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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. Defaulting on debt has a __________ that intertwines all countries in Europe.
domino effect
Relative price differences and ppp
State driven recapitalization are now needed
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.

2. What are the important trading centers?
Reserve currency
London - New York - Tokyo - and Singapore
Spot rates - forward rates - and swaps
Obligations for the purchase or sale of goods and services at previously agreed prices

3. What are two methods of reducing translation and transaction exposure?
Lead and lag strategies
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
Supply & demand of the currency -Interest rates -Inflation -Investor expectations

4. What holds true to Purchase Power Parity Theory?
A common reference
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. protect resources efficiently 2. ensure correct mix of tactics and strategies
Monetary and fiscal policies

5. 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
Lending of funds in foreign currencies
Inflation - interest rate - and market psychology
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP

6. What is non convertible currency?
Goods and services of one country can be exchanged for the goods and services of another country
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
Exchange rates are determined by the demand and supply for different currencies
A common reference

7. What are some characteristics of swaps?
Group of investors movement in the same direction and same time or government intervention
A common reference
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
Currency of one country can be exchanged for the currency of another country

8. What is economic exposure?
domino effect
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
Spot rates - forward rates - and swaps
Firms future international earning power

9. What are the three different types of foreign exchange rate risks?
Delay payables if currency is expected to depreciate
Control the amount of money in circulation - enforced by government policies - focus on growth rate
Affected by fluctuation in foreign exchange values
Transaction - translation and economic exposure

10. What are other strategies for managing forex risk?
Spot rates and forward rates
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
24/7
Currency of one country can be exchanged for the currency of another country

11. What is the second characteristic of transaction exposure?
Borrowing of funds in foreign currency
The income form individual transacations
Obligations for the purchase or sale of goods and services at previously agreed prices
Increase currency values and protect against increases in foreign prices of goods and services

12. What are the two ways to reduce economic exposure?
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
Exchange rate policies
1. distribute productive assets 2. ensure assets are not concentrated in countries

13. What is free convertible currency?
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
Impact of currency exchange rate changes on reported financial statements
An attempt to collect currency receivables early as result of expected depreciation
True

14. How can translation exposure be described?
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
Impact of currency exchange rate changes on reported financial statements
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency

15. What is the fourth characteristic of transaction exposure?
Goods and services of one country can be exchanged for the goods and services of another country
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
Lending of funds in foreign currencies
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs

16. What is the law of one price?
Exchange rate policies
Large number of individuals and cos exchange of domestic currencies for 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
State driven recapitalization are now needed

17. What is the third role of the U.S. dollar outside the U.S.?
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
Reserve currency
Exchange rate policies
Vehicle currency(transaction between 2 less commonly used currencies)

18. Most Transaction inovolve...
Obligations for the purchase or sale of goods and services at previously agreed prices
Affected by fluctuation in foreign exchange values
u.s. dollar
Collecting & spending of money by the government

19. Because many banks (2/3) are below the capital adequacy ratio of 9% many can not recapitalize on their own as a result
24/7
State driven recapitalization are now needed
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)
The income form individual transacations

20. What is the purpose of not concentrating assets in countries?
Increase currency values and protect against increases in foreign prices of goods and services
Paying foreign currency payable before dues as a result expected currency appreciation
Collecting & spending of money by the government
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP

21. What implications does understanding foreign exchange rates have on managers?
Interest rates and money supply
It helps them understand the influence of exchange rates on profitability of trade investment deals
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
Control the amount of money in circulation - enforced by government policies - focus on growth rate

22. What is the characteristic of translation expose?
Paying foreign currency payable before dues as a result expected currency appreciation
Measurement of past events
Productivity and balance payments
Supply & demand of the currency -Interest rates -Inflation -Investor expectations

23. In the long run empirical testing has of the PPP Theory has proven to be accurate in the long run. True or False
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
True
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
Currency of one country can be exchanged for the currency of another country

