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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 implications does understanding foreign exchange rates have on managers?
It helps them understand the influence of exchange rates on profitability of trade investment deals
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. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
Inflation - interest rate - and market psychology

2. What are the types of Exchange Rate Fluctuations?
domino effect
Reserve currency
Monetary and fiscal policies
Firms future international earning power

3. What is the first characteristic of transaction exposure ?
Issue mo good loans so that profits from new business can eat away the losses form the bad
State driven recapitalization are now needed
1. distribute productive assets 2. ensure assets are not concentrated in countries
Affected by fluctuation in foreign exchange values

4. What are other strategies for managing forex risk?
up to date
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
Transaction - translation and economic 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

5. What are some factors that influence exchange rates?
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
Collecting & spending of money by the government
An attempt to collect currency receivables early as result of expected depreciation
Obligations for the purchase or sale of goods and services at previously agreed prices

6. What are the three different types of foreign exchange rate risks?
24/7
Monetary and fiscal policies
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
Transaction - translation and economic exposure

7. What is the first characteristic of lag strategy?
Borrowing of funds in foreign currency
Delay collection of foreign currency receivables if currency is exception to appreciate
Currency of one country can be exchanged for the currency of another country
True

8. What is the second role of the U.S. dollar outside the U.S. ?
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
Intervention currency (peg country currency)
Delay collection of foreign currency receivables if currency is exception to appreciate
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

9. What is the third role of the U.S. dollar outside the U.S.?
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
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
Reserve currency
Borrowing of funds in foreign currency

10. What are the first two things that determine Forex rates?
The income form individual transacations
Productivity and balance payments
Relative price differences and ppp
1. distribute productive assets 2. ensure assets are not concentrated in countries

11. How do you establish central control?
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
Currency of one country can be exchanged for the currency of another country
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

12. No single theory can explain explain the causes the value of currencies to change. True or False?
Issue mo good loans so that profits from new business can eat away the losses form the bad
True
Large number of individuals and cos exchange of domestic currencies for a foreign currency
Productivity and balance payments

13. What is the second thing that determines the Forex rates?
Interest rates and money supply
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
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

14. What is externally convertible currency
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
Intervention currency (peg country currency)

15. What are some characteristics of swaps?
u.s. dollar
Establish central control and attempts to forecast future exchange rates
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
Collecting & spending of money by the government

16. What is hedging?

17. What is the fourth roles of the U.S. dollar outside the U.S.?
Vehicle currency(transaction between 2 less commonly used currencies)
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
Measurement of past events
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

18. What is the nature of the forex market?
Lending of funds in foreign currencies
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
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

19. What is the fourth thing that determines the forex rates?
Exchange rate policies
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
Spot rates and forward rates
up to date

20. Because many banks (2/3) are below the capital adequacy ratio of 9% many can not recapitalize on their own as a result
Delay collection of foreign currency receivables if currency is exception to appreciate
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)
State driven recapitalization are now needed

21. What is the second issue with EFSF?
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. 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
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
Spot rates and forward rates

22. What is the fourth characteristic of transaction exposure?
Lending of funds in foreign currencies
Obligations for the purchase or sale of goods and services at previously agreed prices
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
Forward exchange or spot exchange

23. What is the second characteristic of lead strategy?
Paying foreign currency payable before dues as a result expected currency appreciation
Goods and services of one country can be exchanged for the goods and services of another country
1. distribute productive assets 2. ensure assets are not concentrated in countries
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

24. What holds true to Purchase Power Parity Theory?
Paying foreign currency payable before dues as a result expected currency appreciation
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
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. distribute productive assets 2. ensure assets are not concentrated in countries

25. What is the fifth thing that determines the forex rates?
Measurement of past events
Group of investors movement in the same direction and same time or government intervention
Investor psychology
Paying foreign currency payable before dues as a result expected currency appreciation

26. Bailout Fund of EFSF - What is this shiz nitz?
Affected by fluctuation in foreign exchange values
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
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)

