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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. How is the price of the forward contract determined?
largest - It is open 24 hours a day - except weekends
Current market price - spot - plus or minus the difference between the interest rates of the two countries
1USD
AUD

2. The ticker symbol for the Chinese Yuan
Currency of the respective operating unit's country
The currency of the primary economic environment in which the legal entity operates
CNY
1.40 - Because I would be able to buy more euros

3. What are some of the reason not hedge at all or partially hedge in a few countries?
Government regulation and cost of hedging
British Pound - Australian Dollar - New Zealand Dollar - Euro
End of Period Rate (SCO-4 rate)
downward slope

4. ____________ - foreign currency/rate = USD
1.40 - Because I would be able to buy more euros
largest - It is open 24 hours a day - except weekends
Mitigates risks by using hedging techniques
Indirect quote

5. In a EUR-USD relationship - when arrow is going up means Euro is strengthening and Dollar...
Used to hedge against variability in expected future cash flows
weakens
90%
3 -210 billion (3 trillion)

6. A downward slope that represents stock-USD relationship means that stock price is losing ______ - so you are losing money
3 -210 billion (3 trillion)
value
actual weighted average contract rate
BRL

7. The difference in interest rate is referred to as...
three digit ticker symbol ex: USD - United States Dollar
Forward Points
The calculation is the same - but instead of adding forward points you subtract
Hedging allows us to provide stable earnings - makes planning simpler - and allows for longer lead time for marketing

8. What is local currency?

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9. A downward slope that represents AUD-USD relationship means that if you bought Australian dollars at point A - you have _____ money at point B
lost
90%
3 -210 billion (3 trillion)
spot price x interest differential

10. What instruments do we use to hedge?
China - Malaysia - Colombia - Chile - Argentina
Treasury Daily Spot Rate
Forward contracts and Options
Effective Hedge rate

11. Revaluation can be hedged - while ___________ cannot be hedged
The average P&L rate (APL) which is the weighted average of Treasury Daily Spot rates for the month
Buy a stock in an Oil Company. Stock price increases when oil goes up and offset for your expenses in filling up tank
translation
adverse fluctuations

12. The ______________ for a currency normally uses the first two digits to identify the country - and the last digit to identify the currency
strengthens
1 Case = 2 pizzas
three digit ticker symbol ex: USD - United States Dollar
1USD

13. USD-JPY account for ____ of trading FX volume
13%
15 months in advance - layering on hedges through time
Forward Points
less

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

15. When is hedge rate published?
Forward contracts and Options
largest - It is open 24 hours a day - except weekends
6 weeks prior to Q/E
foreign exchange forward contract

16. How far in advance do we hedge?
direct
15 months in advance - layering on hedges through time
P&L activity
12%

17. 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?
functional currency
21%
5%
translation

18. 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
Treasury Daily Spot Rate
downward slope
MXN - EUR - CHF
There are FOUR

19. When looking at a currency chart - you need to know if the currency is quoted Directly or Indirectly to be able to describe...
What is happening
5%
strengthens
15 months in advance - layering on hedges through time

20. How does treasury accomplish its purpose?
Currency of the respective operating unit's country
foreign exchange forward contract
What is happening
Mitigates risks by using hedging techniques

21. Where are revaluations done?
Oracle
15 months in advance - layering on hedges through time
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 of the respective operating unit's country

22. What is reporting currency?
Currency in which the entity reports results externally
more
directly or indirectly
downward slope

23. What is the purpose of hedging?
Hedging allows us to provide stable earnings - makes planning simpler - and allows for longer lead time for marketing
interest rate differential
less
P&L activity

24. US Treasuries is the second highest trading volume accounting for...
300 billion
interest rate differential
translation
3 business days and beyond

25. What are monetary accounts?
6 weeks prior to Q/E
is getting bigger
1 unit
Accounts that revalue every month to the balance sheet rate. (cash - A/are)

26. A ____________________ is an exchange of two currencies at a fixed rate for any date other than spot delivery
foreign exchange forward contract
direct
weakens
B/S rate

27. With direct quoting _______ of the first item is quoted for a specific price in terms of the second item.
actual weighted average contract rate
1 unit
300 billion
The currency of the primary economic environment in which the legal entity operates

