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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 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
Vehicle currency(transaction between 2 less commonly used currencies)
Investor psychology
Exchange rate policies

2. What is arbitrage?
State driven recapitalization are now needed
Reserve currency
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)

3. What are the two ways to quote currency?
London - New York - Tokyo - and Singapore
Spot rates and forward rates
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
Vehicle currency(transaction between 2 less commonly used currencies)

4. How can translation exposure be described?
Impact of currency exchange rate changes on reported financial statements
Measurement of past events
Increase their exposure to banking -'s banking center
Delay payables if currency is expected to depreciate

5. What are some factors that influence exchange rates?
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
Inflation - interest rate - and market psychology
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
Collecting & spending of money by the government

6. What is economic exposure?
Interest rates and money supply
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
Transaction - translation and economic exposure
Firms future international earning power

7. What implications does understanding foreign exchange rates have on managers?
It helps them understand the influence of exchange rates on profitability of trade investment deals
Investor psychology
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
State driven recapitalization are now needed

8. According to economic theories of exchage rate determination?
Exchange rates are determined by the demand and supply for different currencies
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
u.s. dollar
A common reference

9. How and What is the purpose of distributing assets?
u.s. dollar
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
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
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

10. What is the first roels of the U.S. dollar outside the U.S.?
A common reference
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
Spot rates and forward 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

11. Bailout Fund of EFSF - What is this shiz nitz?
Impact of currency exchange rate changes on reported financial statements
24/7
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency

12. What are the three different types of foreign exchange rate risks?
An attempt to collect currency receivables early as result of expected depreciation
Transaction - translation and economic exposure
u.s. dollar
Large number of individuals and cos exchange of domestic currencies for a foreign currency

13. What causes big mac prices to vary?
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
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
Transportation costs - trade barriers - and not trade inputs such as rents or wages

14. What are the three ways of insuring against a Forex risk?
Delay payables if currency is expected to depreciate
Spot rates - forward rates - and swaps
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
Interest rates and money supply

15. Burger economics!!! Why do we use it?
Forward exchange or spot exchange
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
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP

16. What is the second characteristic of lead strategy?
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
Paying foreign currency payable before dues as a result expected currency appreciation

17. Greece has not defaulted because it has not been able to fully implement its...
True
Control the amount of money in circulation - enforced by government policies - focus on growth rate
u.s. dollar
agreed upon austerity

18. Defaulting on debt has a __________ that intertwines all countries in Europe.
Intervention currency (peg country currency)
domino effect
Obligations for the purchase or sale of goods and services at previously agreed prices
Goods and services of one country can be exchanged for the goods and services of another country

19. What is the first issue with EFSF?
Investor psychology
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
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
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

20. When do countries use the foreign exchange market?
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
Increase their exposure to banking -'s banking center
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.

21. 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
Relative price differences and ppp
London - New York - Tokyo - and Singapore
Reserve currency

22. What is the fifth thing that determines the forex rates?
Investor psychology
Relative price differences and ppp
Reserve currency
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure

23. How do you insure or hedge against a Forex risk?
True
Increase currency values and protect against increases in foreign prices of goods and services
Forward exchange or spot exchange
Intervention currency (peg country currency)

24. What are the first two things that determine Forex rates?
An attempt to collect currency receivables early as result of expected depreciation
Establish central control and attempts to forecast future exchange rates
Lending of funds in foreign currencies
Relative price differences and ppp

25. What is the second characteristic of lag strategy?
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
Monetary and fiscal policies
Delay payables if currency is expected to depreciate
1. distribute productive assets 2. ensure assets are not concentrated in countries

26. What is the purpose of not concentrating assets in countries?
An attempt to collect currency receivables early as result of expected depreciation
Affected by fluctuation in foreign exchange values
A common reference
Increase currency values and protect against increases in foreign prices of goods and services

27. How can transaction exposure be described?
Affected by fluctuation in foreign exchange values
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)
The income form individual transacations
Reserve currency

28. What is the first characteristic of lag strategy?
Delay collection of foreign currency receivables if currency is exception to appreciate
u.s. dollar
Transaction - translation and economic exposure
1. protect resources efficiently 2. ensure correct mix of tactics and strategies

29. What is the first characteristic of transaction exposure ?
A common reference
Spot rates - forward rates - and swaps
Affected by fluctuation in foreign exchange values
State driven recapitalization are now needed

30. What are the characteristics of economic exposure?
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
domino effect
Transportation costs - trade barriers - and not trade inputs such as rents or wages
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs

31. What are some strategies for managing forex risk?
Investor psychology
Paying foreign currency payable before dues as a result expected currency appreciation
up to date
Establish central control and attempts to forecast future exchange rates

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

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33. What are the types of Exchange Rate Fluctuations?
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
Forward exchange or spot exchange
Monetary and fiscal policies
Spot rates - forward rates - and swaps

34. What are the two ways to reduce economic exposure?
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP
1. distribute productive assets 2. ensure assets are not concentrated in countries
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
Banks stability was measure at a 5% capital adequacy ratio

35. What are the purposes of fiscal policies?
Collecting & spending of money by the government
True
24/7
Lending of funds in foreign currencies

36. What is capital fight when looking at it form investor psychology?
True
Delay collection of foreign currency receivables if currency is exception to appreciate
Large number of individuals and cos exchange of domestic currencies for a foreign currency
Collecting & spending of money by the government

37. Because many banks (2/3) are below the capital adequacy ratio of 9% many can not recapitalize on their own as a result
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
agreed upon austerity
State driven recapitalization are now needed
Establish central control and attempts to forecast future exchange rates

38. In the long run empirical testing has of the PPP Theory has proven to be accurate in the long run. True or False
Delay payables if currency is expected to depreciate
True
It helps them understand the influence of exchange rates on profitability of trade investment deals
Increase currency values and protect against increases in foreign prices of goods and services

39. It is important to stay __________ with your current events
The income form individual transacations
agreed upon austerity
Forward exchange or spot exchange
up to date

40. What is a currency swamp?
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
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

41. What is the second issue with EFSF?
Investor psychology
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
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
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

42. What is the fourth characteristic of transaction exposure?
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
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)
Lending of funds in foreign currencies

43. What is the third characteristic of transaction exposure?
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 income form individual transacations
Borrowing of funds in foreign currency
Obligations for the purchase or sale of goods and services at previously agreed prices

44. What are two methods of reducing translation and transaction exposure?
Lead and lag strategies
Relative price differences and ppp
up to date
Establish central control and attempts to forecast future exchange rates

45. What is hedging?

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46. What is the nature of the forex market?
1. distribute productive assets 2. ensure assets are not concentrated in countries
Vehicle currency(transaction between 2 less commonly used currencies)
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
An attempt to collect currency receivables early as result of expected depreciation

47. What are three factors that impact a country's future exchange rate movements?
Lead and lag strategies
Delay collection of foreign currency receivables if currency is exception to appreciate
Inflation - interest rate - and market psychology
Supply & demand of the currency -Interest rates -Inflation -Investor expectations

48. What is the third thing that determines the forex rates?
Productivity and balance payments
Exchange rate policies
Exchange rates are determined by the demand and supply for different currencies
Impact of currency exchange rate changes on reported financial statements

49. Marekts are open...
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
Impact of currency exchange rate changes on reported financial statements
24/7
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

50. What is a spot rate?
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
agreed upon austerity
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)
Impact of currency exchange rate changes on reported financial statements