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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 three different types of foreign exchange rate risks?
Transportation costs - trade barriers - and not trade inputs such as rents or wages
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
Transaction - translation and economic exposure
Productivity and balance payments

2. Currently margins require more cash reserves - What is the best method of doing this **** in the Euro Zone?
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
Firms future international earning power
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

3. The euro faces risks fo recapitalization?
Large number of individuals and cos exchange of domestic currencies for a foreign currency
Banks stability was measure at a 5% capital adequacy ratio
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
Monetary and fiscal policies

4. Greece has not defaulted because it has not been able to fully implement its...
agreed upon austerity
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
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. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency

5. It is important to stay __________ with your current events
up to date
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
u.s. dollar
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)

6. What is the first characteristic of lead strategy?
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. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
Spot rates - forward rates - and swaps
An attempt to collect currency receivables early as result of expected depreciation

7. According to economic theories of exchage rate determination?
Exchange rates are determined by the demand and supply for different currencies
u.s. dollar
Collecting & spending of money by the government
Establish central control and attempts to forecast future exchange rates

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

9. What is the third role of the U.S. dollar outside the U.S.?
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
Reserve currency
Vehicle currency(transaction between 2 less commonly used currencies)
True

10. What are three factors that impact a country's future exchange rate movements?
Inflation - interest rate - and market psychology
Lending of funds in foreign currencies
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)

11. 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
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
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
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency

12. What is the bandwagon effect when looking at form investor psychology ?
True
Paying foreign currency payable before dues as a result expected currency appreciation
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
Group of investors movement in the same direction and same time or government intervention

13. What is free convertible currency?
Transaction - translation and economic exposure
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
Goods and services of one country can be exchanged for the goods and services of another country
Paying foreign currency payable before dues as a result expected currency appreciation

14. What is the law of one price?
Control the amount of money in circulation - enforced by government policies - focus on growth rate
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
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

15. When do countries use foreign exchange market?
agreed upon austerity
Collecting & spending of money by the government
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
Forward exchange or spot exchange

16. What are the two ways to reduce economic exposure?
State driven recapitalization are now needed
Delay collection of foreign currency receivables if currency is exception to appreciate
Exchange rate policies
1. distribute productive assets 2. ensure assets are not concentrated in countries

17. What is a spot rate?
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
Currency of one country can be exchanged for the currency of another country
A common reference
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)

18. What causes big mac prices to vary?
Impact of currency exchange rate changes on reported financial statements
Banks stability was measure at a 5% capital adequacy ratio
Transportation costs - trade barriers - and not trade inputs such as rents or wages
domino effect

19. What holds true to Purchase Power Parity Theory?
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
Goods and services of one country can be exchanged for the goods and services of another country
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)
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

20. How do you establish central control?
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
Borrowing of funds in foreign 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

21. What is the first characteristic of lag strategy?
Issue mo good loans so that profits from new business can eat away the losses form the bad
Collecting & spending of money by the government
Delay collection of foreign currency receivables if currency is exception to appreciate
domino effect

22. What is the real exchange rate?
Spot rates and forward rates
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
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
Goods and services of one country can be exchanged for the goods and services of another country

23. What is the third characteristic of transaction exposure?
Spot rates - forward rates - and swaps
Borrowing of funds in foreign currency
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
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

24. What is non convertible currency?
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
Affected by fluctuation in foreign exchange values
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

25. What is the purpose of not concentrating assets in countries?
Increase currency values and protect against increases in foreign prices of goods and services
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
Transportation costs - trade barriers - and not trade inputs such as rents or wages
Transaction - translation and economic exposure

26. What are the first two things that determine Forex rates?
Relative price differences and ppp
Intervention currency (peg country currency)
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
agreed upon austerity

27. What is the characteristic of translation expose?
agreed upon austerity
Measurement of past events
Large number of individuals and cos exchange of domestic currencies for a foreign currency
1. protect resources efficiently 2. ensure correct mix of tactics and strategies

28. What is economic exposure?
Firms future international earning power
Delay collection of foreign currency receivables if currency is exception to appreciate
Measurement of past events
It helps them understand the influence of exchange rates on profitability of trade investment deals

29. In the long run empirical testing has of the PPP Theory has proven to be accurate in the long run. True or False
True
Goods and services of one country can be exchanged for the goods and services of another country
agreed upon austerity
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps

30. What are some strategies for managing forex risk?
Establish central control and attempts to forecast future exchange rates
24/7
Obligations for the purchase or sale of goods and services at previously agreed prices
Inflation - interest rate - and market psychology

31. What are the purposes of fiscal policies?
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
Collecting & spending of money by the government
Exchange rates are determined by the demand and supply for different currencies
An attempt to collect currency receivables early as result of expected depreciation

32. What is the second role of the U.S. dollar outside the U.S. ?
Intervention currency (peg country currency)
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP
24/7

33. What is the nominal exchange rate?
Currency of one country can be exchanged for the currency of another country
Lending of funds in foreign currencies
agreed upon austerity
Delay collection of foreign currency receivables if currency is exception to appreciate

34. How can translation exposure be described?
An attempt to collect currency receivables early as result of expected depreciation
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
Impact of currency exchange rate changes on reported financial statements
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency

35. How can transaction exposure be described?
The income form individual transacations
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
Delay collection of foreign currency receivables if currency is exception to appreciate
London - New York - Tokyo - and Singapore

36. What is a currency swamp?
domino effect
Delay payables if currency is expected to depreciate
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates

37. What is the fifth thing that determines the forex rates?
Monetary and fiscal policies
Currency of one country can be exchanged for the currency of another country
Firms future international earning power
Investor psychology

38. How do you insure or hedge against a Forex risk?
Forward exchange or spot exchange
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
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

39. What is a forward rate?
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
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP
Increase currency values and protect against increases in foreign prices of goods and services

40. What are the important trading centers?
Inflation - interest rate - and market psychology
Delay collection of foreign currency receivables if currency is exception to appreciate
London - New York - Tokyo - and Singapore
Control the amount of money in circulation - enforced by government policies - focus on growth rate

41. 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
Banks stability was measure at a 5% capital adequacy ratio
Relative price differences and ppp
An attempt to collect currency receivables early as result of expected depreciation

42. What is the fourth thing that determines the forex rates?
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
domino effect
Exchange rate policies
Spot rates - forward rates - and swaps

43. What do monetary policies do?
Exchange rates are determined by the demand and supply for different currencies
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
Control the amount of money in circulation - enforced by government policies - focus on growth rate
The income form individual transacations

44. No single theory can explain explain the causes the value of currencies to change. True or False?
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
Increase currency values and protect against increases in foreign prices of goods and services
True
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP

45. What is the second characteristic of transaction exposure?
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
Obligations for the purchase or sale of goods and services at previously agreed prices
Paying foreign currency payable before dues as a result expected currency appreciation
Monetary and fiscal policies

46. What is the first roels of the U.S. dollar outside the U.S.?
Inflation - interest rate - and market psychology
A common reference
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
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

47. Marekts are open...
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
24/7
Transaction - translation and economic exposure
Inflation - interest rate - and market psychology

48. What are the two ways to quote currency?
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
Large number of individuals and cos exchange of domestic currencies for a foreign currency
Spot rates and forward rates
Banks stability was measure at a 5% capital adequacy ratio

49. When do countries use the foreign exchange market?
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
Group of investors movement in the same direction and same time or government intervention
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. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.

50. What are the characteristics of economic exposure?
Spot rates and forward rates
Lead and lag strategies
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
Investor psychology