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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 roles of the U.S. dollar outside the U.S.?
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
Vehicle currency(transaction between 2 less commonly used currencies)

2. What is the second thing that determines the Forex rates?
Productivity and balance payments
Vehicle currency(transaction between 2 less commonly used currencies)
Interest rates and money supply
Transaction - translation and economic exposure

3. What is the first roels of the U.S. dollar outside the U.S.?
Inflation - interest rate - and market psychology
Measurement of past events
A common reference
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)

4. What implications does understanding foreign exchange rates have on managers?
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)
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
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

5. What is the fourth thing that determines the forex rates?
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
Intervention currency (peg country currency)
Exchange rate policies
The income form individual transacations

6. What are the two ways to reduce economic exposure?
Spot rates and forward rates
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
1. distribute productive assets 2. ensure assets are not concentrated in countries
True

7. When do countries use the foreign exchange market?
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
Obligations for the purchase or sale of goods and services at previously agreed prices
True
Exchange rate policies

8. What are the purposes of fiscal policies?
Collecting & spending of money by the government
Forward exchange or spot exchange
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
Large number of individuals and cos exchange of domestic currencies for a foreign currency

9. What is the second characteristic of lead strategy?
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
Interest rates and money supply
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

10. What is the bandwagon effect when looking at form investor psychology ?
Borrowing of funds in foreign currency
Paying foreign currency payable before dues as a result expected currency appreciation
Productivity and balance payments
Group of investors movement in the same direction and same time or government intervention

11. The euro faces risks fo recapitalization?
Banks stability was measure at a 5% capital adequacy ratio
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
Exchange rates are determined by the demand and supply for different currencies
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP

12. Greece has not defaulted because it has not been able to fully implement its...
agreed upon austerity
True
Affected by fluctuation in foreign exchange values
Large number of individuals and cos exchange of domestic currencies for a foreign currency

13. What is arbitrage?
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)
Increase currency values and protect against increases in foreign prices of goods and services
Goods and services of one country can be exchanged for the goods and services 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

14. What is the fourth characteristic of transaction exposure?
Issue mo good loans so that profits from new business can eat away the losses form the bad
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
Increase their exposure to banking -'s banking center
Lending of funds in foreign currencies

15. What are the first two things that determine Forex rates?
Relative price differences and ppp
Issue mo good loans so that profits from new business can eat away the losses form the bad
London - New York - Tokyo - and Singapore
Spot rates - forward rates - and swaps

16. 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
Affected by fluctuation in foreign exchange values
True
Spot rates and forward rates

17. 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
Firms future international earning power
Issue mo good loans so that profits from new business can eat away the losses form the bad
Lending of funds in foreign currencies

18. What is the nature of the forex market?
Lead and lag strategies
Firms future international earning power
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 process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps

19. How do you establish central control?
Inflation - interest rate - and market psychology
True
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
Reserve currency

20. 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
Increase their exposure to banking -'s banking center
Goods and services of one country can be exchanged for the goods and services of another country
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs

21. It is important to stay __________ with your current events
up to date
Spot rates and forward rates
Intervention currency (peg country 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

22. What is a forward rate?
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
Banks stability was measure at a 5% capital adequacy ratio
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
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

23. How do you insure or hedge against a Forex risk?
Monetary and fiscal policies
Spot rates - forward rates - and swaps
Forward exchange or spot exchange
Collecting & spending of money by the government

24. What is hedging?

25. What are the types of Exchange Rate Fluctuations?
Issue mo good loans so that profits from new business can eat away the losses form the bad
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP
Increase their exposure to banking -'s banking center
Monetary and fiscal policies

26. What causes big mac prices to vary?
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
Goods and services of one country can be exchanged for the goods and services of another country
Lead and lag strategies
Transportation costs - trade barriers - and not trade inputs such as rents or wages

27. How can translation exposure be described?
Goods and services of one country can be exchanged for the goods and services of another country
Impact of currency exchange rate changes on reported financial statements
Spot rates and forward rates
London - New York - Tokyo - and Singapore

28. What is the purpose of not concentrating assets in countries?
True
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
The income form individual transacations
Increase currency values and protect against increases in foreign prices of goods and services

29. What is the third characteristic of transaction exposure?
Currency of one country can be exchanged for the currency of another country
Borrowing of funds in foreign currency
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
Lead and lag strategies

30. 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
Borrowing of funds in foreign currency
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

31. What is the fifth thing that determines the forex rates?
domino effect
Large number of individuals and cos exchange of domestic currencies for a foreign currency
Investor psychology
Affected by fluctuation in foreign exchange values

32. No single theory can explain explain the causes the value of currencies to change. True or False?
24/7
True
Lead and lag strategies
Relative price differences and ppp

33. In the long run empirical testing has of the PPP Theory has proven to be accurate in the long run. True or False
True
Collecting & spending of money by the government
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
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency

34. What are some strategies for managing forex risk?
Establish central control and attempts to forecast future exchange rates
u.s. dollar
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
Banks stability was measure at a 5% capital adequacy ratio

35. What is a currency swamp?
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
Productivity and balance payments
Firms future international earning power
Affected by fluctuation in foreign exchange values

36. What is the second characteristic of lag strategy?
Intervention currency (peg country currency)
Delay payables if currency is expected to depreciate
Issue mo good loans so that profits from new business can eat away the losses form the bad
24/7

37. What is capital fight when looking at it form investor psychology?
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.
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
Large number of individuals and cos exchange of domestic currencies for a foreign currency

38. What are two methods of reducing translation and transaction exposure?
Obligations for the purchase or sale of goods and services at previously agreed prices
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
Lead and lag strategies

39. What are the three ways of insuring against a Forex risk?
An attempt to collect currency receivables early as result of expected depreciation
True
Monetary and fiscal policies
Spot rates - forward rates - and swaps

40. What is the law of one price?
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
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 rates are determined by the demand and supply for different currencies

41. What are the characteristics of economic exposure?
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
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP
Spot rates and forward rates

42. What are the important trading centers?
An attempt to collect currency receivables early as result of expected depreciation
London - New York - Tokyo - and Singapore
Reserve currency
Investor psychology

43. What is the first characteristic of transaction exposure ?
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
Large number of individuals and cos exchange of domestic currencies for a foreign currency
Affected by fluctuation in foreign exchange values
1. distribute productive assets 2. ensure assets are not concentrated in countries

44. According to economic theories of exchage rate determination?
Exchange rates are determined by the demand and supply for different currencies
Increase their exposure to banking -'s banking center
Investor psychology
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

45. How can transaction exposure be described?
Impact of currency exchange rate changes on reported financial statements
u.s. dollar
The income form individual transacations
Supply & demand of the currency -Interest rates -Inflation -Investor expectations

46. What is the characteristic of translation expose?
Measurement of past events
Inflation - interest rate - and market psychology
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
Lead and lag strategies

47. What is the second issue with EFSF?
Measurement of past events
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic 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
Currency of one country can be exchanged for the currency of another country

48. Marekts are open...
Vehicle currency(transaction between 2 less commonly used currencies)
24/7
State driven recapitalization are now needed
Monetary and fiscal policies

49. What is the third thing that determines the forex rates?
Increase their exposure to banking -'s banking center
Productivity and balance payments
London - New York - Tokyo - and Singapore
The income form individual transacations

50. Most Transaction inovolve...
up to date
Delay collection of foreign currency receivables if currency is exception to appreciate
Spot rates - forward rates - and swaps
u.s. dollar