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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. No single theory can explain explain the causes the value of currencies to change. True or False?
True
Affected by fluctuation in foreign exchange values
It helps them understand the influence of exchange rates on profitability of trade investment deals
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps

2. 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
Forward exchange or spot exchange
Lead and lag strategies

3. What are the three different types of foreign exchange rate risks?
Transaction - translation and economic exposure
Group of investors movement in the same direction and same time or government intervention
Measurement of past events
Investor psychology

4. What implications does understanding foreign exchange rates have on managers?
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
It helps them understand the influence of exchange rates on profitability of trade investment deals
True
Forward exchange or spot exchange

5. How can transaction exposure be described?
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
State driven recapitalization are now needed
Delay payables if currency is expected to depreciate
The income form individual transacations

6. How can translation exposure be described?
Exchange rate policies
Currency of one country can be exchanged for the currency of another country
Impact of currency exchange rate changes on reported financial statements
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP

7. What are the first two things that determine Forex rates?
Firms future international earning power
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
Forward exchange or spot exchange

8. What is capital fight when looking at it form investor psychology?
Goods and services of one country can be exchanged for the goods and services of another country
Collecting & spending of money by the government
Large number of individuals and cos exchange of domestic currencies for a foreign 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

9. What are some strategies for managing forex risk?
Transaction - translation and economic exposure
Establish central control and attempts to forecast future exchange rates
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
Control the amount of money in circulation - enforced by government policies - focus on growth rate

10. What are the two ways to quote currency?
Inflation - interest rate - and market psychology
Lending of funds in foreign currencies
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP
Spot rates and forward rates

11. What is the first issue with EFSF?
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
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
Reserve currency
Lending of funds in foreign currencies

12. Because many banks (2/3) are below the capital adequacy ratio of 9% many can not recapitalize on their own as a result
Collecting & spending of money by the government
Exchange rate policies
State driven recapitalization are now needed
Impact of currency exchange rate changes on reported financial statements

13. What is the purpose of not concentrating assets in countries?
Issue mo good loans so that profits from new business can eat away the losses form the bad
Transaction - translation and economic exposure
Increase currency values and protect against increases in foreign prices of goods and services
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)

14. What is the nominal exchange rate?
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
Monetary and fiscal policies
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
Currency of one country can be exchanged for the currency of another country

15. What is the first characteristic of transaction exposure ?
The income form individual transacations
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
Exchange rates are determined by the demand and supply for different currencies
Affected by fluctuation in foreign exchange values

16. What are other strategies for managing forex risk?
True
State driven recapitalization are now needed
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
Increase currency values and protect against increases in foreign prices of goods and services

17. The euro faces risks fo recapitalization?
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
Delay collection of foreign currency receivables if currency is exception to appreciate
Establish central control and attempts to forecast future exchange rates

18. What is the second characteristic of lag strategy?
An attempt to collect currency receivables early as result of expected depreciation
Increase their exposure to banking -'s banking center
Forward exchange or spot exchange
Delay payables if currency is expected to depreciate

19. What is the nature of the forex market?
Issue mo good loans so that profits from new business can eat away the losses form the bad
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
Goods and services of one country can be exchanged for the goods and services of another country
Spot rates and forward rates

20. What is the second role of the U.S. dollar outside the U.S. ?
Large number of individuals and cos exchange of domestic currencies for a foreign currency
up to date
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
Intervention currency (peg country currency)

21. Most Transaction inovolve...
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
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
u.s. dollar
Intervention currency (peg country currency)

22. Marekts are open...
Increase their exposure to banking -'s banking center
24/7
Currency of one country can be exchanged for the currency of another country
agreed upon austerity

23. What holds true to Purchase Power Parity Theory?
Collecting & spending of money by the government
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
Goods and services of one country can be exchanged for the goods and services of another country
Establish central control and attempts to forecast future exchange rates

24. When do countries use the foreign exchange market?
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
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

