Test your basic knowledge |

Foreign Exchange Essentials

Subjects : business-skills, industries

Instructions:

Answer 50 questions in 15 minutes.
If you are not ready to take this test, you can study here.
Match each statement with the correct term.
Don't refresh. All questions and answers are randomly picked and ordered every time you load a test.

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. How do you read EUR-USD = 1.40
financial strength
This means 1 Euro measured against US Dollars is worth $1.40
exchange rate
1USD

2. When looking at a currency chart - you need to know if the currency is quoted Directly or Indirectly to be able to describe...
three digit ticker symbol ex: USD - United States Dollar
What is happening
1.60 - Because you can buy more dollars
less

3. What would happen if the US interest rate was bigger than Mexico?
The calculation is the same - but instead of adding forward points you subtract
Currency of the respective operating unit's country
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
Mitigates risks by using hedging techniques

4. What rate is used on the P&L?
British Pound - Australian Dollar - New Zealand Dollar - Euro
What is happening
The average P&L rate (APL) which is the weighted average of Treasury Daily Spot rates for the month
functional currency

5. What does it mean to hedge?
5%
Hedging protects the value of a future event by executing a trade that changes value in the opposite direction as the future event.
Indirect quote
SFAS 52 - FX Translation - SFAS 133 - Accounting for Derivative Instruments & Hedging - SFAS 157 - Fair Value Measurement - SFAS 161 - Disclosures about Derivative Instruments & Hedging

6. A forward happens in...
6 weeks prior to Q/E
3 business days and beyond
300 billion
There are FOUR

7. If 1 case = 30 USD and 1 pizza = 15 USD - then What is 1 case = ?
less
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
1 Case = 2 pizzas
translation

8. What instruments do we use to hedge?
Forward contracts and Options
13%
AUD
allow FX rate

9. What are monetary accounts?
Accounts that revalue every month to the balance sheet rate. (cash - A/are)
1.40 - Because I would be able to buy more euros
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
Accounts that are carried at historical rates at which they were booked (fixed assets - inventory)

10. What is the trading in volume for FX?
three digit ticker symbol ex: USD - United States Dollar
liquidity and cash
China - Malaysia - Colombia - Chile - Argentina
3 -210 billion (3 trillion)

11. We do not speculate on Foreign Exchange - 10-K says it is to reduce the impact of...
The currency of the primary economic environment in which the legal entity operates
The average P&L rate (APL) which is the weighted average of Treasury Daily Spot rates for the month
adverse fluctuations
6 weeks prior to Q/E

12. GBP-USD account for ____ of trading FX volume
6 weeks prior to Q/E
B/S rate
APL rate
12%

13. The ticker symbol for the Chinese Yuan
CNY
3 business days and beyond
21%
interest rate differential

14. In a GBP-USD relationship - if pound is strengthening it means that you can get _____ US Dollars for one pound
BRL
more
three digit ticker symbol ex: USD - United States Dollar
90%

15. USD-JPY account for ____ of trading FX volume
exchange rate
an estimate of aggregate rate
largest - It is open 24 hours a day - except weekends
13%

16. What is cash flow used for?
Used to hedge against variability in expected future cash flows
Indirect quote
three digit ticker symbol ex: USD - United States Dollar
more

17. In a stock-USD relationship - when arrow is going down means that stock is becoming ____ valuable against dollar
value
Buy a stock in an Oil Company. Stock price increases when oil goes up and offset for your expenses in filling up tank
Used to hedge against variability in expected future cash flows
less

18. In a stock-USD relationship - when arrow is going up means that stock is becoming more ______ against dollar
Mitigates risks by using hedging techniques
BRL
valuable
1 share = 1/3 case

19. An ___________ expresses the value of one currency relative to another
Government regulation and cost of hedging
The difference between hedge rate and final effective hedge rate
Currency of the respective operating unit's country
exchange rate

20. What rate is used on the balance sheet?
FX policy
two business days
End of Period Rate (SCO-4 rate)
The difference between hedge rate and final effective hedge rate

21. The ______________ for a currency normally uses the first two digits to identify the country - and the last digit to identify the currency
three digit ticker symbol ex: USD - United States Dollar
exchange one currency for another
weakens
1.60 - Because you can buy more dollars

22. What is the purpose of hedging?
1 share = 1/3 case
spot price x interest differential
Hedging allows us to provide stable earnings - makes planning simpler - and allows for longer lead time for marketing
largest - It is open 24 hours a day - except weekends

23. How is the hedge rate variance calculated?
The difference between hedge rate and final effective hedge rate
CNY
1 share = 1/3 case
Government regulation and cost of hedging

24. What are some of the reason not hedge at all or partially hedge in a few countries?
Hedging protects the value of a future event by executing a trade that changes value in the opposite direction as the future event.
Government regulation and cost of hedging
is getting bigger
strengthens

25. Australian currency code is...
AUD
15 months in advance - layering on hedges through time
British Pound - Australian Dollar - New Zealand Dollar - Euro
is getting bigger

26. In a EUR-USD relationship - when arrow is going down - means Euro weakens and US Dollar...
90%
strengthens
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
Currency in which the entity reports results externally

