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Foreign Exchange Essentials

Subjects : business-skills, industries

Instructions:

Answer 50 questions in 15 minutes.
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Match each statement with the correct term.
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This is a study tool. The 3 wrong answers for each question are randomly chosen from answers to other questions. So, you might find at times the answers obvious, but you will see it re-enforces your understanding as you take the test each time.

1. If you execute an FX trade to _______________ using the current market price - the trade will typically settle in two business days
Pound strengthens
translation
exchange one currency for another
largest - It is open 24 hours a day - except weekends

2. One of the objectives of the hedge rate is to __________ that is used for pricing - planning - and accounting thus maximizing the efficiency of our hedge program
downward slope
30%
allow FX rate
Used to hedge against variability in expected future cash flows

3. What does it mean to hedge?
Hedging protects the value of a future event by executing a trade that changes value in the opposite direction as the future event.
13%
BS account balances
The calculation is the same - but instead of adding forward points you subtract

4. How many currencies use Direct method of quoting?
There are FOUR
Accounts that are carried at historical rates at which they were booked (fixed assets - inventory)
1.60 - Because you can buy more dollars
Spot price

5. Hedge Rate is _______________ that will be achieved on a specific quarter's cash flow
an estimate of aggregate rate
The average P&L rate (APL) which is the weighted average of Treasury Daily Spot rates for the month
3 -210 billion (3 trillion)
Currency in which the entity reports results externally

6. What would happen if the US interest rate was bigger than Mexico?
Pound strengthens
This means 1 Euro measured against US Dollars is worth $1.40
Forward contracts and Options
The calculation is the same - but instead of adding forward points you subtract

7. The difference in interest rate is referred to as...
three digit ticker symbol ex: USD - United States Dollar
Forward Points
financial strength
Currency in which the entity reports results externally

8. A Spot happens in...
B/S rate
two business days
directly or indirectly
British Pound - Australian Dollar - New Zealand Dollar - Euro

9. ____________ booked a hedge rate is trued up to the EHR each month during the quarter
1 unit
P&L activity
Process to convert an entity's BS & P&L from the functional currency to the reporting currency - BS is translated at BS rate - P&L is translated at APL rate
The average P&L rate (APL) which is the weighted average of Treasury Daily Spot rates for the month

10. What is the trading in volume for FX?
liquidity and cash
Buy a stock in an Oil Company. Stock price increases when oil goes up and offset for your expenses in filling up tank
3 -210 billion (3 trillion)
Hedging allows us to provide stable earnings - makes planning simpler - and allows for longer lead time for marketing

11. In a USD-JPY relationship - when the line in a graph is upward slope it means the yen is weakening and dollar is strenghtening because exchange rate...
foreign exchange forward contract
is getting bigger
downward slope
Pound strengthens

12. In a stock-USD relationship - when arrow is going down means that stock is becoming ____ valuable against dollar
90%
FX policy
Indirect quote
less

13. The ______________ for a currency normally uses the first two digits to identify the country - and the last digit to identify the currency
exchange rate
BRL
three digit ticker symbol ex: USD - United States Dollar
300 billion

14. A forward happens in...
Treasury Daily Spot Rate
downward slope
CNY
3 business days and beyond

15. What currencies use Direct method of quoting?
British Pound - Australian Dollar - New Zealand Dollar - Euro
15 months in advance - layering on hedges through time
translation
Process to revalue the monetary BS accounts from: entered rate to B/S rate - prior month's B/S rate to current month's BS rates

16. If 1 case = 30 USD and 1 pizza = 15 USD - then What is 1 case = ?
1 Case = 2 pizzas
F&O account 87503
SFAS 52
Effective Hedge rate

17. Give an example of one way to hedge a price increase in gas prices...
lost
21%
directly or indirectly
Buy a stock in an Oil Company. Stock price increases when oil goes up and offset for your expenses in filling up tank

18. EUR-USD currency pair accounts for about ____ of all FX volume
Government regulation and cost of hedging
SFAS 52 - FX Translation - SFAS 133 - Accounting for Derivative Instruments & Hedging - SFAS 157 - Fair Value Measurement - SFAS 161 - Disclosures about Derivative Instruments & Hedging
30%
China - Malaysia - Colombia - Chile - Argentina

19. The rules for adding or subtracting forward points depend on whether it is quoted...
allow FX rate
Current market price - spot - plus or minus the difference between the interest rates of the two countries
directly or indirectly
1 Case = 2 pizzas

20. If 1 pizza = 15 USD then ____ = 1/15 pizza
1USD
The average P&L rate (APL) which is the weighted average of Treasury Daily Spot rates for the month
actual weighted average contract rate
spot price x interest differential

21. What dictates minimum and maximum hedge percentages?
FX policy
largest - It is open 24 hours a day - except weekends
The difference between hedge rate and final effective hedge rate
lost

22. All other currency trading with USD accounts for ____ of FX volume
21%
weakens
financial strength
What is happening

23. Forward points multiply the exchange rate by the...
currency options and forward
interest rate differential
21%
The currency of the primary economic environment in which the legal entity operates

24. What instruments do we use to hedge?
Forward contracts and Options
Hedging allows us to provide stable earnings - makes planning simpler - and allows for longer lead time for marketing
13%
Hedging protects the value of a future event by executing a trade that changes value in the opposite direction as the future event.

