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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. The current market price for any currency pair is referred to as ?
exchange 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
90%
Spot price

2. The ticker symbol for the Chinese Yuan
CNY
strengthens
21%
translation

3. US Treasuries is the second highest trading volume accounting for...
MXN - EUR - CHF
Current market price - spot - plus or minus the difference between the interest rates of the two countries
6 weeks prior to Q/E
300 billion

4. If you are an European planning a trip to America - which rate do you want? 1.40 or 1.60?
1.60 - Because you can buy more dollars
MXN - EUR - CHF
less
AUD

5. The ______________ for a currency normally uses the first two digits to identify the country - and the last digit to identify the currency
Currency of the respective operating unit's country
Indirect quote
1.60 - Because you can buy more dollars
three digit ticker symbol ex: USD - United States Dollar

6. A forward happens in...
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
APL rate
3 business days and beyond
The calculation is the same - but instead of adding forward points you subtract

7. Give an example of one way to hedge a price increase in gas prices...
What is happening
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
Buy a stock in an Oil Company. Stock price increases when oil goes up and offset for your expenses in filling up tank
SEK

8. What are some of the reason not hedge at all or partially hedge in a few countries?
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
Government regulation and cost of hedging
adverse fluctuations
valuable

9. What currencies use Direct method of quoting?
FX policy
downward slope
China - Malaysia - Colombia - Chile - Argentina
British Pound - Australian Dollar - New Zealand Dollar - Euro

10. What are the exceptions to the ticker naming convention?
MXN - EUR - CHF
three digit ticker symbol ex: USD - United States Dollar
average rate
Accounts that revalue every month to the balance sheet rate. (cash - A/are)

11. An ___________ expresses the value of one currency relative to another
exchange rate
downward slope
Treasury Daily Spot Rate
valuable

12. Direct quote- _____________=USD
Mitigates risks by using hedging techniques
financial strategy and financial policy
foreign currency* rate
SEK

13. The difference in interest rate is referred to as...
Forward Points
foreign currency* rate
Hedging protects the value of a future event by executing a trade that changes value in the opposite direction as the future event.
lost

14. What is cash flow used for?
Used to hedge against variability in expected future cash flows
average rate
China - Malaysia - Colombia - Chile - Argentina
APL rate

15. The timing of when we execute hedges drastically impacts the ____________ we achieve
300 billion
B/S rate
F&O account 87503
average rate

16. The Foreign Exchange market is the __________ market in the world
exchange one currency for another
30%
largest - It is open 24 hours a day - except weekends
interest rate differential

17. How do you read EUR-USD = 1.40
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
Used to hedge against variability in expected future cash flows
There are FOUR
This means 1 Euro measured against US Dollars is worth $1.40

18. How does treasury accomplish its purpose?
Mitigates risks by using hedging techniques
financial strategy and financial policy
Pound strengthens
30%

19. ____________ should be denominated in the currency they will either be paid or received in...
FX policy
BS account balances
more
Indirect quote

20. Treasury is responsible for banking requirements - funding for the business and managing...
APL rate
largest - It is open 24 hours a day - except weekends
Hedging protects the value of a future event by executing a trade that changes value in the opposite direction as the future event.
financial risk

21. A Spot happens in...
two business days
spot price x interest differential
Used to hedge against the change in fair value (revaluation) of monetary assets & liabilities
End of Period Rate (SCO-4 rate)

22. GBP-USD account for ____ of trading FX volume
financial strength
AUD
1 unit
12%

23. The offset of revaluation is recorded to...
F&O account 87503
Current market price - spot - plus or minus the difference between the interest rates of the two countries
APL rate
strengthens

24. What is Fair Value hedge program used for?
allow FX rate
lost
average rate
Used to hedge against the change in fair value (revaluation) of monetary assets & liabilities

25. 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
allow FX rate
lost
B/S rate
functional currency

26. 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?
1.40 - Because I would be able to buy more euros
Buy a stock in an Oil Company. Stock price increases when oil goes up and offset for your expenses in filling up tank
two business days
weakens

