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Foreign Exchange Market

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. When do countries use foreign exchange market?
1. pay a foreign co for its products or services in a countries currency 2. spare cash for short term money market investments 3. involved in currency speculation
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)
Intervention currency (peg country currency)
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates

2. What are some strategies for managing forex risk?
The income form individual transacations
Delay payables if currency is expected to depreciate
Currency of one country can be exchanged for the currency of another country
Establish central control and attempts to forecast future exchange rates

3. Greece has not defaulted because it has not been able to fully implement its...
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
Collecting & spending of money by the government
Impact of currency exchange rate changes on reported financial statements
agreed upon austerity

4. Marekts are open...
1. distribute productive assets 2. ensure assets are not concentrated in countries
Intervention currency (peg country currency)
24/7
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.

5. What is the first characteristic of lead strategy?
Measurement of past events
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
Goods and services of one country can be exchanged for the goods and services of another country
An attempt to collect currency receivables early as result of expected depreciation

6. What is hedging?

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7. What causes big mac prices to vary?
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
Delay collection of foreign currency receivables if currency is exception to appreciate
High-speed computer linkages between trading centers around the globe - have created 1 market - resulted in no significant difference between exchange rate quotes - different exchange quoted result in arbitrage opportunities
Transportation costs - trade barriers - and not trade inputs such as rents or wages

8. What is externally convertible currency
Interest rates and money supply
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
True

9. What are the first two things that determine Forex rates?
Relative price differences and ppp
u.s. dollar
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
Collecting & spending of money by the government

10. What are some factors that influence exchange rates?
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
True
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs

11. How do you establish central control?
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
1. not that many staffing 2. months away form being implemented 3. esfs new power to restructured banks goes against EU treaties that guarantee all banking authority to the member state level

12. What is non convertible currency?
Investor psychology
True
Paying foreign currency payable before dues as a result expected currency appreciation
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency

13. What holds true to Purchase Power Parity Theory?
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
There is absence of trade barriers - each country price in commodity basket are at an equal ration - not accurate in predicting exchange rates in the short run
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
Firms future international earning power

14. Because many banks (2/3) are below the capital adequacy ratio of 9% many can not recapitalize on their own as a result
Large number of individuals and cos exchange of domestic currencies for a foreign currency
State driven recapitalization are now needed
Forward exchange or spot exchange
An attempt to collect currency receivables early as result of expected depreciation

15. What is the real exchange rate?
Vehicle currency(transaction between 2 less commonly used currencies)
Paying foreign currency payable before dues as a result expected currency appreciation
1. no process 2. no agreement as to who should hold the process 3. Germans want eco reforms following bailout 4. remediation and supervisory structures must be built
Goods and services of one country can be exchanged for the goods and services of another country

16. What is the fourth thing that determines the forex rates?
24/7
Exchange rate policies
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates

17. What is the first roels of the U.S. dollar outside the U.S.?
A common reference
In competitive markets free of transportation costs and barriers to trade identical products sold in different countries must sell for the same price is expressed in terms of the same currency
Exchange rates are determined by the demand and supply for different currencies
Reserve currency

18. Currently margins require more cash reserves - What is the best method of doing this **** in the Euro Zone?
Goods and services of one country can be exchanged for the goods and services of another country
Vehicle currency(transaction between 2 less commonly used currencies)
Issue mo good loans so that profits from new business can eat away the losses form the bad
Supply & demand of the currency -Interest rates -Inflation -Investor expectations

19. What are two methods of reducing translation and transaction exposure?
The income form individual transacations
Lead and lag strategies
Establish central control and attempts to forecast future exchange rates
A common reference

20. What is free convertible currency?
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
State driven recapitalization are now needed
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
agreed upon austerity

21. What is the third thing that determines the forex rates?
Productivity and balance payments
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
Goods and services of one country can be exchanged for the goods and services of another country
24/7

22. What is the third role of the U.S. dollar outside the U.S.?
Firms future international earning power
1. no process 2. no agreement as to who should hold the process 3. Germans want eco reforms following bailout 4. remediation and supervisory structures must be built
Reserve currency
1. distribute productive assets 2. ensure assets are not concentrated in countries

23. How and What is the purpose of distributing assets?
Collecting & spending of money by the government
Forward exchange or spot exchange
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
High-speed computer linkages between trading centers around the globe - have created 1 market - resulted in no significant difference between exchange rate quotes - different exchange quoted result in arbitrage opportunities

24. In the long run empirical testing has of the PPP Theory has proven to be accurate in the long run. True or False
Collecting & spending of money by the government
True
Group of investors movement in the same direction and same time or government intervention
Goods and services of one country can be exchanged for the goods and services of another country

25. What are some characteristics of swaps?
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)
These transactions are used when need to move out of one currency into another - they are for a limited period - there is no foreign exchange rate risk
Spot rates and forward rates
Spot rates - forward rates - and swaps

26. When do countries use the foreign exchange market?
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates

27. What is the nominal exchange rate?
Affected by fluctuation in foreign exchange values
Increase their exposure to banking -'s banking center
State driven recapitalization are now needed
Currency of one country can be exchanged for the currency of another country

28. What is the fourth roles of the U.S. dollar outside the U.S.?
Spot rates and forward rates
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
Vehicle currency(transaction between 2 less commonly used currencies)
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs

29. What is the second thing that determines the Forex rates?
Interest rates and money supply
True
Productivity and balance payments
Transaction - translation and economic exposure

30. What is the first issue with EFSF?
up to date
Spot rates - forward rates - and swaps
1. no process 2. no agreement as to who should hold the process 3. Germans want eco reforms following bailout 4. remediation and supervisory structures must be built
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.