25. What are non-monetary accounts?
1 Case = 2 pizzas
China - Malaysia - Colombia - Chile - Argentina
Accounts that are carried at historical rates at which they were booked (fixed assets - inventory)
15 months in advance - layering on hedges through time

26. What is Fair Value hedge program used for?
3 business days and beyond
Accounts that revalue every month to the balance sheet rate. (cash - A/are)
30%
Used to hedge against the change in fair value (revaluation) of monetary assets & liabilities

27. ____________ is used for translation of foreign currency P&L to Reporting currency?
foreign exchange forward contract
translation
APL rate
largest - It is open 24 hours a day - except weekends

28. What are some of the reason not hedge at all or partially hedge in a few countries?
more
15 months in advance - layering on hedges through time
lost
Government regulation and cost of hedging

29. What rate is used on the balance sheet?
financial strength
End of Period Rate (SCO-4 rate)
FX policy
foreign exchange forward contract

30. If the Mexico rate is 5.25%/year and the US is 0.25%/year - What is the rate that would be used to calculate the forward rate?
5%
300 billion
allow FX rate
financial strength

31. Functional currency of an entity is determined by Treasury Accounting based on ______ requirements
The calculation is the same - but instead of adding forward points you subtract
largest - It is open 24 hours a day - except weekends
SFAS 52
Currency of the respective operating unit's country

32. US Treasuries is the second highest trading volume accounting for...
300 billion
The average P&L rate (APL) which is the weighted average of Treasury Daily Spot rates for the month
There are FOUR
F&O account 87503

33. An ___________ expresses the value of one currency relative to another
Used to hedge against the change in fair value (revaluation) of monetary assets & liabilities
Currency in which the entity reports results externally
B/S rate
exchange rate

34. __________ is used for translation of foreign currency B/S to reporting currency
APL rate
B/S rate
foreign currency* rate
90%

35. If 1 Share = 10 USD and 1 CASE = 30 USD - then 1 share =?
1USD
foreign exchange forward contract
B/S rate
1 share = 1/3 case

36. The offset of revaluation is recorded to...
financial strength
12%
Hedging allows us to provide stable earnings - makes planning simpler - and allows for longer lead time for marketing
F&O account 87503

37. Treasury is responsible for banking requirements - funding for the business and managing...
financial risk
Oracle
Forward Points
Used to hedge against variability in expected future cash flows

38. The ticker symbol for the Chinese Yuan
CNY
12%
value
1.60 - Because you can buy more dollars

39. Forward points is equal to...
The average P&L rate (APL) which is the weighted average of Treasury Daily Spot rates for the month
5%
spot price x interest differential
an estimate of aggregate rate

40. In a EUR-USD relationship - when arrow is going down - means Euro weakens and US Dollar...
15 months in advance - layering on hedges through time
exchange rate
strengthens
Hedging allows us to provide stable earnings - makes planning simpler - and allows for longer lead time for marketing

41. USD-JPY account for ____ of trading FX volume
SFAS 52 - FX Translation - SFAS 133 - Accounting for Derivative Instruments & Hedging - SFAS 157 - Fair Value Measurement - SFAS 161 - Disclosures about Derivative Instruments & Hedging
13%
is getting bigger
The average P&L rate (APL) which is the weighted average of Treasury Daily Spot rates for the month

42. Revaluation can be hedged - while ___________ cannot be hedged
translation
Spot price
F&O account 87503
3 business days and beyond

43. What are the four major FX accounting guidances?
SFAS 52 - FX Translation - SFAS 133 - Accounting for Derivative Instruments & Hedging - SFAS 157 - Fair Value Measurement - SFAS 161 - Disclosures about Derivative Instruments & Hedging
Forward Points
B/S rate
adverse fluctuations

44. A ____________________ is an exchange of two currencies at a fixed rate for any date other than spot delivery
Oracle
three digit ticker symbol ex: USD - United States Dollar
financial risk
foreign exchange forward contract

45. A downward slope that represents AUD-USD relationship means that if you bought Australian dollars at point A - you have _____ money at point B
1.60 - Because you can buy more dollars
Mitigates risks by using hedging techniques
lost
Oracle

46. Hedging instrument used in cash flow program is...
P&L activity
BRL
End of Period Rate (SCO-4 rate)
currency options and forward

47. Treasury ensures that companies have ____________ to meet its obligations
more
liquidity and cash
F&O account 87503
actual weighted average contract rate

48. In a GBP-USD relationship - when the line in a graph is upward slope it means the __________ overtime because the exchange rate is getting bigger
Pound strengthens
foreign exchange forward contract
Mitigates risks by using hedging techniques
China - Malaysia - Colombia - Chile - Argentina

49. ____________ - foreign currency/rate = USD
Used to hedge against variability in expected future cash flows
Indirect quote
APL rate
This means 1 Euro measured against US Dollars is worth $1.40

50. GBP-USD account for ____ of trading FX volume
12%
F&O account 87503
1.40 - Because I would be able to buy more euros
FX policy

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Foreign Exchange Essentials

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