27. With direct quoting _______ of the first item is quoted for a specific price in terms of the second item.
1 unit
functional currency
SFAS 52 - FX Translation - SFAS 133 - Accounting for Derivative Instruments & Hedging - SFAS 157 - Fair Value Measurement - SFAS 161 - Disclosures about Derivative Instruments & Hedging
SFAS 52

28. All other currency trading with USD accounts for ____ of FX volume
foreign exchange forward contract
lost
Buy a stock in an Oil Company. Stock price increases when oil goes up and offset for your expenses in filling up tank
21%

29. Hedging instrument used in cash flow program is...
Forward contracts and Options
AUD
currency options and forward
The calculation is the same - but instead of adding forward points you subtract

30. In a downward slope that represents USD-JPY relationship a _____________ means that if you bough Japanese Yen at point A you made money at point B
5%
downward slope
currency options and forward
Hedging allows us to provide stable earnings - makes planning simpler - and allows for longer lead time for marketing

31. Give some examples of countries where its hard to hedge?
The difference between hedge rate and final effective hedge rate
Accounts that are carried at historical rates at which they were booked (fixed assets - inventory)
China - Malaysia - Colombia - Chile - Argentina
What is happening

32. What are the four major FX accounting guidances?
China - Malaysia - Colombia - Chile - Argentina
SFAS 52 - FX Translation - SFAS 133 - Accounting for Derivative Instruments & Hedging - SFAS 157 - Fair Value Measurement - SFAS 161 - Disclosures about Derivative Instruments & Hedging
currency options and forward
BS account balances

33. If 1 Share = 10 USD and 1 CASE = 30 USD - then 1 share =?
6 weeks prior to Q/E
1 share = 1/3 case
financial strategy and financial policy
Accounts that are carried at historical rates at which they were booked (fixed assets - inventory)

34. The rules for adding or subtracting forward points depend on whether it is quoted...
translation
End of Period Rate (SCO-4 rate)
Government regulation and cost of hedging
directly or indirectly

35. What rate is used to book daily transactions?
strengthens
CNY
Treasury Daily Spot Rate
End of Period Rate (SCO-4 rate)

36. A ____________________ is an exchange of two currencies at a fixed rate for any date other than spot delivery
two business days
foreign exchange forward contract
BS account balances
translation

37. What is Fair Value hedge program used for?
Accounts that revalue every month to the balance sheet rate. (cash - A/are)
12%
China - Malaysia - Colombia - Chile - Argentina
Used to hedge against the change in fair value (revaluation) of monetary assets & liabilities

38. How is the price of the forward contract determined?
Accounts that revalue every month to the balance sheet rate. (cash - A/are)
21%
Currency in which the entity reports results externally
Current market price - spot - plus or minus the difference between the interest rates of the two countries

39. When is hedge rate published?
6 weeks prior to Q/E
interest rate differential
foreign exchange forward contract
What is happening

40. The currency ticker for the Sweden Kroner is?
Hedging allows us to provide stable earnings - makes planning simpler - and allows for longer lead time for marketing
3 business days and beyond
SEK
SFAS 52 - FX Translation - SFAS 133 - Accounting for Derivative Instruments & Hedging - SFAS 157 - Fair Value Measurement - SFAS 161 - Disclosures about Derivative Instruments & Hedging

41. How many currencies use Direct method of quoting?
There are FOUR
Pound strengthens
5%
Hedging allows us to provide stable earnings - makes planning simpler - and allows for longer lead time for marketing

42. Revaluation can be hedged - while ___________ cannot be hedged
Forward Points
directly or indirectly
translation
allow FX rate

43. US Treasuries is the second highest trading volume accounting for...
300 billion
lost
weakens
The difference between hedge rate and final effective hedge rate

44. ____________ should be denominated in the currency they will either be paid or received in...
BRL
The calculation is the same - but instead of adding forward points you subtract
B/S rate
BS account balances

45. In a EUR-USD relationship - when arrow is going up means Euro is strengthening and Dollar...
weakens
End of Period Rate (SCO-4 rate)
Currency in which the entity reports results externally
6 weeks prior to Q/E

46. A Spot happens in...
allow FX rate
two business days
SFAS 52
Pound strengthens

47. Hedging instrument used in Fair Value Hedge program is...
B/S rate
Hedging allows us to provide stable earnings - makes planning simpler - and allows for longer lead time for marketing
fx forward
SFAS 52

48. 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...
1.40 - Because I would be able to buy more euros
British Pound - Australian Dollar - New Zealand Dollar - Euro
1 unit
is getting bigger

49. What currencies use Direct method of quoting?
British Pound - Australian Dollar - New Zealand Dollar - Euro
more
interest rate differential
is getting bigger

50. 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
13%
SFAS 52 - FX Translation - SFAS 133 - Accounting for Derivative Instruments & Hedging - SFAS 157 - Fair Value Measurement - SFAS 161 - Disclosures about Derivative Instruments & Hedging
Accounts that are carried at historical rates at which they were booked (fixed assets - inventory)
Pound strengthens