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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. What rate is used on the P&L?
The average P&L rate (APL) which is the weighted average of Treasury Daily Spot rates for the month
spot price x interest differential
The currency of the primary economic environment in which the legal entity operates
fx forward

2. How far in advance do we hedge?
foreign currency* rate
15 months in advance - layering on hedges through time
AUD
1.40 - Because I would be able to buy more euros

3. In a EUR-USD relationship - when arrow is going down - means Euro weakens and US Dollar...
an estimate of aggregate rate
interest rate differential
Currency in which the entity reports results externally
strengthens

4. Treasury is responsible for managing companies funds and determining the firms'...
fx forward
financial strategy and financial policy
foreign currency* rate
F&O account 87503

5. The timing of when we execute hedges drastically impacts the ____________ we achieve
Used to hedge against the change in fair value (revaluation) of monetary assets & liabilities
12%
1.40 - Because I would be able to buy more euros
average rate

6. What is local currency?

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7. How does treasury accomplish its purpose?
Mitigates risks by using hedging techniques
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
financial strategy and financial policy
translation

8. What is the purpose of hedging?
Used to hedge against the change in fair value (revaluation) of monetary assets & liabilities
1.60 - Because you can buy more dollars
Hedging allows us to provide stable earnings - makes planning simpler - and allows for longer lead time for marketing
three digit ticker symbol ex: USD - United States Dollar

9. What are monetary accounts?
End of Period Rate (SCO-4 rate)
3 business days and beyond
less
Accounts that revalue every month to the balance sheet rate. (cash - A/are)

10. In a GBP-USD relationship - if pound is strengthening it means that you can get _____ US Dollars for one pound
an estimate of aggregate rate
End of Period Rate (SCO-4 rate)
financial strategy and financial policy
more

11. All other currency trading with USD accounts for ____ of FX volume
financial strategy and financial policy
B/S rate
P&L activity
21%

12. What are the four major FX accounting guidances?
MXN - EUR - CHF
SFAS 52 - FX Translation - SFAS 133 - Accounting for Derivative Instruments & Hedging - SFAS 157 - Fair Value Measurement - SFAS 161 - Disclosures about Derivative Instruments & Hedging
weakens
less

13. A Spot happens in...
3 business days and beyond
foreign currency* rate
1.40 - Because I would be able to buy more euros
two business days

14. Where are revaluations done?
15 months in advance - layering on hedges through time
direct
Oracle
exchange one currency for another

15. EUR-USD currency pair accounts for about ____ of all FX volume
SEK
exchange one currency for another
30%
FX policy

16. What are non-monetary accounts?
F&O account 87503
BRL
Accounts that are carried at historical rates at which they were booked (fixed assets - inventory)
This means 1 Euro measured against US Dollars is worth $1.40

17. How is the hedge rate variance calculated?
The difference between hedge rate and final effective hedge rate
Current market price - spot - plus or minus the difference between the interest rates of the two countries
Forward contracts and Options
financial risk

18. The offset of revaluation is recorded to...
Forward Points
F&O account 87503
lost
15 months in advance - layering on hedges through time

19. What is the ticker symbol for Brazilian Real?
BRL
Current market price - spot - plus or minus the difference between the interest rates of the two countries
1.40 - Because I would be able to buy more euros
The calculation is the same - but instead of adding forward points you subtract

20. We do not speculate on Foreign Exchange - 10-K says it is to reduce the impact of...
1 share = 1/3 case
Used to hedge against the change in fair value (revaluation) of monetary assets & liabilities
valuable
adverse fluctuations

21. If you are an American planning a trip to Europe - which exchange rate would you rather have to convert your US Dollars to Euro? 1.40 or 1.60?
Hedging allows us to provide stable earnings - makes planning simpler - and allows for longer lead time for marketing
Mitigates risks by using hedging techniques
1.40 - Because I would be able to buy more euros
Currency of the respective operating unit's country

22. Treasury's role is to identify risk - control to prevent erosion of...
financial strength
Indirect quote
FX policy
financial risk

23. If 1 pizza = 15 USD then ____ = 1/15 pizza
1USD
Currency in which the entity reports results externally
90%
functional currency

24. The currency ticker for the Sweden Kroner is?
SFAS 52
SEK
30%
liquidity and cash

25. A downward slope that represents stock-USD relationship means that stock price is losing ______ - so you are losing money
1.60 - Because you can buy more dollars
CNY
value
allow FX rate

