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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. What currencies use Direct method of quoting?
The average P&L rate (APL) which is the weighted average of Treasury Daily Spot rates for the month
The calculation is the same - but instead of adding forward points you subtract
The difference between hedge rate and final effective hedge rate
British Pound - Australian Dollar - New Zealand Dollar - Euro

2. Direct quote- _____________=USD
1.40 - Because I would be able to buy more euros
more
foreign currency* rate
adverse fluctuations

3. Give an example of one way to hedge a price increase in gas prices...
Hedging allows us to provide stable earnings - makes planning simpler - and allows for longer lead time for marketing
Effective Hedge rate
Buy a stock in an Oil Company. Stock price increases when oil goes up and offset for your expenses in filling up tank
FX policy

4. What rate is used on the P&L?
13%
The average P&L rate (APL) which is the weighted average of Treasury Daily Spot rates for the month
directly or indirectly
21%

5. Effective Hedge Rate is ________________ of all outstanding FX contracts for the quarter being hedged
The calculation is the same - but instead of adding forward points you subtract
F&O account 87503
SFAS 52
actual weighted average contract rate

6. If 1 Share = 10 USD and 1 CASE = 30 USD - then 1 share =?
1 Case = 2 pizzas
Used to hedge against variability in expected future cash flows
Buy a stock in an Oil Company. Stock price increases when oil goes up and offset for your expenses in filling up tank
1 share = 1/3 case

7. GBP-USD account for ____ of trading FX volume
There are FOUR
12%
lost
SEK

8. Treasury is responsible for banking requirements - funding for the business and managing...
1 share = 1/3 case
Currency of the respective operating unit's country
FX policy
financial risk

9. A downward slope that represents stock-USD relationship means that stock price is losing ______ - so you are losing money
BRL
3 business days and beyond
value
The calculation is the same - but instead of adding forward points you subtract

10. A Spot happens in...
two business days
Oracle
30%
average rate

11. 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
This means 1 Euro measured against US Dollars is worth $1.40
financial strength
three digit ticker symbol ex: USD - United States Dollar

12. Treasury is responsible for managing companies funds and determining the firms'...
SFAS 52 - FX Translation - SFAS 133 - Accounting for Derivative Instruments & Hedging - SFAS 157 - Fair Value Measurement - SFAS 161 - Disclosures about Derivative Instruments & Hedging
actual weighted average contract rate
financial strategy and financial policy
Hedging allows us to provide stable earnings - makes planning simpler - and allows for longer lead time for marketing

13. Functional currency of an entity is determined by Treasury Accounting based on ______ requirements
Hedging protects the value of a future event by executing a trade that changes value in the opposite direction as the future event.
financial strategy and financial policy
SFAS 52
Forward Points

14. If 1 case = 30 USD and 1 pizza = 15 USD - then What is 1 case = ?
Buy a stock in an Oil Company. Stock price increases when oil goes up and offset for your expenses in filling up tank
APL rate
1 unit
1 Case = 2 pizzas

15. In a stock-USD relationship - when arrow is going down means that stock is becoming ____ valuable against dollar
12%
Government regulation and cost of hedging
less
strengthens

16. What does it mean to hedge?
currency options and forward
1 share = 1/3 case
Hedging protects the value of a future event by executing a trade that changes value in the opposite direction as the future event.
Used to hedge against variability in expected future cash flows

17. __________ is used for translation of foreign currency B/S to reporting currency
exchange rate
B/S rate
1.40 - Because I would be able to buy more euros
largest - It is open 24 hours a day - except weekends

18. The timing of when we execute hedges drastically impacts the ____________ we achieve
Oracle
average rate
Currency in which the entity reports results externally
Spot price

19. How many currencies use Direct method of quoting?
Forward Points
China - Malaysia - Colombia - Chile - Argentina
There are FOUR
functional currency

20. Hedge Rate is _______________ that will be achieved on a specific quarter's cash flow
interest rate differential
There are FOUR
direct
an estimate of aggregate rate

21. ____________ is used for translation of foreign currency P&L to Reporting currency?
F&O account 87503
APL rate
translation
average rate

22. What is Revaluation?

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23. B/S rate is used for revaluation of foreign currency transaction to...
financial strategy and financial policy
allow FX rate
functional currency
Used to hedge against the change in fair value (revaluation) of monetary assets & liabilities