31. Because of the recessionary environment euro banks have failed to do what?

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32. What are the characteristics of economic exposure?
Banks stability was measure at a 5% capital adequacy ratio
Firms future international earning power
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
Vehicle currency(transaction between 2 less commonly used currencies)

33. What is the fifth thing that determines the forex rates?
1. not that many staffing 2. months away form being implemented 3. esfs new power to restructured banks goes against EU treaties that guarantee all banking authority to the member state level
Transportation costs - trade barriers - and not trade inputs such as rents or wages
It helps them understand the influence of exchange rates on profitability of trade investment deals
Investor psychology

34. What are three factors that impact a country's future exchange rate movements?
An attempt to collect currency receivables early as result of expected depreciation
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
Inflation - interest rate - and market psychology
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP

35. What is the second issue with EFSF?
Impact of currency exchange rate changes on reported financial statements
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
1. not that many staffing 2. months away form being implemented 3. esfs new power to restructured banks goes against EU treaties that guarantee all banking authority to the member state level
1. distribute productive assets 2. ensure assets are not concentrated in countries

36. What are the types of Exchange Rate Fluctuations?
Delay payables if currency is expected to depreciate
These transactions are used when need to move out of one currency into another - they are for a limited period - there is no foreign exchange rate risk
Monetary and fiscal policies
Supply & demand of the currency -Interest rates -Inflation -Investor expectations

37. What is a forward rate?
High-speed computer linkages between trading centers around the globe - have created 1 market - resulted in no significant difference between exchange rate quotes - different exchange quoted result in arbitrage opportunities
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
Forward exchange or spot exchange

38. It is important to stay __________ with your current events
Large number of individuals and cos exchange of domestic currencies for a foreign currency
Monetary and fiscal policies
Investor psychology
up to date

39. How can translation exposure be described?
Goods and services of one country can be exchanged for the goods and services of another country
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
Control the amount of money in circulation - enforced by government policies - focus on growth rate
Impact of currency exchange rate changes on reported financial statements

40. What is a currency swamp?
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP
Control the amount of money in circulation - enforced by government policies - focus on growth rate
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency

41. What is the second characteristic of lag strategy?
Banks stability was measure at a 5% capital adequacy ratio
Delay payables if currency is expected to depreciate
Lending of funds in foreign currencies
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP

42. What is economic exposure?
High-speed computer linkages between trading centers around the globe - have created 1 market - resulted in no significant difference between exchange rate quotes - different exchange quoted result in arbitrage opportunities
A common reference
Firms future international earning power
Large number of individuals and cos exchange of domestic currencies for a foreign currency

43. What is the second characteristic of lead strategy?
Delay payables if currency is expected to depreciate
Currency of one country can be exchanged for the currency of another country
Paying foreign currency payable before dues as a result expected currency appreciation
agreed upon austerity

44. What is the second characteristic of transaction exposure?
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)
Lead and lag strategies
Obligations for the purchase or sale of goods and services at previously agreed prices
True

45. What are the three different types of foreign exchange rate risks?
Increase their exposure to banking -'s banking center
Transaction - translation and economic exposure
Exchange rate policies
Group of investors movement in the same direction and same time or government intervention

46. What is the first characteristic of lag strategy?
Borrowing of funds in foreign currency
Reserve currency
Delay collection of foreign currency receivables if currency is exception to appreciate
Investor psychology

47. What do monetary policies do?
Increase currency values and protect against increases in foreign prices of goods and services
Forward exchange or spot exchange
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
Control the amount of money in circulation - enforced by government policies - focus on growth rate

48. What are the three ways of insuring against a Forex risk?
Spot rates - forward rates - and swaps
High-speed computer linkages between trading centers around the globe - have created 1 market - resulted in no significant difference between exchange rate quotes - different exchange quoted result in arbitrage opportunities
Spot rates and forward rates
Issue mo good loans so that profits from new business can eat away the losses form the bad

49. What is the bandwagon effect when looking at form investor psychology ?
Group of investors movement in the same direction and same time or government intervention
Impact of currency exchange rate changes on reported financial statements
Intervention currency (peg country currency)
Delay payables if currency is expected to depreciate

50. What are the two ways to reduce economic exposure?
There is absence of trade barriers - each country price in commodity basket are at an equal ration - not accurate in predicting exchange rates in the short run
Inflation - interest rate - and market psychology
1. distribute productive assets 2. ensure assets are not concentrated in countries
Spot rates - forward rates - and swaps