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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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1. The ticker symbol for the Chinese Yuan
weakens
CNY
Forward Points
12%

2. B/S rate is used for revaluation of foreign currency transaction to...
There are FOUR
functional currency
Currency in which the entity reports results externally
SEK

3. What is currency Translation?

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4. Treasury's role is to identify risk - control to prevent erosion of...
financial strength
12%
fx forward
foreign currency* rate

5. In general EUR-USD is involved in roughly ___ of all FX volume
90%
financial risk
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

6. 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
Used to hedge against the change in fair value (revaluation) of monetary assets & liabilities
allow FX rate
3 business days and beyond

7. 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...
is getting bigger
AUD
Indirect quote
value

8. What is cash flow used for?
Used to hedge against variability in expected future cash flows
downward slope
Accounts that revalue every month to the balance sheet rate. (cash - A/are)
value

9. How is the hedge rate variance calculated?
Effective Hedge rate
Used to hedge against the change in fair value (revaluation) of monetary assets & liabilities
The difference between hedge rate and final effective hedge rate
foreign currency* rate

10. With direct quoting _______ of the first item is quoted for a specific price in terms of the second item.
1 unit
P&L activity
Pound strengthens
lost

11. Treasury ensures that companies have ____________ to meet its obligations
Accounts that are carried at historical rates at which they were booked (fixed assets - inventory)
APL rate
liquidity and cash
15 months in advance - layering on hedges through time

12. What is the purpose of hedging?
Hedging allows us to provide stable earnings - makes planning simpler - and allows for longer lead time for marketing
The currency of the primary economic environment in which the legal entity operates
more
Mitigates risks by using hedging techniques

13. What is reporting currency?
Currency in which the entity reports results externally
liquidity and cash
There are FOUR
financial risk

14. A downward slope that represents stock-USD relationship means that stock price is losing ______ - so you are losing money
Currency in which the entity reports results externally
value
BS account balances
average rate

15. In a stock-USD relationship - when arrow is going up means that stock is becoming more ______ against dollar
BRL
FX policy
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
valuable

16. GBP-USD account for ____ of trading FX volume
value
12%
MXN - EUR - CHF
BRL

17. 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
translation
directly or indirectly
SFAS 52
downward slope

18. How do you read EUR-USD = 1.40
1 Case = 2 pizzas
This means 1 Euro measured against US Dollars is worth $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
value

19. What rate is used on the balance sheet?
Pound strengthens
End of Period Rate (SCO-4 rate)
Forward contracts and Options
an estimate of aggregate rate

20. What instruments do we use to hedge?
Buy a stock in an Oil Company. Stock price increases when oil goes up and offset for your expenses in filling up tank
Forward contracts and Options
weakens
Forward Points

21. ____________ should be denominated in the currency they will either be paid or received in...
liquidity and cash
financial risk
300 billion
BS account balances

22. Hedge rate is constant throughout quarter while _______________ changes throughout quarter
Effective Hedge rate
5%
direct
currency options and forward

23. Hedging instrument used in cash flow program is...
strengthens
SFAS 52
spot price x interest differential
currency options and forward

24. 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
direct
actual weighted average contract rate
liquidity and cash
Pound strengthens

25. In a stock-USD relationship - when arrow is going down means that stock is becoming ____ valuable against dollar
The difference between hedge rate and final effective hedge rate
Forward contracts and Options
SEK
less

26. Give an example of one way to hedge a price increase in gas prices...
Current market price - spot - plus or minus the difference between the interest rates of the two countries
Buy a stock in an Oil Company. Stock price increases when oil goes up and offset for your expenses in filling up tank
SFAS 52
valuable

27. What is Fair Value hedge program used for?
Used to hedge against the change in fair value (revaluation) of monetary assets & liabilities
Current market price - spot - plus or minus the difference between the interest rates of the two countries
Indirect quote
direct

