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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?
Transaction - translation and economic exposure
Lead and lag strategies
Intervention currency (peg country currency)
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates

2. What is the first characteristic of lag strategy?
Impact of currency exchange rate changes on reported financial statements
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
Delay collection of foreign currency receivables if currency is exception to appreciate
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency

3. What are the three ways of insuring against a Forex risk?
Impact of currency exchange rate changes on reported financial statements
Spot rates - forward rates - and swaps
domino effect
An attempt to collect currency receivables early as result of expected depreciation

4. Currently margins require more cash reserves - What is the best method of doing this **** in the Euro Zone?
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
Delay payables if currency is expected to depreciate
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.

5. What is a forward rate?
Large number of individuals and cos exchange of domestic currencies for a foreign currency
Productivity and balance payments
Interest rates and money supply
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days

6. What is hedging?

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7. When do countries use the foreign exchange market?
Lending of funds in foreign currencies
An attempt to collect currency receivables early as result of expected depreciation
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps

8. What are some factors that influence exchange rates?
Reserve currency
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
24/7
Increase currency values and protect against increases in foreign prices of goods and services

9. What are the first two things that determine Forex rates?
Issue mo good loans so that profits from new business can eat away the losses form the bad
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
Group of investors movement in the same direction and same time or government intervention
Relative price differences and ppp

10. What is the nominal exchange rate?
Increase their exposure to banking -'s banking center
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
Spot rates and forward rates

11. Defaulting on debt has a __________ that intertwines all countries in Europe.
up to date
domino effect
Exchange rates are determined by the demand and supply for different currencies
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps

12. What is a spot rate?
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)
Paying foreign currency payable before dues as a result expected currency appreciation
An attempt to collect currency receivables early as result of expected depreciation

13. What is the second role of the U.S. dollar outside the U.S. ?
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
Intervention currency (peg country currency)
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
Supply & demand of the currency -Interest rates -Inflation -Investor expectations

14. What are the three different types of foreign exchange rate risks?
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP
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
Transaction - translation and economic exposure

15. What is the third thing that determines the forex rates?
Investor psychology
Productivity and balance payments
Lending of funds in foreign currencies
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

16. Because many banks (2/3) are below the capital adequacy ratio of 9% many can not recapitalize on their own as a result
Inflation - interest rate - and market psychology
24/7
State driven recapitalization are now needed
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

17. What is the fourth thing that determines the forex rates?
London - New York - Tokyo - and Singapore
Measurement of past events
Exchange rate policies
Forward exchange or spot exchange

18. What is the purpose of not concentrating assets in countries?
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
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

19. What is externally convertible currency
London - New York - Tokyo - and Singapore
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
Banks stability was measure at a 5% capital adequacy ratio
Control the amount of money in circulation - enforced by government policies - focus on growth rate

20. How and What is the purpose of distributing assets?
Firms future international earning power
Forward exchange or spot exchange
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

21. What is the third role of the U.S. dollar outside the U.S.?
Forward exchange or spot exchange
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
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

22. What are the important trading centers?
London - New York - Tokyo - and Singapore
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
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
Increase currency values and protect against increases in foreign prices of goods and services

23. 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
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
Transportation costs - trade barriers - and not trade inputs such as rents or wages
Forward exchange or spot exchange

24. What are some characteristics of swaps?
Firms future international earning power
Relative price differences and ppp
Delay payables if currency is expected to depreciate
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

25. What are three factors that impact a country's future exchange rate movements?
State driven recapitalization are now needed
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
Inflation - interest rate - and market psychology
Delay payables if currency is expected to depreciate

26. Greece has not defaulted because it has not been able to fully implement its...
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
agreed upon austerity
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)

27. Burger economics!!! Why do we use it?
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP
Currency of one country can be exchanged for the currency of another country
Affected by fluctuation in foreign exchange values
Lending of funds in foreign currencies

