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Foreign Exchange Essentials

Subjects : business-skills, industries

Instructions:

Answer 50 questions in 15 minutes.
If you are not ready to take this test, you can study here.
Match each statement with the correct term.
Don't refresh. All questions and answers are randomly picked and ordered every time you load a test.

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. Revaluation can be hedged - while ___________ cannot be hedged
Buy a stock in an Oil Company. Stock price increases when oil goes up and offset for your expenses in filling up tank
300 billion
exchange rate
translation

2. What is the trading in volume for FX?
currency options and forward
3 -210 billion (3 trillion)
financial risk
5%

3. Hedge rate is constant throughout quarter while _______________ changes throughout quarter
Forward Points
Effective Hedge rate
three digit ticker symbol ex: USD - United States Dollar
valuable

4. The ______________ for a currency normally uses the first two digits to identify the country - and the last digit to identify the currency
Pound strengthens
three digit ticker symbol ex: USD - United States Dollar
1 share = 1/3 case
6 weeks prior to Q/E

5. All other currency trading with USD accounts for ____ of FX volume
300 billion
interest rate differential
21%
Hedging allows us to provide stable earnings - makes planning simpler - and allows for longer lead time for marketing

6. The ticker symbol for the Chinese Yuan
directly or indirectly
15 months in advance - layering on hedges through time
CNY
exchange one currency for another

7. Functional currency of an entity is determined by Treasury Accounting based on ______ requirements
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
weakens
SFAS 52

8. 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 risk
There are FOUR
British Pound - Australian Dollar - New Zealand Dollar - Euro
Pound strengthens

9. USD-JPY account for ____ of trading FX volume
lost
Currency of the respective operating unit's country
directly or indirectly
13%

10. What rate is used on the balance sheet?
12%
average rate
BS account balances
End of Period Rate (SCO-4 rate)

11. Give some examples of countries where its hard to hedge?
China - Malaysia - Colombia - Chile - Argentina
P&L activity
15 months in advance - layering on hedges through time
exchange one currency for another

12. How do you read EUR-USD = 1.40
B/S rate
1USD
spot price x interest differential
This means 1 Euro measured against US Dollars is worth $1.40

13. What is Functional Currency?
valuable
two business days
The currency of the primary economic environment in which the legal entity operates
The average P&L rate (APL) which is the weighted average of Treasury Daily Spot rates for the month

14. Hedge Rate is _______________ that will be achieved on a specific quarter's cash flow
valuable
Indirect quote
an estimate of aggregate rate
FX policy

15. 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?
more
CNY
Mitigates risks by using hedging techniques
1.40 - Because I would be able to buy more euros

16. 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
Hedging allows us to provide stable earnings - makes planning simpler - and allows for longer lead time for marketing
BS account balances
3 -210 billion (3 trillion)

17. When is hedge rate published?
directly or indirectly
6 weeks prior to Q/E
15 months in advance - layering on hedges through time
weakens

18. What would happen if the US interest rate was bigger than Mexico?
financial strategy and financial policy
The calculation is the same - but instead of adding forward points you subtract
actual weighted average contract rate
value

19. The difference in interest rate is referred to as...
Hedging allows us to provide stable earnings - makes planning simpler - and allows for longer lead time for marketing
Government regulation and cost of hedging
Forward Points
300 billion

20. The timing of when we execute hedges drastically impacts the ____________ we achieve
The average P&L rate (APL) which is the weighted average of Treasury Daily Spot rates for the month
average rate
Forward contracts and Options
direct

21. How does treasury accomplish its purpose?
FX policy
AUD
15 months in advance - layering on hedges through time
Mitigates risks by using hedging techniques

22. Give an example of one way to hedge a price increase in gas prices...
financial strategy and financial policy
P&L activity
Buy a stock in an Oil Company. Stock price increases when oil goes up and offset for your expenses in filling up tank
Treasury Daily Spot Rate

23. In a stock-USD relationship - when arrow is going down means that stock is becoming ____ valuable against dollar
1 unit
less
Buy a stock in an Oil Company. Stock price increases when oil goes up and offset for your expenses in filling up tank
Forward Points