27. How can translation exposure be described?
Impact of currency exchange rate changes on reported financial statements
Exchange rates are determined by the demand and supply for different currencies
domino effect
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps

28. What is the third thing that determines the forex rates?
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)
Productivity and balance payments
Measurement of past events
Lending of funds in foreign currencies

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

30. What is the purpose of not concentrating assets in countries?
Increase currency values and protect against increases in foreign prices of goods and services
Borrowing of funds in foreign currency
Goods and services of one country can be exchanged for the goods and services of another country
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP

31. What are the three ways of insuring against a Forex risk?
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP
Delay payables if currency is expected to depreciate
Spot rates - forward rates - and swaps
Impact of currency exchange rate changes on reported financial statements

32. What are two methods of reducing translation and transaction exposure?
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
Lead and lag strategies
Large number of individuals and cos exchange of domestic currencies for a foreign currency
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

33. What are the two ways to quote 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
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
Spot rates and forward rates
Transportation costs - trade barriers - and not trade inputs such as rents or wages

34. Defaulting on debt has a __________ that intertwines all countries in Europe.
Exchange rates are determined by the demand and supply for different 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
domino effect
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs

35. What is free convertible currency?
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)
Transaction - translation and economic exposure
Forward exchange or spot exchange

36. What are the characteristics of economic exposure?
An attempt to collect currency receivables early as result of expected depreciation
London - New York - Tokyo - and Singapore
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
Affected by fluctuation in foreign exchange values

37. According to economic theories of exchage rate determination?
Currency of one country can be exchanged for the currency 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
Exchange rates are determined by the demand and supply for different currencies
Collecting & spending of money by the government

38. How can transaction exposure be described?
Monetary and fiscal policies
Delay collection of foreign currency receivables if currency is exception to appreciate
The income form individual transacations
Exchange rates are determined by the demand and supply for different currencies

39. Currently margins require more cash reserves - What is the best method of doing this **** in the Euro Zone?
Delay payables if currency is expected to depreciate
Issue mo good loans so that profits from new business can eat away the losses form the bad
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

40. What is the first characteristic of lead strategy?
Goods and services of one country can be exchanged for the goods and services of another country
An attempt to collect currency receivables early as result of expected depreciation
up to date
Delay payables if currency is expected to depreciate

41. What are the two ways to reduce economic exposure?
Affected by fluctuation in foreign exchange values
1. distribute productive assets 2. ensure assets are not concentrated in countries
Banks stability was measure at a 5% capital adequacy ratio
Paying foreign currency payable before dues as a result expected currency appreciation

42. When do countries use the foreign exchange market?
Collecting & spending of money by the government
Currency of one country can be exchanged for the currency of another country
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
Establish central control and attempts to forecast future exchange rates

43. What is the law of one price?
London - New York - Tokyo - and Singapore
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
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
Spot rates - forward rates - and swaps

44. How do you insure or hedge against a Forex risk?
Transaction - translation and economic exposure
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
A common reference
Forward exchange or spot exchange

45. What are some strategies for managing forex risk?
Lending of funds in foreign currencies
London - New York - Tokyo - and Singapore
The income form individual transacations
Establish central control and attempts to forecast future exchange rates

46. What causes big mac prices to vary?
Transportation costs - trade barriers - and not trade inputs such as rents or wages
State driven recapitalization are now needed
Forward exchange or spot exchange
agreed upon austerity

47. What is arbitrage?
Delay payables if currency is expected to depreciate
Spot rates and forward rates
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency

48. What is the second characteristic of lag strategy?
Delay payables if currency is expected to depreciate
agreed upon austerity
Issue mo good loans so that profits from new business can eat away the losses form the bad
Transaction - translation and economic exposure

49. What are the important trading centers?
Banks stability was measure at a 5% capital adequacy ratio
London - New York - Tokyo - and Singapore
Investor psychology
True

50. What is the nominal exchange rate?
Transportation costs - trade barriers - and not trade inputs such as rents or wages
The income form individual transacations
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