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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. When do countries use foreign exchange market?
An attempt to collect currency receivables early as result of expected depreciation
1. distribute productive assets 2. ensure assets are not concentrated in countries
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert 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

2. What is arbitrage?
1. distribute productive assets 2. ensure assets are not concentrated in countries
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)
u.s. dollar

3. The euro faces risks fo recapitalization?
Forward exchange or spot exchange
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
Banks stability was measure at a 5% capital adequacy ratio
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency

4. What is economic exposure?
1. distribute productive assets 2. ensure assets are not concentrated in countries
Vehicle currency(transaction between 2 less commonly used currencies)
Firms future international earning power
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)

5. 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
Banks stability was measure at a 5% capital adequacy ratio
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

6. What is the first issue with EFSF?
An attempt to collect currency receivables early as result of expected depreciation
London - New York - Tokyo - and Singapore
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.

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

8. What are the two ways to quote currency?
Establish central control and attempts to forecast future exchange rates
Spot rates and forward rates
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
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

9. What is hedging?

10. It is important to stay __________ with your current events
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)
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
up to date

11. In the long run empirical testing has of the PPP Theory has proven to be accurate in the long run. True or False
True
up to date
Borrowing of funds in foreign currency
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency

12. What are some strategies for managing forex risk?
Establish central control and attempts to forecast future exchange rates
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
Forward exchange or spot exchange
Obligations for the purchase or sale of goods and services at previously agreed prices

13. Greece has not defaulted because it has not been able to fully implement its...
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
agreed upon austerity
u.s. dollar
Intervention currency (peg country currency)

14. What is the law of one price?
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
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. distribute productive assets 2. ensure assets are not concentrated in countries

15. What are the characteristics of economic exposure?
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
Goods and services of one country can be exchanged for the goods and services of another country
Lead and lag strategies
Measurement of past events

16. 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
Delay payables if currency is expected to depreciate
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

17. What is the second characteristic of lag strategy?
Banks stability was measure at a 5% capital adequacy ratio
Delay payables if currency is expected to depreciate
State driven recapitalization are now needed
Investor psychology

18. What are the types of Exchange Rate Fluctuations?
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)
Monetary and fiscal policies
An attempt to collect currency receivables early as result of expected depreciation
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

19. How can transaction exposure be described?
The income form individual transacations
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
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.

20. What are the first two things that determine Forex rates?
Relative price differences and ppp
Exchange rates are determined by the demand and supply for different currencies
Transaction - translation and economic exposure
1. protect resources efficiently 2. ensure correct mix of tactics and strategies

21. Defaulting on debt has a __________ that intertwines all countries in Europe.
Productivity and balance payments
domino effect
It helps them understand the influence of exchange rates on profitability of trade investment deals
Impact of currency exchange rate changes on reported financial statements

22. What is the characteristic of translation expose?
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP
Transaction - translation and economic exposure
Measurement of past events
Currency of one country can be exchanged for the currency of another country

23. What is the third thing that determines the forex rates?
Spot rates - forward rates - and swaps
Increase currency values and protect against increases in foreign prices of goods and services
Productivity and balance payments
Obligations for the purchase or sale of goods and services at previously agreed prices

24. What is the fourth thing that determines the forex rates?
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
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
Exchange rate policies

25. What is a forward rate?
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
Large number of individuals and cos exchange of domestic currencies for a foreign currency
Increase their exposure to banking -'s banking center
Lending of funds in foreign currencies

26. What is the second characteristic of transaction exposure?
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
Paying foreign currency payable before dues as a result expected currency appreciation
Obligations for the purchase or sale of goods and services at previously agreed prices

27. What are the three ways of insuring against a Forex risk?
Delay collection of foreign currency receivables if currency is exception to appreciate
Spot rates - forward rates - and swaps
True
Banks stability was measure at a 5% capital adequacy ratio

28. How and What is the purpose of distributing assets?
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
Exchange rate policies
Affected by fluctuation in foreign exchange values
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates

29. 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
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
Measurement of past events
Paying foreign currency payable before dues as a result expected currency appreciation

30. What are some factors that influence exchange rates?
Relative price differences and ppp
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
It helps them understand the influence of exchange rates on profitability of trade investment deals
Supply & demand of the currency -Interest rates -Inflation -Investor expectations

31. What are the important trading centers?
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP
Transaction - translation and economic exposure
Lead and lag strategies
London - New York - Tokyo - and Singapore

32. What is the third role of the U.S. dollar outside the U.S.?
Reserve currency
The income form individual transacations
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
Group of investors movement in the same direction and same time or government intervention

33. What is a spot rate?
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)
Relative price differences and ppp
Measurement of past events
Banks stability was measure at a 5% capital adequacy ratio

34. Most Transaction inovolve...
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
u.s. dollar
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
Spot rates and forward rates

35. What is free convertible currency?
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
The income form individual transacations

36. Because many banks (2/3) are below the capital adequacy ratio of 9% many can not recapitalize on their own as a result
Relative price differences and ppp
State driven recapitalization are now needed
Spot rates and forward rates
Banks stability was measure at a 5% capital adequacy ratio

37. What is the second role of the U.S. dollar outside the U.S. ?
up to date
agreed upon austerity
Intervention currency (peg country currency)
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency

38. What are three factors that impact a country's future exchange rate movements?
Inflation - interest rate - and market psychology
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
Large number of individuals and cos exchange of domestic currencies for a foreign currency
Productivity and balance payments

39. 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
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
Banks stability was measure at a 5% capital adequacy ratio
Affected by fluctuation in foreign exchange values

40. 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
Spot rates and forward rates
Currency of one country can be exchanged for the currency of another country
An attempt to collect currency receivables early as result of expected depreciation

41. How do you establish central control?
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
Reserve currency
True
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

42. What is the third characteristic of transaction exposure?
Firms future international earning power
Lead and lag strategies
Borrowing of funds in foreign currency
Transportation costs - trade barriers - and not trade inputs such as rents or wages

43. What is the bandwagon effect when looking at form investor psychology ?
Transportation costs - trade barriers - and not trade inputs such as rents or wages
True
It helps them understand the influence of exchange rates on profitability of trade investment deals
Group of investors movement in the same direction and same time or government intervention

44. What are two methods of reducing translation and transaction exposure?
Lead and lag strategies
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)
Borrowing of funds in foreign currency
Vehicle currency(transaction between 2 less commonly used currencies)

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

46. 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 changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
Transaction - translation and economic exposure
True

47. What is the nature of the forex market?
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
Lead and lag strategies
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
An attempt to collect currency receivables early as result of expected depreciation

48. What do monetary policies do?
Paying foreign currency payable before dues as a result expected currency appreciation
Control the amount of money in circulation - enforced by government policies - focus on growth rate
Banks stability was measure at a 5% capital adequacy ratio
Issue mo good loans so that profits from new business can eat away the losses form the bad

49. What causes big mac prices to vary?
Transportation costs - trade barriers - and not trade inputs such as rents or wages
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
Monetary and fiscal policies
Increase currency values and protect against increases in foreign prices of goods and services

50. What is the first characteristic of lag strategy?
True
Group of investors movement in the same direction and same time or government intervention
Delay collection of foreign currency receivables if currency is exception to appreciate
domino effect