24. How do you insure or hedge against a Forex risk?
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
Forward exchange or spot exchange
Interest rates and money supply
24/7

25. What is a currency swamp?
Vehicle currency(transaction between 2 less commonly used 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
Currency of one country can be exchanged for the currency of another country

26. What are the two ways to quote currency?
Spot rates and forward rates
True
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
Forward exchange or spot exchange

27. What is the fourth thing that determines the forex rates?
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
True
Exchange rate policies
An attempt to collect currency receivables early as result of expected depreciation

28. What is the bandwagon effect when looking at form investor psychology ?
1. distribute productive assets 2. ensure assets are not concentrated in countries
Exchange rates are determined by the demand and supply for different currencies
Collecting & spending of money by the government
Group of investors movement in the same direction and same time or government intervention

29. What causes big mac prices to vary?
Transportation costs - trade barriers - and not trade inputs such as rents or wages
24/7
True
up to date

30. No single theory can explain explain the causes the value of currencies to change. True or False?
True
Investor psychology
Inflation - interest rate - and market psychology
Large number of individuals and cos exchange of domestic currencies for a foreign currency

31. 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
Obligations for the purchase or sale of goods and services at previously agreed prices
Lead and lag strategies
Inflation - interest rate - and market psychology

32. Marekts are open...
True
Exchange rate policies
1. distribute productive assets 2. ensure assets are not concentrated in countries
24/7

33. What do monetary policies do?
Control the amount of money in circulation - enforced by government policies - focus on growth rate
Impact of currency exchange rate changes on reported financial statements
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

34. Greece has not defaulted because it has not been able to fully implement its...
agreed upon austerity
Issue mo good loans so that profits from new business can eat away the losses form the bad
Transportation costs - trade barriers - and not trade inputs such as rents or wages
Exchange rates are determined by the demand and supply for different currencies

35. What is the second role of the U.S. dollar outside the U.S. ?
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
Intervention currency (peg country currency)
Exchange rates are determined by the demand and supply for different currencies
u.s. dollar

36. What is arbitrage?
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
Banks stability was measure at a 5% capital adequacy ratio
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

37. What are the characteristics of economic exposure?
Banks stability was measure at a 5% capital adequacy ratio
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
agreed upon austerity

38. What is a forward rate?
Affected by fluctuation in foreign exchange values
Interest rates and money supply
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
True

39. Burger economics!!! Why do we use it?
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
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

40. What are the purposes of fiscal policies?
Collecting & spending of money by the government
1. distribute productive assets 2. ensure assets are not concentrated in countries
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates

41. What are the first two things that determine Forex rates?
Control the amount of money in circulation - enforced by government policies - focus on growth rate
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
Productivity and balance payments
Relative price differences and ppp

42. What is capital fight when looking at it form investor psychology?
Reserve currency
Large number of individuals and cos exchange of domestic currencies for a foreign currency
London - New York - Tokyo - and Singapore
agreed upon austerity

43. What is a spot rate?
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)
The income form individual transacations
Issue mo good loans so that profits from new business can eat away the losses form the bad
Transportation costs - trade barriers - and not trade inputs such as rents or wages

44. The euro faces risks fo recapitalization?
Increase their exposure to banking -'s banking center
Reserve currency
Interest rates and money supply
Banks stability was measure at a 5% capital adequacy ratio

45. What is the first issue with EFSF?
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
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
Large number of individuals and cos exchange of domestic currencies for a foreign currency

46. What are the types of Exchange Rate Fluctuations?
Affected by fluctuation in foreign exchange values
Monetary and fiscal policies
Relative price differences and ppp
Productivity and balance payments

47. What is hedging?

48. When do countries use the foreign exchange market?
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
Lending of funds in foreign currencies
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)
Spot rates - forward rates - and swaps

49. When do countries use foreign exchange market?
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
24/7
Forward exchange or spot exchange
A common reference

50. It is important to stay __________ with your current events
Productivity and balance payments
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
London - New York - Tokyo - and Singapore