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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. ____________ should be denominated in the currency they will either be paid or received in...
End of Period Rate (SCO-4 rate)
Current market price - spot - plus or minus the difference between the interest rates of the two countries
BS account balances
foreign currency* rate

2. In general EUR-USD is involved in roughly ___ of all FX volume
allow FX rate
Accounts that are carried at historical rates at which they were booked (fixed assets - inventory)
90%
exchange one currency for another

3. Hedge Rate is _______________ that will be achieved on a specific quarter's cash flow
more
average rate
an estimate of aggregate rate
Oracle

4. 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
actual weighted average contract rate
Forward Points

5. Australian currency code is...
FX policy
Accounts that revalue every month to the balance sheet rate. (cash - A/are)
AUD
13%

6. 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?
B/S rate
SFAS 52
5%
Current market price - spot - plus or minus the difference between the interest rates of the two countries

7. The ticker symbol for the Chinese Yuan
three digit ticker symbol ex: USD - United States Dollar
SEK
CNY
15 months in advance - layering on hedges through time

8. How is the hedge rate variance calculated?
The difference between hedge rate and final effective hedge rate
Spot price
value
strengthens

9. With direct quoting _______ of the first item is quoted for a specific price in terms of the second item.
fx forward
1 unit
APL rate
adverse fluctuations

10. In a stock-USD relationship - when arrow is going up means that stock is becoming more ______ against dollar
The currency of the primary economic environment in which the legal entity operates
SFAS 52 - FX Translation - SFAS 133 - Accounting for Derivative Instruments & Hedging - SFAS 157 - Fair Value Measurement - SFAS 161 - Disclosures about Derivative Instruments & Hedging
financial strategy and financial policy
valuable

11. The offset of revaluation is recorded to...
Currency of the respective operating unit's country
AUD
F&O account 87503
Accounts that revalue every month to the balance sheet rate. (cash - A/are)

12. How far in advance do we hedge?
15 months in advance - layering on hedges through time
interest rate differential
Oracle
Accounts that are carried at historical rates at which they were booked (fixed assets - inventory)

13. What rate is used on the balance sheet?
BS account balances
End of Period Rate (SCO-4 rate)
13%
The calculation is the same - but instead of adding forward points you subtract

14. 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
3 -210 billion (3 trillion)
P&L activity
foreign currency* rate

15. What is the purpose of hedging?
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
Hedging allows us to provide stable earnings - makes planning simpler - and allows for longer lead time for marketing
Used to hedge against variability in expected future cash flows
1USD

16. 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...
Currency of the respective operating unit's country
30%
The difference between hedge rate and final effective hedge rate
is getting bigger

17. What is the trading in volume for FX?
SFAS 52 - FX Translation - SFAS 133 - Accounting for Derivative Instruments & Hedging - SFAS 157 - Fair Value Measurement - SFAS 161 - Disclosures about Derivative Instruments & Hedging
3 -210 billion (3 trillion)
Accounts that are carried at historical rates at which they were booked (fixed assets - inventory)
1 unit

18. ____________ - foreign currency/rate = USD
Indirect quote
1.40 - Because I would be able to buy more euros
Government regulation and cost of hedging
5%

19. What is Functional Currency?
Forward Points
exchange one currency for another
currency options and forward
The currency of the primary economic environment in which the legal entity operates

20. Forward points is equal to...
spot price x interest differential
SFAS 52
directly or indirectly
valuable

21. ____________ is used for translation of foreign currency P&L to Reporting currency?
The difference between hedge rate and final effective hedge rate
APL rate
Hedging protects the value of a future event by executing a trade that changes value in the opposite direction as the future event.
Hedging allows us to provide stable earnings - makes planning simpler - and allows for longer lead time for marketing

22. When looking at a currency chart - you need to know if the currency is quoted Directly or Indirectly to be able to describe...
actual weighted average contract rate
The currency of the primary economic environment in which the legal entity operates
What is happening
13%

23. All other currency trading with USD accounts for ____ of FX volume
AUD
21%
financial strength
The currency of the primary economic environment in which the legal entity operates