28. Hedge Rate is _______________ that will be achieved on a specific quarter's cash flow
valuable
an estimate of aggregate rate
Hedging allows us to provide stable earnings - makes planning simpler - and allows for longer lead time for marketing
SFAS 52

29. Give some examples of countries where its hard to hedge?
Forward Points
End of Period Rate (SCO-4 rate)
fx forward
China - Malaysia - Colombia - Chile - Argentina

30. Give an example of one way to hedge a price increase in gas prices...
3 -210 billion (3 trillion)
This means 1 Euro measured against US Dollars is worth $1.40
lost
Buy a stock in an Oil Company. Stock price increases when oil goes up and offset for your expenses in filling up tank

31. Hedging instrument used in Fair Value Hedge program is...
Accounts that are carried at historical rates at which they were booked (fixed assets - inventory)
is getting bigger
fx forward
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

32. In a GBP-USD relationship - if pound is strengthening it means that you can get _____ US Dollars for one pound
is getting bigger
currency options and forward
B/S rate
more

33. GBP-USD account for ____ of trading FX volume
financial strategy and financial policy
more
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
12%

34. What is cash flow used for?
foreign exchange forward contract
1.40 - Because I would be able to buy more euros
Pound strengthens
Used to hedge against variability in expected future cash flows

35. What does it mean to hedge?
directly or indirectly
Hedging protects the value of a future event by executing a trade that changes value in the opposite direction as the future event.
Oracle
The currency of the primary economic environment in which the legal entity operates

36. If 1 case = 30 USD and 1 pizza = 15 USD - then What is 1 case = ?
liquidity and cash
three digit ticker symbol ex: USD - United States Dollar
Used to hedge against variability in expected future cash flows
1 Case = 2 pizzas

37. What rate is used on the balance sheet?
foreign exchange forward contract
downward slope
Currency in which the entity reports results externally
End of Period Rate (SCO-4 rate)

38. The rules for adding or subtracting forward points depend on whether it is quoted...
The calculation is the same - but instead of adding forward points you subtract
largest - It is open 24 hours a day - except weekends
5%
directly or indirectly

39. What are the four major FX accounting guidances?
Effective Hedge rate
Accounts that are carried at historical rates at which they were booked (fixed assets - inventory)
less
SFAS 52 - FX Translation - SFAS 133 - Accounting for Derivative Instruments & Hedging - SFAS 157 - Fair Value Measurement - SFAS 161 - Disclosures about Derivative Instruments & Hedging

40. A forward happens in...
End of Period Rate (SCO-4 rate)
China - Malaysia - Colombia - Chile - Argentina
AUD
3 business days and beyond

41. An ___________ expresses the value of one currency relative to another
BRL
exchange rate
exchange one currency for another
Used to hedge against the change in fair value (revaluation) of monetary assets & liabilities

42. The currency ticker for the Sweden Kroner is?
Indirect quote
more
SEK
Government regulation and cost of hedging

43. Treasury's role is to identify risk - control to prevent erosion of...
financial strength
Oracle
FX policy
foreign currency* rate

44. What is Fair Value hedge program used for?
Accounts that are carried at historical rates at which they were booked (fixed assets - inventory)
Used to hedge against the change in fair value (revaluation) of monetary assets & liabilities
1.60 - Because you can buy more dollars
1 share = 1/3 case

45. Forward points multiply the exchange rate by the...
interest rate differential
300 billion
AUD
Currency of the respective operating unit's country

46. ____________ booked a hedge rate is trued up to the EHR each month during the quarter
an estimate of aggregate rate
Spot price
P&L activity
The difference between hedge rate and final effective hedge rate

47. Whether the quote was indirect or direct - they are all stored as ______ in Oracle
CNY
interest rate differential
direct
financial strength

48. If you execute an FX trade to _______________ using the current market price - the trade will typically settle in two business days
weakens
downward slope
13%
exchange one currency for another

49. EUR-USD currency pair accounts for about ____ of all FX volume
less
30%
Hedging allows us to provide stable earnings - makes planning simpler - and allows for longer lead time for marketing
What is happening

50. What currencies use Direct method of quoting?
SEK
actual weighted average contract rate
British Pound - Australian Dollar - New Zealand Dollar - Euro
financial strength

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Foreign Exchange Essentials

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