28. What are other strategies for managing forex risk?
Forward exchange or spot exchange
Control the amount of money in circulation - enforced by government policies - focus on growth rate
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
Currency of one country can be exchanged for the currency of another country

29. How do you insure or hedge against a Forex risk?
Delay collection of foreign currency receivables if currency is exception to appreciate
Forward exchange or spot exchange
It helps them understand the influence of exchange rates on profitability of trade investment deals
Intervention currency (peg country currency)

30. What is a currency swamp?
Relative price differences and ppp
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
The income form individual transacations
Supply & demand of the currency -Interest rates -Inflation -Investor expectations

31. What are the purposes of fiscal policies?
Obligations for the purchase or sale of goods and services at previously agreed prices
Collecting & spending of money by the government
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
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

32. What is non convertible currency?
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
domino effect
Delay payables if currency is expected to depreciate
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.

33. What are the two ways to reduce economic exposure?
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)
1. distribute productive assets 2. ensure assets are not concentrated in countries
Spot rates - forward rates - and swaps
Measurement of past events

34. When do countries use foreign exchange market?
Currency of one country can be exchanged for the currency of another country
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
A common reference
Banks stability was measure at a 5% capital adequacy ratio

35. No single theory can explain explain the causes the value of currencies to change. True or False?
True
Relative price differences and ppp
Intervention currency (peg country currency)
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP

36. What is the second characteristic of transaction exposure?
Vehicle currency(transaction between 2 less commonly used currencies)
Obligations for the purchase or sale of goods and services at previously agreed prices
London - New York - Tokyo - and Singapore
Goods and services of one country can be exchanged for the goods and services of another country

37. What holds true to Purchase Power Parity Theory?
Vehicle currency(transaction between 2 less commonly used currencies)
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
Delay payables if currency is expected to depreciate
24/7

38. What causes big mac prices to vary?
Firms future international earning power
It helps them understand the influence of exchange rates on profitability of trade investment deals
Group of investors movement in the same direction and same time or government intervention
Transportation costs - trade barriers - and not trade inputs such as rents or wages

39. What is the fifth thing that determines the forex rates?
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
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
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs

40. What are the types of Exchange Rate Fluctuations?
Monetary and fiscal policies
u.s. dollar
Exchange rates are determined by the demand and supply for different currencies
It helps them understand the influence of exchange rates on profitability of trade investment deals

41. What is the fourth characteristic of transaction exposure?
Both residents and on residents are prohibited from converting their holdings of domestic currency into a 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
Lending of funds in foreign currencies
Obligations for the purchase or sale of goods and services at previously agreed prices

42. 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
Transportation costs - trade barriers - and not trade inputs such as rents or wages
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
Borrowing of funds in foreign currency

43. What is the first characteristic of transaction exposure ?
Control the amount of money in circulation - enforced by government policies - focus on growth rate
Reserve currency
A common reference
Affected by fluctuation in foreign exchange values

44. What is the first roels of the U.S. dollar outside the U.S.?
An attempt to collect currency receivables early as result of expected depreciation
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
A common reference
Productivity and balance payments

45. Bailout Fund of EFSF - What is this shiz nitz?
Exchange rate policies
Transportation costs - trade barriers - and not trade inputs such as rents or wages
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
A common reference

46. What is free convertible currency?
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)
Borrowing of funds in foreign currency
up to date

47. What is the second characteristic of lag strategy?
Forward exchange or spot exchange
Interest rates and money supply
Delay payables if currency is expected to depreciate
Investor psychology

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

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49. What is the characteristic of translation expose?
1. distribute productive assets 2. ensure assets are not concentrated in countries
Measurement of past events
Goods and services of one country can be exchanged for the goods and services of another country
Monetary and fiscal policies

50. Marekts are open...
24/7
Paying foreign currency payable before dues as a result expected currency appreciation
London - New York - Tokyo - and Singapore
Transaction - translation and economic exposure