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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 are two methods of reducing translation and transaction exposure?
Lead and lag strategies
Intervention currency (peg country currency)
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps

2. What are three factors that impact a country's future exchange rate movements?
Inflation - interest rate - and market psychology
Spot rates and forward rates
1. distribute productive assets 2. ensure assets are not concentrated in countries
London - New York - Tokyo - and Singapore

3. What are some characteristics of swaps?
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic 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
True
State driven recapitalization are now needed

4. No single theory can explain explain the causes the value of currencies to change. True or False?
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
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
Productivity and balance payments
True

5. Bailout Fund of EFSF - What is this shiz nitz?
Delay collection of foreign currency receivables if currency is exception to appreciate
Exchange rates are determined by the demand and supply for different currencies
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs

6. What are some factors that influence exchange rates?
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
An attempt to collect currency receivables early as result of expected depreciation
State driven recapitalization are now needed
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency

7. What is the bandwagon effect when looking at form investor psychology ?
Lending of funds in foreign currencies
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
Group of investors movement in the same direction and same time or government intervention

8. In the long run empirical testing has of the PPP Theory has proven to be accurate in the long run. True or False
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)
Collecting & spending of money by the government
The income form individual transacations
True

9. What is the first characteristic of transaction exposure ?
agreed upon austerity
Affected by fluctuation in foreign exchange values
up to date
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)

10. What implications does understanding foreign exchange rates have on managers?
Exchange rate policies
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
It helps them understand the influence of exchange rates on profitability of trade investment deals
1. distribute productive assets 2. ensure assets are not concentrated in countries

11. What is the fourth characteristic of transaction exposure?
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
State driven recapitalization are now needed
Delay collection of foreign currency receivables if currency is exception to appreciate
Lending of funds in foreign currencies

12. What is the second characteristic of lag strategy?
Delay payables if currency is expected to depreciate
Paying foreign currency payable before dues as a result expected currency appreciation
agreed upon austerity
Inflation - interest rate - and market psychology

13. Because many banks (2/3) are below the capital adequacy ratio of 9% many can not recapitalize on their own as a result
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
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
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs

14. Greece has not defaulted because it has not been able to fully implement its...
agreed upon austerity
up to date
Monetary and fiscal policies
1. distribute productive assets 2. ensure assets are not concentrated in countries

15. What are the types of Exchange Rate Fluctuations?
Increase currency values and protect against increases in foreign prices of goods and services
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
Monetary and fiscal policies
Lending of funds in foreign currencies

16. What causes big mac prices to vary?
Measurement of past events
State driven recapitalization are now needed
Transportation costs - trade barriers - and not trade inputs such as rents or wages
The income form individual transacations

17. Defaulting on debt has a __________ that intertwines all countries in Europe.
Impact of currency exchange rate changes on reported financial statements
Measurement of past events
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

18. What is the second issue with EFSF?
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
Control the amount of money in circulation - enforced by government policies - focus on growth rate
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days

19. What are the three different types of foreign exchange rate risks?
Delay payables if currency is expected to depreciate
Spot rates and forward rates
Forward exchange or spot exchange
Transaction - translation and economic exposure

20. What is economic exposure?
Obligations for the purchase or sale of goods and services at previously agreed prices
Measurement of past events
Establish central control and attempts to forecast future exchange rates
Firms future international earning power

21. What is hedging?

22. The euro faces risks fo recapitalization?
State driven recapitalization are now needed
Banks stability was measure at a 5% capital adequacy ratio
Delay payables if currency is expected to depreciate
Borrowing of funds in foreign currency

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

24. What is the characteristic of translation expose?
Measurement of past events
Reserve currency
Affected by fluctuation in foreign exchange values
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs

25. What is the purpose of not concentrating assets in countries?
Affected by fluctuation in foreign exchange values
Delay collection of foreign currency receivables if currency is exception to appreciate
Increase currency values and protect against increases in foreign prices of goods and services
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

26. Most Transaction inovolve...
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
u.s. dollar
Lead and lag strategies

27. What is the first roels of the U.S. dollar outside the U.S.?
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)
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

28. What are other strategies for managing forex risk?
Control the amount of money in circulation - enforced by government policies - focus on growth rate
Transportation costs - trade barriers - and not trade inputs such as rents or wages
Inflation - interest rate - and market psychology
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure

29. What are the first two things that determine Forex rates?
Impact of currency exchange rate changes on reported financial statements
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
Relative price differences and ppp
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP

30. What is the first characteristic of lag strategy?
A common reference
Measurement of past events
Delay collection of foreign currency receivables if currency is exception to appreciate
Lead and lag strategies

31. What are the characteristics of economic exposure?
Forward exchange or spot exchange
Measurement of past events
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs

32. What is a currency swamp?
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
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
Spot rates and forward rates

33. Marekts are open...
24/7
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
Banks stability was measure at a 5% capital adequacy ratio
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

34. What is externally convertible currency
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
True
Lead and lag strategies

35. 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
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
Borrowing of funds in foreign currency
Exchange rates are determined by the demand and supply for different currencies

36. What is the nature of the forex 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
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
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
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

37. When do countries use the foreign exchange market?
Impact of currency exchange rate changes on reported financial statements
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
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 fluctuation in foreign exchange values

38. What holds true to Purchase Power Parity Theory?
up to date
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
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
Exchange rate policies

39. According to economic theories of exchage rate determination?
Investor psychology
Exchange rates are determined by the demand and supply for different currencies
1. distribute productive assets 2. ensure assets are not concentrated in countries
Collecting & spending of money by the government

40. Currently margins require more cash reserves - What is the best method of doing this **** in the Euro Zone?
State driven recapitalization are now needed
Issue mo good loans so that profits from new business can eat away the losses form the bad
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)
Banks stability was measure at a 5% capital adequacy ratio

41. What is the second characteristic of transaction exposure?
Obligations for the purchase or sale of goods and services at previously agreed prices
London - New York - Tokyo - and Singapore
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
Measurement of past events

42. What are the purposes of fiscal policies?
Collecting & spending of money by the government
A common reference
Lead and lag strategies
up to date

43. What are the important trading centers?
Intervention currency (peg country currency)
Exchange rate policies
domino effect
London - New York - Tokyo - and Singapore

44. What is the third role of the U.S. dollar outside the U.S.?
Obligations for the purchase or sale of goods and services at previously agreed prices
Reserve currency
1. distribute productive assets 2. ensure assets are not concentrated in countries
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs

45. What are the two ways to quote currency?
Spot rates and forward rates
Transaction - translation and economic exposure
Transportation costs - trade barriers - and not trade inputs such as rents or wages
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)

46. What is capital fight when looking at it form investor psychology?
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
It helps them understand the influence of exchange rates on profitability of trade investment deals
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
Large number of individuals and cos exchange of domestic currencies for a foreign currency

47. What is non convertible currency?
A common reference
Collecting & spending of money by the government
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
Delay payables if currency is expected to depreciate

48. Burger economics!!! Why do we use it?
up to date
London - New York - Tokyo - and Singapore
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP
Transaction - translation and economic exposure

49. What is arbitrage?
Delay payables if currency is expected to depreciate
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
Reserve currency
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)

50. How and What is the purpose of distributing assets?
Large number of individuals and cos exchange of domestic currencies for a foreign currency
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
Exchange rate policies
Borrowing of funds in foreign currency