26. How is the price of the forward contract determined?
two business days
Currency of the respective operating unit's country
Current market price - spot - plus or minus the difference between the interest rates of the two countries
The average P&L rate (APL) which is the weighted average of Treasury Daily Spot rates for the month

27. What is currency Translation?

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28. Effective Hedge Rate is ________________ of all outstanding FX contracts for the quarter being hedged
exchange rate
1 unit
actual weighted average contract rate
15 months in advance - layering on hedges through time

29. ____________ - foreign currency/rate = USD
SFAS 52
fx forward
Forward Points
Indirect quote

30. Treasury ensures that companies have ____________ to meet its obligations
spot price x interest differential
weakens
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
liquidity and cash

31. US Treasuries is the second highest trading volume accounting for...
300 billion
spot price x interest differential
Currency in which the entity reports results externally
Hedging protects the value of a future event by executing a trade that changes value in the opposite direction as the future event.

32. 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...
1.60 - Because you can buy more dollars
There are FOUR
is getting bigger
BRL

33. What rate is used on the balance sheet?
two business days
End of Period Rate (SCO-4 rate)
largest - It is open 24 hours a day - except weekends
APL rate

34. Functional currency of an entity is determined by Treasury Accounting based on ______ requirements
Pound strengthens
SFAS 52
6 weeks prior to Q/E
Accounts that are carried at historical rates at which they were booked (fixed assets - inventory)

35. The ______________ for a currency normally uses the first two digits to identify the country - and the last digit to identify the currency
F&O account 87503
Currency of the respective operating unit's country
three digit ticker symbol ex: USD - United States Dollar
Effective Hedge rate

36. A ____________________ is an exchange of two currencies at a fixed rate for any date other than spot delivery
Indirect quote
adverse fluctuations
actual weighted average contract rate
foreign exchange forward contract

37. ____________ booked a hedge rate is trued up to the EHR each month during the quarter
P&L activity
China - Malaysia - Colombia - Chile - Argentina
financial strength
more

38. In a stock-USD relationship - when arrow is going down means that stock is becoming ____ valuable against dollar
direct
less
financial strength
There are FOUR

39. What currencies use Direct method of quoting?
British Pound - Australian Dollar - New Zealand Dollar - Euro
Used to hedge against variability in expected future cash flows
weakens
30%

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

41. How many currencies use Direct method of quoting?
more
Buy a stock in an Oil Company. Stock price increases when oil goes up and offset for your expenses in filling up tank
Accounts that are carried at historical rates at which they were booked (fixed assets - inventory)
There are FOUR

42. What rate is used to book daily transactions?
Treasury Daily Spot Rate
exchange one currency for another
The average P&L rate (APL) which is the weighted average of Treasury Daily Spot rates for the month
financial strategy and financial policy

43. The current market price for any currency pair is referred to as ?
Pound strengthens
Spot price
Used to hedge against variability in expected future cash flows
foreign exchange forward contract

44. Hedge rate is constant throughout quarter while _______________ changes throughout quarter
12%
P&L activity
Treasury Daily Spot Rate
Effective Hedge rate

45. What is Functional Currency?
liquidity and cash
Government regulation and cost of hedging
The currency of the primary economic environment in which the legal entity operates
1 share = 1/3 case

46. The Foreign Exchange market is the __________ market in the world
Accounts that revalue every month to the balance sheet rate. (cash - A/are)
largest - It is open 24 hours a day - except weekends
Oracle
6 weeks prior to Q/E

47. A downward slope that represents AUD-USD relationship means that if you bought Australian dollars at point A - you have _____ money at point B
BRL
more
The difference between hedge rate and final effective hedge rate
lost

48. 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
Mitigates risks by using hedging techniques
Indirect quote
allow FX rate
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

49. If 1 case = 30 USD and 1 pizza = 15 USD - then What is 1 case = ?
APL rate
Effective Hedge rate
Accounts that are carried at historical rates at which they were booked (fixed assets - inventory)
1 Case = 2 pizzas

50. What is cash flow used for?
functional currency
Accounts that are carried at historical rates at which they were booked (fixed assets - inventory)
CNY
Used to hedge against variability in expected future cash flows

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Foreign Exchange Essentials

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