27. What is the purpose of hedging?
End of Period Rate (SCO-4 rate)
The currency of the primary economic environment in which the legal entity operates
Hedging allows us to provide stable earnings - makes planning simpler - and allows for longer lead time for marketing
SFAS 52

28. What is Functional Currency?
The currency of the primary economic environment in which the legal entity operates
The calculation is the same - but instead of adding forward points you subtract
13%
Forward Points

29. __________ is used for translation of foreign currency B/S to reporting currency
B/S rate
What is happening
1.40 - Because I would be able to buy more euros
currency options and forward

30. ____________ is used for translation of foreign currency P&L to Reporting currency?
300 billion
APL rate
B/S rate
Spot price

31. EUR-USD currency pair accounts for about ____ of all FX volume
90%
30%
Pound strengthens
functional currency

32. B/S rate is used for revaluation of foreign currency transaction to...
There are FOUR
functional currency
lost
directly or indirectly

33. What rate is used on the P&L?
Hedging allows us to provide stable earnings - makes planning simpler - and allows for longer lead time for marketing
The average P&L rate (APL) which is the weighted average of Treasury Daily Spot rates for the month
currency options and forward
There are FOUR

34. A ____________________ is an exchange of two currencies at a fixed rate for any date other than spot delivery
The difference between hedge rate and final effective hedge rate
90%
foreign exchange forward contract
6 weeks prior to Q/E

35. If 1 case = 30 USD and 1 pizza = 15 USD - then What is 1 case = ?
The average P&L rate (APL) which is the weighted average of Treasury Daily Spot rates for the month
British Pound - Australian Dollar - New Zealand Dollar - Euro
interest rate differential
1 Case = 2 pizzas

36. How far in advance do we hedge?
15 months in advance - layering on hedges through time
The calculation is the same - but instead of adding forward points you subtract
What is happening
more

37. All other currency trading with USD accounts for ____ of FX volume
21%
largest - It is open 24 hours a day - except weekends
exchange rate
Spot price

38. Australian currency code is...
two business days
AUD
spot price x interest differential
Used to hedge against the change in fair value (revaluation) of monetary assets & liabilities

39. What is Revaluation?

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40. The currency ticker for the Sweden Kroner is?
SEK
1.60 - Because you can buy more dollars
Current market price - spot - plus or minus the difference between the interest rates of the two countries
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

41. If 1 Share = 10 USD and 1 CASE = 30 USD - then 1 share =?
Accounts that revalue every month to the balance sheet rate. (cash - A/are)
financial risk
an estimate of aggregate rate
1 share = 1/3 case

42. What rate is used on the balance sheet?
value
End of Period Rate (SCO-4 rate)
Accounts that are carried at historical rates at which they were booked (fixed assets - inventory)
Current market price - spot - plus or minus the difference between the interest rates of the two countries

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
currency options and forward
financial risk
21%

44. Effective Hedge Rate is ________________ of all outstanding FX contracts for the quarter being hedged
1USD
Used to hedge against the change in fair value (revaluation) of monetary assets & liabilities
This means 1 Euro measured against US Dollars is worth $1.40
actual weighted average contract rate

45. Treasury is responsible for managing companies funds and determining the firms'...
an estimate of aggregate rate
financial strategy and financial policy
largest - It is open 24 hours a day - except weekends
End of Period Rate (SCO-4 rate)

46. Treasury ensures that companies have ____________ to meet its obligations
is getting bigger
13%
liquidity and cash
spot price x interest differential

47. The rules for adding or subtracting forward points depend on whether it is quoted...
two business days
6 weeks prior to Q/E
300 billion
directly or indirectly

48. If you execute an FX trade to _______________ using the current market price - the trade will typically settle in two business days
The difference between hedge rate and final effective hedge rate
valuable
exchange one currency for another
strengthens

49. When is hedge rate published?
weakens
valuable
6 weeks prior to Q/E
Buy a stock in an Oil Company. Stock price increases when oil goes up and offset for your expenses in filling up tank

50. In a GBP-USD relationship - if pound is strengthening it means that you can get _____ US Dollars for one pound
more
Accounts that are carried at historical rates at which they were booked (fixed assets - inventory)
fx forward
is getting bigger

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Foreign Exchange Essentials

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