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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 holds true to Purchase Power Parity Theory?
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
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
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

2. What are other strategies for managing forex risk?
True
1. distribute productive assets 2. ensure assets are not concentrated in countries
Borrowing of funds in foreign currency
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure

3. 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
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
Group of investors movement in the same direction and same time or government intervention

4. What are the important trading centers?
Collecting & spending of money by the government
Increase their exposure to banking -'s banking center
Currency of one country can be exchanged for the currency of another country
London - New York - Tokyo - and Singapore

5. What is the first issue with EFSF?
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
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
Exchange rate policies

6. What are the first two things that determine Forex rates?
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
24/7
Relative price differences and ppp
Affected by fluctuation in foreign exchange values

7. Greece has not defaulted because it has not been able to fully implement its...
agreed upon austerity
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
Firms future international earning power
Increase their exposure to banking -'s banking center

8. What are the two ways to reduce economic exposure?
Interest rates and money supply
Reserve currency
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. distribute productive assets 2. ensure assets are not concentrated in countries

9. What are the three different types of foreign exchange rate risks?
Transaction - translation and economic exposure
Vehicle currency(transaction between 2 less commonly used currencies)
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
Establish central control and attempts to forecast future exchange rates

10. What are some characteristics of swaps?
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)
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
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
up to date

11. Currently margins require more cash reserves - What is the best method of doing this **** in the Euro Zone?
It helps them understand the influence of exchange rates on profitability of trade investment deals
Issue mo good loans so that profits from new business can eat away the losses form the bad
Group of investors movement in the same direction and same time or government intervention
The income form individual transacations

12. How and What is the purpose of distributing assets?
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
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
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
Spot rates - forward rates - and swaps

13. What is capital fight when looking at it form investor psychology?
u.s. dollar
Large number of individuals and cos exchange of domestic currencies for a foreign currency
Transaction - translation and economic exposure
Delay payables if currency is expected to depreciate

14. What is the second thing that determines the Forex rates?
Interest rates and money supply
Impact of currency exchange rate changes on reported financial statements
domino effect
True

15. What is the nature of the forex market?
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
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
Measurement of past events
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. What are the two ways to quote currency?
Firms future international earning power
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
Spot rates and forward rates
Transaction - translation and economic exposure

17. What is the second characteristic of lead strategy?
Delay payables if currency is expected to depreciate
Firms future international earning power
Paying foreign currency payable before dues as a result expected currency appreciation
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.

18. What is the first characteristic of lead strategy?
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
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
An attempt to collect currency receivables early as result of expected depreciation

19. How can translation exposure be described?
Impact of currency exchange rate changes on reported financial statements
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
London - New York - Tokyo - and Singapore
Large number of individuals and cos exchange of domestic currencies for a foreign currency

20. When do countries use foreign exchange market?
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
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
An attempt to collect currency receivables early as result of expected depreciation

21. What is the fourth characteristic of transaction exposure?
Vehicle currency(transaction between 2 less commonly used currencies)
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
Lending of funds 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

22. What are some strategies for managing forex risk?
agreed upon austerity
Establish central control and attempts to forecast future exchange rates
True
Impact of currency exchange rate changes on reported financial statements

23. What do monetary policies do?
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in 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
Control the amount of money in circulation - enforced by government policies - focus on growth rate

24. What is a currency swamp?
Measurement of past events
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
Obligations for the purchase or sale of goods and services at previously agreed prices

25. What causes big mac prices to vary?
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
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
Large number of individuals and cos exchange of domestic currencies for a foreign currency

26. What implications does understanding foreign exchange rates have on managers?
up to date
Affected by fluctuation in foreign exchange values
Delay collection of foreign currency receivables if currency is exception to appreciate
It helps them understand the influence of exchange rates on profitability of trade investment deals

27. The euro faces risks fo recapitalization?
True
Currency of one country can be exchanged for the currency of another country
Banks stability was measure at a 5% capital adequacy ratio
Transportation costs - trade barriers - and not trade inputs such as rents or wages

28. What is a forward rate?
Spot rates and forward rates
Establish central control and attempts to forecast future exchange rates
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

29. Marekts are open...
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
Monetary and fiscal policies
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
24/7

30. What are two methods of reducing translation and transaction exposure?
Lead and lag strategies
Spot rates - forward rates - and swaps
Exchange rate policies
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP

31. How do you establish central control?
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
Lead and lag strategies
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
Supply & demand of the currency -Interest rates -Inflation -Investor expectations

32. How do you insure or hedge against a Forex risk?
Paying foreign currency payable before dues as a result expected currency appreciation
Forward exchange or spot exchange
Transaction - translation and economic exposure
A common reference

33. What is the first characteristic of lag strategy?
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)
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
Delay collection of foreign currency receivables if currency is exception to appreciate

34. What is the third 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
Borrowing of funds in foreign currency
Reserve currency

35. What is the fourth roles of the U.S. dollar outside the U.S.?
Impact of currency exchange rate changes on reported financial statements
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
Vehicle currency(transaction between 2 less commonly used currencies)
True

36. What is the third role of the U.S. dollar outside the U.S.?
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
u.s. dollar
Reserve currency
Issue mo good loans so that profits from new business can eat away the losses form the bad

37. What are some factors that influence exchange rates?
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
Goods and services of one country can be exchanged for the goods and services of another country
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
Currency of one country can be exchanged for the currency of another country

38. What is the real exchange rate?
The income form individual transacations
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
Goods and services of one country can be exchanged for the goods and services of another country
A common reference

39. What is the law of one price?
agreed upon austerity
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
Collecting & spending of money by the government

40. What is the second characteristic of lag strategy?
Delay payables if currency is expected to depreciate
Establish central control and attempts to forecast future exchange rates
A common reference
Issue mo good loans so that profits from new business can eat away the losses form the bad

41. What is the characteristic of translation expose?
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
Exchange rate policies
Measurement of past events
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

42. What is the first roels of the U.S. dollar outside the U.S.?
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)
Issue mo good loans so that profits from new business can eat away the losses form the bad
A common reference
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs

43. What is free convertible 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
Issue mo good loans so that profits from new business can eat away the losses form the bad
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure

44. Bailout Fund of EFSF - What is this shiz nitz?
Lead and lag strategies
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
A common reference
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure

45. What is the purpose of not concentrating assets in countries?
Increase currency values and protect against increases in foreign prices of goods and services
Increase their exposure to banking -'s banking center
It helps them understand the influence of exchange rates on profitability of trade investment deals
Collecting & spending of money by the government

46. In the long run empirical testing has of the PPP Theory has proven to be accurate in the long run. True or False
Exchange rate policies
True
Issue mo good loans so that profits from new business can eat away the losses form the bad
Banks stability was measure at a 5% capital adequacy ratio

47. Because many banks (2/3) are below the capital adequacy ratio of 9% many can not recapitalize on their own as a result
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
State driven recapitalization are now needed
Forward exchange or spot exchange
London - New York - Tokyo - and Singapore

48. What is the second role of the U.S. dollar outside the U.S. ?
Delay collection of foreign currency receivables if currency is exception to appreciate
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
Intervention currency (peg country currency)

49. What is a spot rate?
24/7
Lead and lag strategies
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)

50. Defaulting on debt has a __________ that intertwines all countries in Europe.
domino effect
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
Spot rates and forward rates