24. What are some of the reason not hedge at all or partially hedge in a few countries?
The average P&L rate (APL) which is the weighted average of Treasury Daily Spot rates for the month
3 -210 billion (3 trillion)
valuable
Government regulation and cost of hedging

25. What is local currency?

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26. In a EUR-USD relationship - when arrow is going down - means Euro weakens and US Dollar...
SEK
strengthens
What is happening
Forward Points

27. What rate is used to book daily transactions?
SFAS 52
liquidity and cash
CNY
Treasury Daily Spot Rate

28. A forward happens in...
3 business days and beyond
SFAS 52
Indirect quote
1USD

29. 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
The currency of the primary economic environment in which the legal entity operates
30%
average rate

30. The difference in interest rate is referred to as...
CNY
valuable
Accounts that revalue every month to the balance sheet rate. (cash - A/are)
Forward Points

31. 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
Pound strengthens
more
liquidity and cash
Used to hedge against the change in fair value (revaluation) of monetary assets & liabilities

32. 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?
value
5%
average rate
1.60 - Because you can buy more dollars

33. What is the trading in volume for FX?
3 business days and beyond
an estimate of aggregate rate
Government regulation and cost of hedging
3 -210 billion (3 trillion)

34. In general EUR-USD is involved in roughly ___ of all FX volume
foreign exchange forward contract
What is happening
The calculation is the same - but instead of adding forward points you subtract
90%

35. What is currency Translation?

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36. EUR-USD currency pair accounts for about ____ of all FX volume
The currency of the primary economic environment in which the legal entity operates
Forward contracts and Options
Forward Points
30%

37. What are non-monetary accounts?
The difference between hedge rate and final effective hedge rate
SEK
Accounts that are carried at historical rates at which they were booked (fixed assets - inventory)
lost

38. The Foreign Exchange market is the __________ market in the world
largest - It is open 24 hours a day - except weekends
Used to hedge against the change in fair value (revaluation) of monetary assets & liabilities
21%
Hedging allows us to provide stable earnings - makes planning simpler - and allows for longer lead time for marketing

39. What is reporting currency?
Currency in which the entity reports results externally
1.40 - Because I would be able to buy more euros
financial strategy and financial policy
China - Malaysia - Colombia - Chile - Argentina

40. With direct quoting _______ of the first item is quoted for a specific price in terms of the second item.
1 unit
Oracle
1USD
SFAS 52

41. Treasury's role is to identify risk - control to prevent erosion of...
is getting bigger
The calculation is the same - but instead of adding forward points you subtract
financial strength
Pound strengthens

42. What is Functional Currency?
average rate
This means 1 Euro measured against US Dollars is worth $1.40
The currency of the primary economic environment in which the legal entity operates
Treasury Daily Spot Rate

43. The rules for adding or subtracting forward points depend on whether it is quoted...
directly or indirectly
5%
Effective Hedge rate
Forward Points

44. How does treasury accomplish its purpose?
valuable
fx forward
an estimate of aggregate rate
Mitigates risks by using hedging techniques

45. 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
Buy a stock in an Oil Company. Stock price increases when oil goes up and offset for your expenses in filling up tank
valuable
15 months in advance - layering on hedges through time
downward slope

46. The offset of revaluation is recorded to...
three digit ticker symbol ex: USD - United States Dollar
APL rate
F&O account 87503
Hedging protects the value of a future event by executing a trade that changes value in the opposite direction as the future event.

47. All other currency trading with USD accounts for ____ of FX volume
Forward Points
21%
functional currency
SEK

48. What is Fair Value hedge program used for?
Mitigates risks by using hedging techniques
Used to hedge against the change in fair value (revaluation) of monetary assets & liabilities
exchange one currency for another
The average P&L rate (APL) which is the weighted average of Treasury Daily Spot rates for the month

49. Hedging instrument used in cash flow program is...
Current market price - spot - plus or minus the difference between the interest rates of the two countries
AUD
directly or indirectly
currency options and forward

50. In a EUR-USD relationship - when arrow is going up means Euro is strengthening and Dollar...
13%
The difference between hedge rate and final effective hedge rate
weakens
CNY

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Foreign Exchange Essentials

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