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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 the first two things that determine Forex rates?
Relative price differences and ppp
u.s. dollar
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

2. When do countries use the foreign exchange market?
Obligations for the purchase or sale of goods and services at previously agreed prices
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs

3. What is the law of one price?
Relative price differences and ppp
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
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
Affected by fluctuation in foreign exchange values

4. What are the purposes of fiscal policies?
Forward exchange or spot exchange
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
Productivity and balance payments
Collecting & spending of money by the government

5. What is arbitrage?
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)
Exchange rate policies
Currency of one country can be exchanged for the currency of another country
Inflation - interest rate - and market psychology

6. What is the second characteristic of lead strategy?
Paying foreign currency payable before dues as a result expected currency appreciation
Transaction - translation and economic exposure
Establish central control and attempts to forecast future exchange rates
Supply & demand of the currency -Interest rates -Inflation -Investor expectations

7. Most Transaction inovolve...
Delay payables if currency is expected to depreciate
u.s. dollar
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
Borrowing of funds in foreign currency

8. What is the characteristic of translation expose?
Spot rates - forward rates - and swaps
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
Measurement of past events
Impact of currency exchange rate changes on reported financial statements

9. What are the characteristics of economic exposure?
Investor psychology
Delay payables if currency is expected to depreciate
Large number of individuals and cos exchange of domestic currencies for a foreign currency
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs

10. Currently margins require more cash reserves - What is the best method of doing this **** in the Euro Zone?
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
Issue mo good loans so that profits from new business can eat away the losses form the bad
Reserve currency
Supply & demand of the currency -Interest rates -Inflation -Investor expectations

11. What are some strategies for managing forex risk?
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
True
Firms future international earning power
Establish central control and attempts to forecast future exchange rates

12. What is the third characteristic of transaction exposure?
An attempt to collect currency receivables early as result of expected depreciation
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
Affected by fluctuation in foreign exchange values
Borrowing of funds in foreign currency

13. What is externally convertible currency
Banks stability was measure at a 5% capital adequacy ratio
Exchange rates are determined by the demand and supply for different currencies
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
up to date

14. What is the fifth thing that determines the forex rates?
Forward exchange or spot exchange
Collecting & spending of money by the government
Investor psychology
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs

15. What is hedging?

16. What are some factors that influence exchange rates?
Reserve currency
Spot rates - forward rates - and swaps
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
Firms future international earning power

17. What is a forward rate?
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
Obligations for the purchase or sale of goods and services at previously agreed prices
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

18. What is the fourth roles of the U.S. dollar outside the U.S.?
Collecting & spending of money by the government
Impact of currency exchange rate changes on reported financial statements
Vehicle currency(transaction between 2 less commonly used currencies)
24/7

19. What is the second issue with EFSF?
Intervention currency (peg country currency)
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)
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

20. What is the fourth characteristic of transaction exposure?
Lending of funds in foreign currencies
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. 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
Collecting & spending of money by the government

21. Because many banks (2/3) are below the capital adequacy ratio of 9% many can not recapitalize on their own as a result
State driven recapitalization are now needed
Inflation - interest rate - and market psychology
Borrowing of funds in foreign currency
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency

22. What is the first characteristic of lead strategy?
Large number of individuals and cos exchange of domestic currencies for a foreign currency
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
An attempt to collect currency receivables early as result of expected depreciation
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)

23. What is non convertible currency?
Paying foreign currency payable before dues as a result expected currency appreciation
Reserve currency
Banks stability was measure at a 5% capital adequacy ratio
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency

24. What are the types of Exchange Rate Fluctuations?
Monetary and fiscal policies
Affected by fluctuation in foreign exchange values
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
Transportation costs - trade barriers - and not trade inputs such as rents or wages

25. What is the nature of the forex market?
An attempt to collect currency receivables early as result of expected depreciation
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
True
1. distribute productive assets 2. ensure assets are not concentrated in countries

26. What is economic exposure?
True
Firms future international earning power
Intervention currency (peg country currency)
True

27. In the long run empirical testing has of the PPP Theory has proven to be accurate in the long run. True or False
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
True
Inflation - interest rate - and market psychology
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

28. What is the second role of the U.S. dollar outside the U.S. ?
Monetary and fiscal policies
Large number of individuals and cos exchange of domestic currencies for a foreign currency
Forward exchange or spot exchange
Intervention currency (peg country currency)

29. What are the three ways of insuring against a Forex risk?
Spot rates - forward rates - and swaps
Relative price differences and ppp
Paying foreign currency payable before dues as a result expected currency appreciation
Transaction - translation and economic exposure

30. Marekts are open...
24/7
True
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
Measurement of past events

31. What is the purpose of not concentrating assets in countries?
Exchange rates are determined by the demand and supply for different currencies
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
Banks stability was measure at a 5% capital adequacy ratio

32. What is free convertible currency?
Relative price differences and ppp
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
Investor psychology
Increase their exposure to banking -'s banking center

33. The euro faces risks fo recapitalization?
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
Banks stability was measure at a 5% capital adequacy ratio
A common reference
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates

34. How do you establish central control?
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
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
1. protect resources efficiently 2. ensure correct mix of tactics and strategies

35. What is the first issue with EFSF?
up to date
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
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

36. How do you insure or hedge against a Forex risk?
u.s. dollar
Interest rates and money supply
Forward exchange or spot exchange
Intervention currency (peg country currency)

37. What are some characteristics of swaps?
Large number of individuals and cos exchange of domestic currencies for a foreign currency
True
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
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure

38. What is the nominal exchange rate?
Currency of one country can be exchanged for the currency of another country
Affected by fluctuation in foreign exchange values
Delay payables if currency is expected to depreciate
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

39. How and What is the purpose of distributing assets?
Goods and services of one country can be exchanged for the goods and services 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
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
Spot rates - forward rates - and swaps

40. What is the first characteristic of transaction exposure ?
Affected by fluctuation in foreign exchange values
State driven recapitalization are now needed
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
Borrowing of funds in foreign currency

41. 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
A common reference
domino effect
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP

42. What is the second characteristic of transaction exposure?
Lead and lag strategies
Obligations for the purchase or sale of goods and services at previously agreed prices
Investor psychology
Measurement of past events

43. What is the second thing that determines the Forex rates?
Interest rates and money supply
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
A common reference

44. 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
Issue mo good loans so that profits from new business can eat away the losses form the bad
Affected by fluctuation in foreign exchange values
Forward exchange or spot exchange

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

46. Defaulting on debt has a __________ that intertwines all countries in Europe.
Goods and services of one country can be exchanged for the goods and services of another country
Interest rates and money supply
domino effect
Delay collection of foreign currency receivables if currency is exception to appreciate

47. 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
True
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)
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

48. What are other strategies for managing forex risk?
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
Spot rates and forward rates
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency

49. According to economic theories of exchage rate determination?
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
Borrowing of funds in foreign currency
Investor psychology
Exchange rates are determined by the demand and supply for different currencies

50. What is the second characteristic of lag strategy?
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
Vehicle currency(transaction between 2 less commonly used currencies)
Delay payables if currency is expected to depreciate
Affected by fluctuation in foreign exchange values