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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 externally convertible currency
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
Collecting & spending of money by the government
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency

2. What are other strategies for managing forex risk?
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
Spot rates and forward rates
agreed upon austerity
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates

3. What are some characteristics of swaps?
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
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
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

4. What are the important trading centers?
Group of investors movement in the same direction and same time or government intervention
London - New York - Tokyo - and Singapore
Currency of one country can be exchanged for the currency of another country
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP

5. What is the second characteristic of lead strategy?
Transportation costs - trade barriers - and not trade inputs such as rents or wages
The income form individual transacations
Paying foreign currency payable before dues as a result expected currency appreciation
Interest rates and money supply

6. What is the nature of the forex market?
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
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
Control the amount of money in circulation - enforced by government policies - focus on growth rate

7. How can translation exposure be described?
Establish central control and attempts to forecast future exchange rates
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
Impact of currency exchange rate changes on reported financial statements
Paying foreign currency payable before dues as a result expected currency appreciation

8. Greece has not defaulted because it has not been able to fully implement its...
u.s. dollar
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP
agreed upon austerity
Transaction - translation and economic exposure

9. What are the two ways to quote currency?
State driven recapitalization are now needed
Interest rates and money supply
Spot rates and forward rates
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)

10. What are three factors that impact a country's future exchange rate movements?
Measurement of past events
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
Inflation - interest rate - and market psychology

11. In the long run empirical testing has of the PPP Theory has proven to be accurate in the long run. True or False
True
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
State driven recapitalization are now needed

12. What is a currency swamp?
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
domino effect
Productivity and balance payments
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates

13. What are the purposes of fiscal policies?
Collecting & spending of money by the government
Exchange rates are determined by the demand and supply for different currencies
Affected by fluctuation in foreign exchange values
Spot rates and forward rates

14. How can transaction exposure be described?
1. distribute productive assets 2. ensure assets are not concentrated in countries
agreed upon austerity
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
The income form individual transacations

15. What is the characteristic of translation expose?
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
Measurement of past events
Delay collection of foreign currency receivables if currency is exception to appreciate
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs

16. When do countries use the foreign exchange market?
u.s. dollar
Vehicle currency(transaction between 2 less commonly used currencies)
Spot rates - forward rates - and swaps
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.

17. What is non convertible currency?
Delay collection of foreign currency receivables if currency is exception to appreciate
Measurement of past events
Monetary and fiscal policies
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency

18. What causes big mac prices to vary?
Issue mo good loans so that profits from new business can eat away the losses form the bad
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
Transportation costs - trade barriers - and not trade inputs such as rents or wages

19. What is the third role of the U.S. dollar outside the U.S.?
Reserve currency
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
Affected by fluctuation in foreign exchange values
Lead and lag strategies

20. What is the second role of the U.S. dollar outside the U.S. ?
Intervention currency (peg country currency)
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
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
domino effect

21. What is a forward rate?
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
Lead and lag strategies

22. What holds true to Purchase Power Parity Theory?
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
Banks stability was measure at a 5% capital adequacy ratio

23. What is the purpose of not concentrating assets in countries?
An attempt to collect currency receivables early as result of expected depreciation
State driven recapitalization are now needed
Increase currency values and protect against increases in foreign prices of goods and services
1. distribute productive assets 2. ensure assets are not concentrated in countries

24. What is the second characteristic of transaction exposure?
Obligations for the purchase or sale of goods and services at previously agreed prices
Delay payables if currency is expected to depreciate
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
Borrowing of funds in foreign currency

25. What are the two ways to reduce economic exposure?
True
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
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs

26. What do monetary policies do?
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
True
Currency of one country can be exchanged for the currency of another country
Control the amount of money in circulation - enforced by government policies - focus on growth rate

27. According to economic theories of exchage rate determination?
Exchange rates are determined by the demand and supply for different currencies
Monetary and fiscal policies
Reserve currency
True

28. Because many banks (2/3) are below the capital adequacy ratio of 9% many can not recapitalize on their own as a result
State driven recapitalization are now needed
A common reference
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
Exchange rates are determined by the demand and supply for different currencies

29. When do countries use foreign exchange market?
Reserve currency
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
Productivity and balance payments
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

30. What is the fourth characteristic of transaction exposure?
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
Vehicle currency(transaction between 2 less commonly used currencies)
Lending of funds in foreign currencies
Issue mo good loans so that profits from new business can eat away the losses form the bad

31. What is the nominal exchange rate?
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
Currency of one country can be exchanged for the currency of another country
Measurement of past events
An attempt to collect currency receivables early as result of expected depreciation

32. What is arbitrage?
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)
State driven recapitalization are now needed
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency

33. What are some strategies for managing forex risk?
London - New York - Tokyo - and Singapore
An attempt to collect currency receivables early as result of expected depreciation
Spot rates - forward rates - and swaps
Establish central control and attempts to forecast future exchange rates

34. What is the fourth thing that determines the forex rates?
Exchange rate policies
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
Vehicle currency(transaction between 2 less commonly used currencies)
Delay collection of foreign currency receivables if currency is exception to appreciate

35. What is free convertible currency?
Firms future international earning power
Relative price differences and ppp
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
Monetary and fiscal policies

36. No single theory can explain explain the causes the value of currencies to change. True or False?
Paying foreign currency payable before dues as a result expected currency appreciation
True
Intervention currency (peg country currency)
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

37. Currently margins require more cash reserves - What is the best method of doing this **** in the Euro Zone?
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
Issue mo good loans so that profits from new business can eat away the losses form the bad

38. What is the first characteristic of lead strategy?
Control the amount of money in circulation - enforced by government policies - focus on growth rate
An attempt to collect currency receivables early as result of expected depreciation
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps

39. What is the first characteristic of lag strategy?
Intervention currency (peg country currency)
Increase their exposure to banking -'s banking center
True
Delay collection of foreign currency receivables if currency is exception to appreciate

40. What is the third thing that determines the forex rates?
Transaction - translation and economic exposure
Monetary and fiscal policies
Delay payables if currency is expected to depreciate
Productivity and balance payments

41. 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
Lending of funds in foreign currencies
24/7
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency

42. The euro faces risks fo recapitalization?
Productivity and balance payments
Relative price differences and ppp
Banks stability was measure at a 5% capital adequacy ratio
u.s. dollar

43. What are some factors that influence exchange rates?
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
Exchange rate policies
Lending of funds in foreign currencies

44. What is the fifth thing that determines the forex rates?
State driven recapitalization are now needed
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
Monetary and fiscal policies
Investor psychology

45. What are the types of Exchange Rate Fluctuations?
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
Monetary and fiscal policies
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
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP

46. How do you establish central control?
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
Lending of funds in foreign currencies
Currency of one country can be exchanged for the currency of another country
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency

47. What is hedging?

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48. Marekts are open...
Transaction - translation and economic exposure
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
Lead and lag strategies
24/7

49. What are the characteristics of economic exposure?
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
Reserve currency
Lending of funds in foreign currencies
Lead and lag strategies

50. How and What is the purpose of distributing assets?
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP
Interest rates and money supply