24. The rules for adding or subtracting forward points depend on whether it is quoted...
Accounts that revalue every month to the balance sheet rate. (cash - A/are)
direct
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
directly or indirectly

25. If 1 pizza = 15 USD then ____ = 1/15 pizza
Hedging allows us to provide stable earnings - makes planning simpler - and allows for longer lead time for marketing
The difference between hedge rate and final effective hedge rate
allow FX rate
1USD

26. GBP-USD account for ____ of trading FX volume
valuable
15 months in advance - layering on hedges through time
12%
financial risk

27. Australian currency code is...
allow FX rate
1 unit
financial strength
AUD

28. In a EUR-USD relationship - when arrow is going down - means Euro weakens and US Dollar...
an estimate of aggregate rate
strengthens
This means 1 Euro measured against US Dollars is worth $1.40
30%

29. Effective Hedge Rate is ________________ of all outstanding FX contracts for the quarter being hedged
1 unit
F&O account 87503
Accounts that revalue every month to the balance sheet rate. (cash - A/are)
actual weighted average contract rate

30. ____________ booked a hedge rate is trued up to the EHR each month during the quarter
SEK
P&L activity
F&O account 87503
What is happening

31. Forward points multiply the exchange rate by the...
interest rate differential
Hedging protects the value of a future event by executing a trade that changes value in the opposite direction as the future event.
The calculation is the same - but instead of adding forward points you subtract
30%

32. What rate is used on the P&L?
three digit ticker symbol ex: USD - United States Dollar
Hedging allows us to provide stable earnings - makes planning simpler - and allows for longer lead time for marketing
foreign exchange forward contract
The average P&L rate (APL) which is the weighted average of Treasury Daily Spot rates for the month

33. In a stock-USD relationship - when arrow is going up means that stock is becoming more ______ against dollar
1 unit
1.40 - Because I would be able to buy more euros
adverse fluctuations
valuable

34. 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
downward slope
This means 1 Euro measured against US Dollars is worth $1.40
allow FX rate
two business days

35. EUR-USD currency pair accounts for about ____ of all FX volume
30%
Pound strengthens
allow FX rate
downward slope

36. What currencies use Direct method of quoting?
The difference between hedge rate and final effective hedge rate
directly or indirectly
weakens
British Pound - Australian Dollar - New Zealand Dollar - Euro

37. 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
Mitigates risks by using hedging techniques
more
1 share = 1/3 case

38. 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...
Government regulation and cost of hedging
allow FX rate
is getting bigger
Hedging protects the value of a future event by executing a trade that changes value in the opposite direction as the future event.

39. A Spot happens in...
foreign currency* rate
two business days
30%
China - Malaysia - Colombia - Chile - Argentina

40. What is Revaluation?

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41. Direct quote- _____________=USD
The difference between hedge rate and final effective hedge rate
downward slope
interest rate differential
foreign currency* rate

42. What is Fair Value hedge program used for?
weakens
Used to hedge against the change in fair value (revaluation) of monetary assets & liabilities
1 Case = 2 pizzas
more

43. The Foreign Exchange market is the __________ market in the world
F&O account 87503
largest - It is open 24 hours a day - except weekends
spot price x interest differential
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

44. What instruments do we use to hedge?
financial strength
1.40 - Because I would be able to buy more euros
Forward contracts and Options
The calculation is the same - but instead of adding forward points you subtract

45. If you are an European planning a trip to America - which rate do you want? 1.40 or 1.60?
15 months in advance - layering on hedges through time
translation
1.60 - Because you can buy more dollars
adverse fluctuations

46. __________ is used for translation of foreign currency B/S to reporting currency
B/S rate
China - Malaysia - Colombia - Chile - Argentina
an estimate of aggregate rate
BS account balances

47. ____________ - foreign currency/rate = USD
currency options and forward
Indirect quote
liquidity and cash
Currency in which the entity reports results externally

48. What does it mean to hedge?
P&L activity
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.
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

49. What is cash flow used for?
The difference between hedge rate and final effective hedge rate
allow FX rate
actual weighted average contract rate
Used to hedge against variability in expected future cash flows

50. An ___________ expresses the value of one currency relative to another
downward slope
financial strength
three digit ticker symbol ex: USD - United States Dollar
exchange rate