though the foreign exchange market is critical to an economy as a whole,it does not have a direct impact on the sales,profits,and strategy of a multinational enterprise.

Assume that the euro/dollar exchange rate is €1 = $1.20.If it costs $36 to buy a European product,the stated price of the product would be €30.

When a German tourist in Seoul goes to a bank to convert her euros into Korean wons,the exchange rate used is the spot exchange rate for that day.

When companies wish to convert currencies,they typically enter the foreign exchange market directly.

Foreign exchange risk refers to the risk of not getting paid for a product that is exported from one country to another.

Carry trade has a speculative element attached to it.

Companies indulge in currency speculation in order to get minimal but assured returns from idle cash.

By 2007,forward instruments accounted for 85 percent of all foreign exchange transactions,while spot exchanges accounted for 15 percent.

The integration of financial centers implies there can be no significant difference in exchange rates quoted in the foreign exchange trading centers.

Spot exchange rates and the 30-day forward rates are usually the same.

Foreign exchange transactions that occur when a dealer wants to sell a nondollar currency and buy another rarely involve dollars.

The foreign exchange market is a market for converting the currency of one country into that of another country.

Tourists are the major participants in the foreign exchange market.

For most major currencies,forward exchange rates are usually quoted for 1 year,2 years,and 3 years into the future.

Assume that current dollar/yen spot exchange rate is $1 = $\times$ 110.If the 30-day forward exchange rate for converting dollars into yen is $1 = $\times$ 105,we say the dollar is selling at a discount on the 30-day forward market.