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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 nominal exchange rate?
Lead and lag strategies
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
Borrowing of funds in foreign currency
Currency of one country can be exchanged for the currency of another country

2. How can translation exposure be described?
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
Impact of currency exchange rate changes on reported financial statements
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
1. protect resources efficiently 2. ensure correct mix of tactics and strategies

3. What is the third role of the U.S. dollar outside the U.S.?
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 purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)
Transaction - translation and economic exposure
Reserve currency

4. What are the characteristics of economic exposure?
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
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
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs

5. What are some strategies for managing forex risk?
1. distribute productive assets 2. ensure assets are not concentrated in countries
Inflation - interest rate - and market psychology
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
Establish central control and attempts to forecast future exchange rates

6. What is the second characteristic of lag strategy?
London - New York - Tokyo - and Singapore
Investor psychology
Delay collection of foreign currency receivables if currency is exception to appreciate
Delay payables if currency is expected to depreciate

7. What is economic exposure?
Control the amount of money in circulation - enforced by government policies - focus on growth rate
Currency of one country can be exchanged for the currency of another country
Firms future international earning power
Vehicle currency(transaction between 2 less commonly used currencies)

8. What is a currency swamp?
u.s. dollar
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)
Lead and lag strategies

9. What are the important trading centers?
Forward exchange or spot exchange
An attempt to collect currency receivables early as result of expected depreciation
True
London - New York - Tokyo - and Singapore

10. What are two methods of reducing translation and transaction exposure?
Measurement of past events
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP
Lead and lag strategies
Firms future international earning power

11. In the long run empirical testing has of the PPP Theory has proven to be accurate in the long run. True or False
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
Spot rates and forward rates
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
True

12. The euro faces risks fo recapitalization?
Measurement of past events
Banks stability was measure at a 5% capital adequacy ratio
agreed upon austerity
Lending of funds in foreign currencies

13. How can transaction exposure be described?
The income form individual transacations
Issue mo good loans so that profits from new business can eat away the losses form the bad
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)
Lead and lag strategies

14. Most Transaction inovolve...
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
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
u.s. dollar

15. What are the two ways to reduce economic exposure?
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
1. distribute productive assets 2. ensure assets are not concentrated in countries
Delay payables if currency is expected to depreciate
Paying foreign currency payable before dues as a result expected currency appreciation

16. Defaulting on debt has a __________ that intertwines all countries in Europe.
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)
domino effect
Firms future international earning power
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

17. Marekts are open...
24/7
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no 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
Collecting & spending of money by the government

18. What are the purposes of fiscal policies?
Interest rates and money supply
Collecting & spending of money by the government
Reserve currency
Delay payables if currency is expected to depreciate

19. What is a forward rate?
True
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
Obligations for the purchase or sale of goods and services at previously agreed prices
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure

20. How do you establish central control?
1. distribute productive assets 2. ensure assets are not concentrated in countries
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. protect resources efficiently 2. ensure correct mix of tactics and strategies
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs

21. What is the third thing that determines the forex rates?
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
It helps them understand the influence of exchange rates on profitability of trade investment deals
Vehicle currency(transaction between 2 less commonly used currencies)
Productivity and balance payments

22. What are the first two things that determine Forex rates?
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
Relative price differences and ppp
Increase their exposure to banking -'s banking center
Interest rates and money supply

23. What is the first issue with EFSF?
Transaction - translation and economic exposure
Establish central control and attempts to forecast future exchange rates
Goods and services of one country can be exchanged for the goods and services of another country
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

24. What is the real exchange rate?
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
Goods and services of one country can be exchanged for the goods and services of another country
True
Affected by fluctuation in foreign exchange values

25. What is free convertible currency?
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
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
Transportation costs - trade barriers - and not trade inputs such as rents or wages
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency

26. What is the fourth roles of the U.S. dollar outside the U.S.?
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
Inflation - interest rate - and market psychology
Vehicle currency(transaction between 2 less commonly used currencies)
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency

27. What is non convertible currency?
Exchange rates are determined by the demand and supply for different currencies
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
Forward exchange or spot exchange
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency

28. What is the third characteristic of transaction exposure?
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
Borrowing of funds in foreign currency
True
Transaction - translation and economic exposure

29. Currently margins require more cash reserves - What is the best method of doing this **** in the Euro Zone?
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
Issue mo good loans so that profits from new business can eat away the losses form the bad
Relative price differences and ppp
Increase their exposure to banking -'s banking center

30. Burger economics!!! Why do we use it?
Paying foreign currency payable before dues as a result expected currency appreciation
Firms future international earning power
The income form individual transacations
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP

31. What is the first characteristic of lead strategy?
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
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
Establish central control and attempts to forecast future exchange rates

32. What is the law of one price?
Control the amount of money in circulation - enforced by government policies - focus on growth rate
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
Establish central control and attempts to forecast future exchange rates
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency

33. How do you insure or hedge against a Forex risk?
Lead and lag strategies
Inflation - interest rate - and market psychology
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
Forward exchange or spot exchange

34. What is a spot rate?
Firms future international earning power
Exchange rate policies
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)
agreed upon austerity

35. Because many banks (2/3) are below the capital adequacy ratio of 9% many can not recapitalize on their own as a result
24/7
Banks stability was measure at a 5% capital adequacy ratio
State driven recapitalization are now needed
u.s. dollar

36. What is arbitrage?
True
Interest rates and money supply
A common reference
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)

37. What is the fifth thing that determines the forex rates?
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
u.s. dollar
1. distribute productive assets 2. ensure assets are not concentrated in countries
Investor psychology

38. What is the second characteristic of transaction exposure?
Control the amount of money in circulation - enforced by government policies - focus on growth rate
Large number of individuals and cos exchange of domestic currencies for a foreign currency
Obligations for the purchase or sale of goods and services at previously agreed prices
Vehicle currency(transaction between 2 less commonly used currencies)

39. What holds true to Purchase Power Parity Theory?
The income form individual transacations
Exchange rate policies
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
Vehicle currency(transaction between 2 less commonly used currencies)

40. What is the fourth thing that determines the forex 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
Exchange rate policies
Currency of one country can be exchanged for the currency of another country
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)

41. According to economic theories of exchage rate determination?
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
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
Obligations for the purchase or sale of goods and services at previously agreed prices
Exchange rates are determined by the demand and supply for different currencies

42. 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 purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)
Interest rates and money supply
Issue mo good loans so that profits from new business can eat away the losses form the bad

43. What is capital fight when looking at it form investor psychology?
Large number of individuals and cos exchange of domestic currencies for a foreign currency
domino effect
Lending of funds in foreign currencies
True

44. What is the characteristic of translation expose?
Transportation costs - trade barriers - and not trade inputs such as rents or wages
1. distribute productive assets 2. ensure assets are not concentrated in countries
Measurement of past events
A common reference

45. How and What is the purpose of distributing assets?
Establish central control and attempts to forecast future exchange rates
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
Intervention currency (peg country currency)
Measurement of past events

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

47. Bailout Fund of EFSF - What is this shiz nitz?
Forward exchange or spot exchange
1. distribute productive assets 2. ensure assets are not concentrated in countries
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs

48. 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
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
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
Firms future international earning power

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

50. What do monetary policies do?
Inflation - interest rate - and market psychology
Intervention currency (peg country currency)
Control the amount of money in circulation - enforced by government policies - focus on growth rate
Spot rates - forward rates - and swaps