25. In the long run empirical testing has of the PPP Theory has proven to be accurate in the long run. True or False
Large number of individuals and cos exchange of domestic currencies for a foreign currency
Delay collection of foreign currency receivables if currency is exception to appreciate
True
The income form individual transacations

26. What is the third role of the U.S. dollar outside the U.S.?
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
Collecting & spending of money by the government
Reserve currency
Impact of currency exchange rate changes on reported financial statements

27. What is the third thing that determines the forex rates?
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
Productivity and balance payments
Investor psychology
1. distribute productive assets 2. ensure assets are not concentrated in countries

28. 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
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
State driven recapitalization are now needed

29. How do you insure or hedge against a Forex risk?
Vehicle currency(transaction between 2 less commonly used currencies)
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
Forward exchange or spot exchange
Spot rates and forward rates

30. Bailout Fund of EFSF - What is this shiz nitz?
Delay payables if currency is expected to depreciate
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
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
Supply & demand of the currency -Interest rates -Inflation -Investor expectations

31. What are two methods of reducing translation and transaction exposure?
Firms future international earning power
Interest rates and money supply
Transportation costs - trade barriers - and not trade inputs such as rents or wages
Lead and lag strategies

32. What is the real exchange rate?
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
Goods and services of one country can be exchanged for the goods and services of another country
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
A common reference

33. What is a spot rate?
24/7
Establish central control and attempts to forecast future exchange rates
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days

34. What are some characteristics of swaps?
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
London - New York - Tokyo - and Singapore
Vehicle currency(transaction between 2 less commonly used currencies)
Exchange rate policies

35. What is the first characteristic of lag strategy?
Paying foreign currency payable before dues as a result expected currency appreciation
Transportation costs - trade barriers - and not trade inputs such as rents or wages
Delay collection of foreign currency receivables if currency is exception to appreciate
The income form individual transacations

36. According to economic theories of exchage rate determination?
Productivity and balance payments
Forward exchange or spot exchange
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

37. What are the three ways of insuring against a Forex risk?
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
Spot rates - forward rates - and swaps
Paying foreign currency payable before dues as a result expected currency appreciation
Reserve currency

38. What is the fifth thing that determines the forex rates?
Lead and lag strategies
Investor psychology
Establish central control and attempts to forecast future exchange rates
Forward exchange or spot exchange

39. What is the fourth thing that determines the forex rates?
Exchange rate policies
Spot rates and forward rates
Lending of funds in foreign currencies
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)

40. What is the law of one price?
The income form individual transacations
Delay payables if currency is expected to depreciate
Transaction - translation and economic exposure
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

41. What are three factors that impact a country's future exchange rate movements?
Inflation - interest rate - and market psychology
A common reference
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)
domino effect

42. What is a forward rate?
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
Goods and services of one country can be exchanged for the goods and services of another country
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 purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)

43. What is the fourth characteristic of transaction exposure?
Productivity and balance payments
Lending of funds in foreign currencies
It helps them understand the influence of exchange rates on profitability of trade investment deals
Inflation - interest rate - and market psychology

44. What do monetary policies do?
Control the amount of money in circulation - enforced by government policies - focus on growth rate
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
Large number of individuals and cos exchange of domestic currencies for a foreign currency
Exchange rate policies

45. What are the important trading centers?
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
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
London - New York - Tokyo - and Singapore

46. What are the characteristics of economic exposure?
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
Vehicle currency(transaction between 2 less commonly used 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
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs

47. What is the characteristic of translation expose?
Measurement of past events
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
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
State driven recapitalization are now needed

48. What is the second characteristic of lead strategy?
Issue mo good loans so that profits from new business can eat away the losses form the bad
London - New York - Tokyo - and Singapore
Paying foreign currency payable before dues as a result expected currency appreciation
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure

49. Currently margins require more cash reserves - What is the best method of doing this **** in the Euro Zone?
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
Relative price differences and ppp
Issue mo good loans so that profits from new business can eat away the losses form the bad
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

50. What are the two ways to reduce economic exposure?
1. distribute productive assets 2. ensure assets are not concentrated in countries
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
Delay payables if currency is expected to depreciate
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