28. 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
Hedging allows us to provide stable earnings - makes planning simpler - and allows for longer lead time for marketing
less
BRL

29. How far in advance do we hedge?
interest rate differential
15 months in advance - layering on hedges through time
1 unit
less

30. What would happen if the US interest rate was bigger than Mexico?
valuable
Government regulation and cost of hedging
fx forward
The calculation is the same - but instead of adding forward points you subtract

31. If 1 Share = 10 USD and 1 CASE = 30 USD - then 1 share =?
1 share = 1/3 case
three digit ticker symbol ex: USD - United States Dollar
Indirect quote
Hedging allows us to provide stable earnings - makes planning simpler - and allows for longer lead time for marketing

32. In a EUR-USD relationship - when arrow is going down - means Euro weakens and US Dollar...
largest - It is open 24 hours a day - except weekends
strengthens
Used to hedge against the change in fair value (revaluation) of monetary assets & liabilities
1 share = 1/3 case

33. What rate is used to book daily transactions?
foreign currency* rate
Treasury Daily Spot Rate
1USD
Pound strengthens

34. Australian currency code is...
Used to hedge against the change in fair value (revaluation) of monetary assets & liabilities
1 unit
This means 1 Euro measured against US Dollars is worth $1.40
AUD

35. What are some of the reason not hedge at all or partially hedge in a few countries?
This means 1 Euro measured against US Dollars is worth $1.40
China - Malaysia - Colombia - Chile - Argentina
Government regulation and cost of hedging
End of Period Rate (SCO-4 rate)

36. The timing of when we execute hedges drastically impacts the ____________ we achieve
Pound strengthens
translation
average rate
an estimate of aggregate rate

37. US Treasuries is the second highest trading volume accounting for...
CNY
300 billion
Pound strengthens
Currency of the respective operating unit's country

38. 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
1 share = 1/3 case
Accounts that are carried at historical rates at which they were booked (fixed assets - inventory)

39. Effective Hedge Rate is ________________ of all outstanding FX contracts for the quarter being hedged
actual weighted average contract rate
MXN - EUR - CHF
directly or indirectly
valuable

40. 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?
1.60 - Because you can buy more dollars
5%
financial strategy and financial policy
Mitigates risks by using hedging techniques

41. The Foreign Exchange market is the __________ market in the world
There are FOUR
largest - It is open 24 hours a day - except weekends
Treasury Daily Spot Rate
BS account balances

42. Hedge Rate is _______________ that will be achieved on a specific quarter's cash flow
21%
an estimate of aggregate rate
Used to hedge against variability in expected future cash flows
directly or indirectly

43. Treasury is responsible for managing companies funds and determining the firms'...
financial strategy and financial policy
There are FOUR
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
foreign currency* rate

44. What is Functional Currency?
liquidity and cash
Pound strengthens
5%
The currency of the primary economic environment in which the legal entity operates

45. The difference in interest rate is referred to as...
directly or indirectly
Accounts that revalue every month to the balance sheet rate. (cash - A/are)
Forward Points
interest rate differential

46. What currencies use Direct method of quoting?
BS account balances
British Pound - Australian Dollar - New Zealand Dollar - Euro
interest rate differential
Oracle

47. What are the exceptions to the ticker naming convention?
interest rate differential
1 Case = 2 pizzas
financial risk
MXN - EUR - CHF

48. How is the price of the forward contract determined?
Current market price - spot - plus or minus the difference between the interest rates of the two countries
Spot price
P&L activity
allow FX rate

49. If you execute an FX trade to _______________ using the current market price - the trade will typically settle in two business days
Forward Points
Indirect quote
exchange one currency for another
financial strength

50. In a GBP-USD relationship - if pound is strengthening it means that you can get _____ US Dollars for one pound
more
The average P&L rate (APL) which is the weighted average of Treasury Daily Spot rates for the month
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

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Foreign Exchange Essentials

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