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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 translation exposure be described?
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
Firms future international earning power
Impact of currency exchange rate changes on reported financial statements

2. Greece has not defaulted because it has not been able to fully implement its...
Exchange rate policies
agreed upon austerity
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)

3. What is the second characteristic of transaction exposure?
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
Control the amount of money in circulation - enforced by government policies - focus on growth rate
True
Obligations for the purchase or sale of goods and services at previously agreed prices

4. What is the law of one price?
24/7
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
Reserve currency
Vehicle currency(transaction between 2 less commonly used currencies)

5. According to economic theories of exchage rate determination?
Exchange rates are determined by the demand and supply for different currencies
Exchange rate policies
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
Lead and lag strategies

6. 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
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
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
Banks stability was measure at a 5% capital adequacy ratio

7. 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
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
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

8. What are the purposes of fiscal policies?
Collecting & spending of money by the government
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
1. distribute productive assets 2. ensure assets are not concentrated in countries
The income form individual transacations

9. What are two methods of reducing translation and transaction exposure?
Measurement of past events
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
Lead and lag strategies
Inflation - interest rate - and market psychology

10. Because many banks (2/3) are below the capital adequacy ratio of 9% many can not recapitalize on their own as a result
Affected by fluctuation in foreign exchange values
agreed upon austerity
London - New York - Tokyo - and Singapore
State driven recapitalization are now needed

11. What are the first two things that determine Forex rates?
Relative price differences and ppp
Increase currency values and protect against increases in foreign prices of goods and services
Transaction - translation and economic exposure
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

12. What is the second characteristic of lag strategy?
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
Delay payables if currency is expected to depreciate
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps

13. What is a forward rate?
Intervention currency (peg country currency)
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
Transportation costs - trade barriers - and not trade inputs such as rents or wages
Forward exchange or spot exchange

14. What do monetary policies do?
Impact of currency exchange rate changes on reported financial statements
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
Control the amount of money in circulation - enforced by government policies - focus on growth rate
1. protect resources efficiently 2. ensure correct mix of tactics and strategies

15. What are some strategies for managing forex risk?
Monetary and fiscal policies
Establish central control and attempts to forecast future exchange rates
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
24/7

16. What are the three ways of insuring against a Forex risk?
1. distribute productive assets 2. ensure assets are not concentrated in countries
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
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
Spot rates - forward rates - and swaps

17. What is a spot rate?
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
24/7
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)

18. What are the types of Exchange Rate Fluctuations?
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
Monetary and fiscal policies
True
Exchange rate policies

19. What are the three different types of foreign exchange rate risks?
London - New York - Tokyo - and Singapore
The income form individual transacations
Transaction - translation and economic exposure
Large number of individuals and cos exchange of domestic currencies for a foreign currency

20. When do countries use foreign exchange market?
Goods and services of one country can be exchanged for the goods and services of another country
Monetary and fiscal policies
Affected by fluctuation in foreign exchange values
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

21. Marekts are open...
24/7
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
True
Supply & demand of the currency -Interest rates -Inflation -Investor expectations

22. What is the first characteristic of lag strategy?
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
Lending of funds in foreign currencies
Delay collection of foreign currency receivables if currency is exception to appreciate
Delay payables if currency is expected to depreciate

23. What causes big mac prices to vary?
up to date
Investor psychology
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)

24. What are some factors that influence exchange rates?
Impact of currency exchange rate changes on reported financial statements
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
Transaction - translation and economic exposure
Increase their exposure to banking -'s banking center

25. What is the nominal exchange rate?
Transaction - translation and economic exposure
State driven recapitalization are now needed
Spot rates - forward rates - and swaps
Currency of one country can be exchanged for the currency of another country

26. How do you insure or hedge against a Forex risk?
Reserve currency
Forward exchange or spot exchange
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
The income form individual transacations

27. What is the first issue with EFSF?
Goods and services of one country can be exchanged for the goods and services of another country
up to date
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)
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

28. What is the fourth thing that determines the forex rates?
agreed upon austerity
Obligations for the purchase or sale of goods and services at previously agreed prices
Exchange rate policies
Forward exchange or spot exchange

29. What is the characteristic of translation expose?
Borrowing of funds in foreign currency
Measurement of past events
The income form individual transacations
Supply & demand of the currency -Interest rates -Inflation -Investor expectations

30. What is hedging?

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31. What is the second issue with EFSF?
Exchange rate policies
A common reference
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
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

32. What is a currency swamp?
Banks stability was measure at a 5% capital adequacy ratio
Intervention currency (peg country currency)
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates

33. No single theory can explain explain the causes the value of currencies to change. True or False?
An attempt to collect currency receivables early as result of expected depreciation
Exchange rates are determined by the demand and supply for different currencies
True
State driven recapitalization are now needed

34. What are the important trading centers?
Spot rates and forward rates
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
London - New York - Tokyo - and Singapore
Firms future international earning power

35. In the long run empirical testing has of the PPP Theory has proven to be accurate in the long run. True or False
Exchange rates are determined by the demand and supply for different currencies
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)
London - New York - Tokyo - and Singapore
True

36. What is free convertible 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
Intervention currency (peg country currency)
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency

37. What are three factors that impact a country's future exchange rate movements?
Reserve currency
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
Inflation - interest rate - and market psychology
Intervention currency (peg country currency)

38. What is the fourth roles of the U.S. dollar outside the U.S.?
Inflation - interest rate - and market psychology
up to date
Vehicle currency(transaction between 2 less commonly used currencies)
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency

39. What is the fourth characteristic of transaction exposure?
Lending of funds in foreign currencies
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
domino effect
Productivity and balance payments

40. What is externally convertible currency
Increase currency values and protect against increases in foreign prices of goods and services
Obligations for the purchase or sale of goods and services at previously agreed prices
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure

41. What is non convertible currency?
Transaction - translation and economic exposure
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
u.s. dollar
Borrowing of funds in foreign currency

42. When do countries use the foreign exchange market?
An attempt to collect currency receivables early as result of expected depreciation
Transaction - translation and economic exposure
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)

43. What is the first roels of the U.S. dollar outside the U.S.?
Spot rates - forward rates - and swaps
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
Firms future international earning power
A common reference

44. It is important to stay __________ with your current events
agreed upon austerity
The income form individual transacations
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
up to date

45. 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
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
Banks stability was measure at a 5% capital adequacy ratio
Supply & demand of the currency -Interest rates -Inflation -Investor expectations

46. 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
u.s. dollar
Lending of funds in foreign currencies
Lead and lag strategies

47. What is the first characteristic of transaction exposure ?
domino effect
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
Affected by fluctuation in foreign exchange values
Lending of funds in foreign currencies

48. What is the fifth thing that determines the forex rates?
Spot rates - forward rates - and swaps
Investor psychology
Inflation - interest rate - and market psychology
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.

49. What is the second characteristic of lead strategy?
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
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
Paying foreign currency payable before dues as a result expected currency appreciation
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency

50. The euro faces risks fo recapitalization?
Banks stability was measure at a 5% capital adequacy ratio
Forward exchange or spot exchange
u.s. dollar
Measurement of past events