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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. What is the fourth characteristic of transaction exposure?
agreed upon austerity
Transportation costs - trade barriers - and not trade inputs such as rents or wages
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
Lending of funds in foreign currencies

2. No single theory can explain explain the causes the value of currencies to change. True or False?
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
Relative price differences and ppp
True
It helps them understand the influence of exchange rates on profitability of trade investment deals

3. What is the first characteristic of transaction exposure ?
Affected by fluctuation in foreign exchange values
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)
Intervention currency (peg country currency)
agreed upon austerity

4. What are three factors that impact a country's future exchange rate movements?
Inflation - interest rate - and market psychology
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
Issue mo good loans so that profits from new business can eat away the losses form the bad
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

5. What is a spot rate?
Forward exchange or spot exchange
Delay payables if currency is expected to depreciate
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)
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

6. What is the second thing that determines the Forex rates?
Interest rates and money supply
An attempt to collect currency receivables early as result of expected depreciation
Measurement of past events
Collecting & spending of money by the government

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

8. What holds true to Purchase Power Parity Theory?
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
Increase their exposure to banking -'s banking center
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

9. What is a currency swamp?
Spot rates - forward rates - and swaps
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
Delay payables if currency is expected to depreciate
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates

10. How can translation exposure be described?
Delay payables if currency is expected to depreciate
Impact of currency exchange rate changes on reported financial statements
Transaction - translation and economic exposure
Paying foreign currency payable before dues as a result expected currency appreciation

11. What are the purposes of fiscal policies?
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
A common reference
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
Collecting & spending of money by the government

12. How do you insure or hedge against a Forex risk?
Exchange rates are determined by the demand and supply for different currencies
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
Forward exchange or spot exchange

13. How can transaction exposure be described?
Borrowing of funds in foreign currency
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
The income form individual transacations
agreed upon austerity

14. What are the three ways of insuring against a Forex risk?
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
Spot rates - forward rates - and swaps
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
Affected by fluctuation in foreign exchange values

15. What is the first roels of the U.S. dollar outside the U.S.?
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
u.s. dollar
Group of investors movement in the same direction and same time or government intervention
A common reference

16. What are some factors that influence exchange rates?
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
Paying foreign currency payable before dues as a result expected currency appreciation
domino effect
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

17. What is the first issue with EFSF?
Lead and lag strategies
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
Currency of one country can be exchanged for the currency of another country
Establish central control and attempts to forecast future exchange rates

18. What is the second issue with EFSF?
Currency of one country can be exchanged for the currency of another country
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
True
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)

19. How and What is the purpose of distributing assets?
Impact of currency exchange rate changes on reported financial statements
up to date
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
Reserve currency

20. What is the second characteristic of lag strategy?
Inflation - interest rate - and market psychology
Banks stability was measure at a 5% capital adequacy ratio
Delay payables if currency is expected to depreciate
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

21. When do countries use foreign exchange market?
Control the amount of money in circulation - enforced by government policies - focus on growth rate
Delay collection of foreign currency receivables if currency is exception to appreciate
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
Exchange rates are determined by the demand and supply for different currencies

22. What is a forward rate?
Exchange rate policies
24/7
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
Affected by fluctuation in foreign exchange values

23. What is the fifth thing that determines the forex rates?
Intervention currency (peg country currency)
Investor psychology
True
It helps them understand the influence of exchange rates on profitability of trade investment deals

24. What do monetary policies do?
The income form individual transacations
up to date
Control the amount of money in circulation - enforced by government policies - focus on growth rate
1. protect resources efficiently 2. ensure correct mix of tactics and strategies

25. What is free convertible currency?
Productivity and balance payments
agreed upon austerity
Lending of funds in foreign currencies
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency

26. What are the characteristics of economic exposure?
Inflation - interest rate - and market psychology
Lead and lag strategies
Banks stability was measure at a 5% capital adequacy ratio
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs

27. How do you establish central control?
Intervention currency (peg country currency)
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
The income form individual transacations
Relative price differences and ppp

28. What are some strategies for managing forex risk?
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
Lead and lag strategies
Firms future international earning power
Establish central control and attempts to forecast future exchange rates

29. What is externally convertible currency
Group of investors movement in the same direction and same time or government intervention
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
Reserve currency
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

30. What is the third role of the U.S. dollar outside the U.S.?
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
Reserve currency
London - New York - Tokyo - and Singapore
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

31. What are two methods of reducing translation and transaction exposure?
Lead and lag strategies
Monetary and fiscal policies
Paying foreign currency payable before dues as a result expected currency appreciation
Measurement of past events

32. What is the characteristic of translation expose?
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
State driven recapitalization are now needed
Measurement of past events
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

33. Because many banks (2/3) are below the capital adequacy ratio of 9% many can not recapitalize on their own as a result
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
Transaction - translation and economic exposure
Goods and services of one country can be exchanged for the goods and services of another country
State driven recapitalization are now needed

34. Burger economics!!! Why do we use it?
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP
24/7
Increase currency values and protect against increases in foreign prices of goods and services
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency

35. What is the first characteristic of lag strategy?
Investor psychology
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
Delay collection of foreign currency receivables if currency is exception to appreciate
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

36. Greece has not defaulted because it has not been able to fully implement its...
agreed upon austerity
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates

37. What are other strategies for managing forex risk?
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
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
True
An attempt to collect currency receivables early as result of expected depreciation

38. What is the nominal exchange rate?
Currency of one country can be exchanged for the currency of another country
Inflation - interest rate - and market psychology
up to date
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)

39. What is the real exchange rate?
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
Goods and services of one country can be exchanged for the goods and services of another country
Forward exchange or spot exchange
Intervention currency (peg country currency)

40. What are the three different types of foreign exchange rate risks?
Monetary and fiscal policies
Intervention currency (peg country currency)
Transaction - translation and economic exposure
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)

41. What is the bandwagon effect when looking at form investor psychology ?
Vehicle currency(transaction between 2 less commonly used currencies)
Paying foreign currency payable before dues as a result expected currency appreciation
Group of investors movement in the same direction and same time or government intervention
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

42. According to economic theories of exchage rate determination?
Exchange rates are determined by the demand and supply for different currencies
Transaction - translation and economic exposure
The income form individual transacations
Increase currency values and protect against increases in foreign prices of goods and services

43. The euro faces risks fo recapitalization?
Banks stability was measure at a 5% capital adequacy ratio
Issue mo good loans so that profits from new business can eat away the losses form the bad
An attempt to collect currency receivables early as result of expected depreciation
Obligations for the purchase or sale of goods and services at previously agreed prices

44. It is important to stay __________ with your current events
Delay collection of foreign currency receivables if currency is exception to appreciate
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
1. distribute productive assets 2. ensure assets are not concentrated in countries
up to date

45. What is non convertible currency?
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
agreed upon austerity
The income form individual transacations

46. When do countries use the foreign exchange market?
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
u.s. dollar
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates

47. What are some characteristics of swaps?
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
up to date
A common reference
Impact of currency exchange rate changes on reported financial statements

48. What is the third characteristic of transaction exposure?
Transaction - translation and economic exposure
Borrowing of funds in foreign currency
Lending of funds in foreign currencies
Obligations for the purchase or sale of goods and services at previously agreed prices

49. What is the law of one price?
1. distribute productive assets 2. ensure assets are not concentrated in countries
Investor psychology
Lead and lag strategies
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

50. What is the second characteristic of lead strategy?
Paying foreign currency payable before dues as a result expected currency appreciation
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)
True
Lead and lag strategies