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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. How can transaction exposure be described?
Affected by fluctuation in foreign exchange values
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
Large number of individuals and cos exchange of domestic currencies for a foreign currency

2. What is the first issue with EFSF?
Paying foreign currency payable before dues as a result expected currency appreciation
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. protect resources efficiently 2. ensure correct mix of tactics and strategies
Borrowing of funds in foreign currency

3. What is the bandwagon effect when looking at form investor psychology ?
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
Measurement of past events
up to date

4. Greece has not defaulted because it has not been able to fully implement its...
Spot rates and forward 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
agreed upon austerity
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure

5. 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
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
agreed upon austerity
Inflation - interest rate - and market psychology

6. What is the first characteristic of transaction exposure ?
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP
Affected by fluctuation in foreign exchange values
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates

7. Marekts are open...
Reserve currency
Firms future international earning power
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
24/7

8. What are other strategies for managing forex risk?
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)
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
Large number of individuals and cos exchange of domestic currencies for a foreign currency

9. What are the types of Exchange Rate Fluctuations?
24/7
Monetary and fiscal policies
Large number of individuals and cos exchange of domestic currencies for a foreign currency
Banks stability was measure at a 5% capital adequacy ratio

10. What implications does understanding foreign exchange rates have on managers?
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 helps them understand the influence of exchange rates on profitability of trade investment deals
Obligations for the purchase or sale of goods and services at previously agreed prices
Relative price differences and ppp

11. What holds true to Purchase Power Parity Theory?
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 is used to measure how far the nominal exchange rate deviate from the one that would create PPP
Relative price differences and ppp
Exchange rates are determined by the demand and supply for different currencies

12. What is the third thing that determines the forex rates?
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
Productivity and balance payments
Relative price differences and ppp
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

13. Bailout Fund of EFSF - What is this shiz nitz?
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
Delay collection of foreign currency receivables if currency is exception to appreciate
State driven recapitalization are now needed

14. What is the third role of the U.S. dollar outside the U.S.?
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
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
Reserve currency

15. No single theory can explain explain the causes the value of currencies to change. True or False?
True
Lead and lag strategies
Large number of individuals and cos exchange of domestic currencies for a foreign currency
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency

16. What is the first characteristic of lead strategy?
An attempt to collect currency receivables early as result of expected depreciation
Transaction - translation and economic exposure
Large number of individuals and cos exchange of domestic currencies for a foreign currency
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days

17. How do you establish central control?
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
Establish central control and attempts to forecast future exchange rates
domino effect
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

18. What is economic exposure?
Issue mo good loans so that profits from new business can eat away the losses form the bad
Relative price differences and ppp
State driven recapitalization are now needed
Firms future international earning power

19. What is the second characteristic of lag strategy?
Measurement of past events
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
Lead and lag strategies
Delay payables if currency is expected to depreciate

20. What are the first two things that determine Forex rates?
Establish central control and attempts to forecast future exchange rates
The income form individual transacations
A common reference
Relative price differences and ppp

21. What is non convertible currency?
Impact of currency exchange rate changes on reported financial statements
True
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
Control the amount of money in circulation - enforced by government policies - focus on growth rate

22. What is the first characteristic of lag strategy?
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
Delay collection of foreign currency receivables if currency is exception to appreciate
Productivity and balance payments
Transportation costs - trade barriers - and not trade inputs such as rents or wages

23. What causes big mac prices to vary?
domino effect
Transportation costs - trade barriers - and not trade inputs such as rents or wages
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
Banks stability was measure at a 5% capital adequacy ratio

24. What are the two ways to reduce economic exposure?
Banks stability was measure at a 5% capital adequacy ratio
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
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

25. What is the real exchange rate?
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
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
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)

26. What is the first roels of the U.S. dollar outside the U.S.?
State driven recapitalization are now needed
A common reference
Inflation - interest rate - and market psychology
Interest rates and money supply

27. What is the second characteristic of transaction exposure?
Obligations for the purchase or sale of goods and services at previously agreed prices
up to date
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

28. What is the second characteristic of lead strategy?
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
Paying foreign currency payable before dues as a result expected currency appreciation
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
Obligations for the purchase or sale of goods and services at previously agreed prices

29. Currently margins require more cash reserves - What is the best method of doing this **** in the Euro Zone?
Impact of currency exchange rate changes on reported financial statements
Issue mo good loans so that profits from new business can eat away the losses form the bad
Currency of one country can be exchanged for the currency 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

30. What is externally convertible currency
Lead and lag strategies
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
agreed upon austerity
Inflation - interest rate - and market psychology

31. What do monetary policies do?
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
Paying foreign currency payable before dues as a result expected currency appreciation
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

32. What are three factors that impact a country's future exchange rate movements?
Affected by fluctuation in foreign exchange values
Inflation - interest rate - and market psychology
24/7
up to date

33. What is the second role of the U.S. dollar outside the U.S. ?
u.s. dollar
Intervention currency (peg country currency)
True
Investor psychology

34. What is arbitrage?
up to date
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)
Group of investors movement in the same direction and same time or government intervention
Spot rates - forward rates - and swaps

35. Defaulting on debt has a __________ that intertwines all countries in Europe.
24/7
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
It helps them understand the influence of exchange rates on profitability of trade investment deals
domino effect

36. What are the three ways of insuring against a Forex risk?
Spot rates - forward rates - and swaps
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
An attempt to collect currency receivables early as result of expected depreciation
True

37. What is a currency swamp?
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
An attempt to collect currency receivables early as result of expected depreciation
up to date
domino effect

38. What is the fourth roles of the U.S. dollar outside the U.S.?
Vehicle currency(transaction between 2 less commonly used currencies)
Interest rates and money supply
Investor psychology
Collecting & spending of money by the government

39. When do countries use foreign exchange market?
Transportation costs - trade barriers - and not trade inputs such as rents or wages
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
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)

40. What is the nominal exchange rate?
Currency of one country can be exchanged for the currency of another country
London - New York - Tokyo - and Singapore
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
Increase their exposure to banking -'s banking center

41. How can translation exposure be described?
Interest rates and money supply
Investor psychology
agreed upon austerity
Impact of currency exchange rate changes on reported financial statements

42. According to economic theories of exchage rate determination?
State driven recapitalization are now needed
Exchange rates are determined by the demand and supply for different currencies
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
Exchange rate policies

43. What is the third characteristic of transaction exposure?
Paying foreign currency payable before dues as a result expected currency appreciation
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
Monetary and fiscal policies
Borrowing of funds in foreign currency

44. What are two methods of reducing translation and transaction exposure?
Lead and lag strategies
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
1. distribute productive assets 2. ensure assets are not concentrated in countries
domino effect

45. What is hedging?

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

47. Most Transaction inovolve...
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
1. distribute productive assets 2. ensure assets are not concentrated in countries
Increase their exposure to banking -'s banking center
u.s. dollar

48. Because many banks (2/3) are below the capital adequacy ratio of 9% many can not recapitalize on their own as a result
Group of investors movement in the same direction and same time or government intervention
Intervention currency (peg country currency)
An attempt to collect currency receivables early as result of expected depreciation
State driven recapitalization are now needed

49. What is the second issue with EFSF?
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
Intervention currency (peg country currency)
Relative price differences and ppp
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs

50. What is the fourth characteristic of transaction exposure?
Lending of funds in foreign currencies
Inflation - interest rate - and market psychology
Spot rates - forward rates - and swaps
1. protect resources efficiently 2. ensure correct mix of tactics and strategies