24. A Spot happens in...
5%
two business days
15 months in advance - layering on hedges through time
B/S rate

25. What is currency Translation?

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26. Forward points multiply the exchange rate by the...
exchange rate
valuable
interest rate differential
functional currency

27. If you execute an FX trade to _______________ using the current market price - the trade will typically settle in two business days
Buy a stock in an Oil Company. Stock price increases when oil goes up and offset for your expenses in filling up tank
exchange one currency for another
This means 1 Euro measured against US Dollars is worth $1.40
strengthens

28. What currencies use Direct method of quoting?
AUD
British Pound - Australian Dollar - New Zealand Dollar - Euro
APL rate
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

29. Give some examples of countries where its hard to hedge?
B/S rate
Accounts that are carried at historical rates at which they were booked (fixed assets - inventory)
foreign exchange forward contract
China - Malaysia - Colombia - Chile - Argentina

30. What is reporting currency?
Effective Hedge rate
British Pound - Australian Dollar - New Zealand Dollar - Euro
Currency in which the entity reports results externally
The difference between hedge rate and final effective hedge rate

31. What rate is used on the P&L?
Mitigates risks by using hedging techniques
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
Government regulation and cost of hedging

32. When is hedge rate published?
6 weeks prior to Q/E
translation
P&L activity
The calculation is the same - but instead of adding forward points you subtract

33. Give an example of one way to hedge a price increase in gas prices...
Forward Points
15 months in advance - layering on hedges through time
British Pound - Australian Dollar - New Zealand Dollar - Euro
Buy a stock in an Oil Company. Stock price increases when oil goes up and offset for your expenses in filling up tank

34. What dictates minimum and maximum hedge percentages?
FX policy
financial risk
End of Period Rate (SCO-4 rate)
actual weighted average contract rate

35. A ____________________ is an exchange of two currencies at a fixed rate for any date other than spot delivery
functional currency
foreign exchange forward contract
B/S rate
largest - It is open 24 hours a day - except weekends

36. What are non-monetary accounts?
allow FX rate
Accounts that are carried at historical rates at which they were booked (fixed assets - inventory)
exchange one currency for another
End of Period Rate (SCO-4 rate)

37. 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
The difference between hedge rate and final effective hedge rate
allow FX rate
1.40 - Because I would be able to buy more euros
liquidity and cash

38. In a stock-USD relationship - when arrow is going down means that stock is becoming ____ valuable against dollar
less
weakens
translation
is getting bigger

39. EUR-USD currency pair accounts for about ____ of all FX volume
Hedging allows us to provide stable earnings - makes planning simpler - and allows for longer lead time for marketing
30%
value
financial strategy and financial policy

40. How many currencies use Direct method of quoting?
Indirect quote
less
spot price x interest differential
There are FOUR

41. What is local currency?

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42. What are monetary accounts?
Accounts that revalue every month to the balance sheet rate. (cash - A/are)
BRL
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
300 billion

43. 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
financial strategy and financial policy
There are FOUR
90%
Pound strengthens

44. If 1 case = 30 USD and 1 pizza = 15 USD - then What is 1 case = ?
SEK
1.60 - Because you can buy more dollars
B/S rate
1 Case = 2 pizzas

45. If 1 Share = 10 USD and 1 CASE = 30 USD - then 1 share =?
Oracle
average rate
SFAS 52
1 share = 1/3 case

46. Where are revaluations done?
The calculation is the same - but instead of adding forward points you subtract
is getting bigger
downward slope
Oracle

47. 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?
Indirect quote
BRL
1.40 - Because I would be able to buy more euros
largest - It is open 24 hours a day - except weekends

48. How is the price of the forward contract determined?
two business days
downward slope
financial strategy and financial policy
Current market price - spot - plus or minus the difference between the interest rates of the two countries

49. Effective Hedge Rate is ________________ of all outstanding FX contracts for the quarter being hedged
30%
actual weighted average contract rate
Accounts that are carried at historical rates at which they were booked (fixed assets - inventory)
F&O account 87503

50. Treasury's role is to identify risk - control to prevent erosion of...
financial strength
value
30%
F&O account 87503

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Foreign Exchange Essentials

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