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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 some strategies for managing forex risk?
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
Transaction - translation and economic exposure
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
Establish central control and attempts to forecast future exchange rates

2. What are the characteristics of economic exposure?
Reserve currency
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
Forward exchange or spot exchange
Banks stability was measure at a 5% capital adequacy ratio

3. What is externally convertible currency
Vehicle currency(transaction between 2 less commonly used currencies)
Increase currency values and protect against increases in foreign prices of goods and services
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
1. distribute productive assets 2. ensure assets are not concentrated in countries

4. Currently margins require more cash reserves - What is the best method of doing this **** in the Euro Zone?
Monetary and fiscal policies
domino effect
Issue mo good loans so that profits from new business can eat away the losses form the bad
Borrowing of funds in foreign currency

5. What is the second characteristic of lag strategy?
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
True
Banks stability was measure at a 5% capital adequacy ratio
Delay payables if currency is expected to depreciate

6. How do you establish central control?
State driven recapitalization are now needed
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
Increase currency values and protect against increases in foreign prices of goods and services
Issue mo good loans so that profits from new business can eat away the losses form the bad

7. What is capital fight when looking at it form investor psychology?
Exchange rate policies
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. 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
Large number of individuals and cos exchange of domestic currencies for a foreign currency

8. What causes big mac prices to vary?
agreed upon austerity
Transportation costs - trade barriers - and not trade inputs such as rents or wages
Vehicle currency(transaction between 2 less commonly used currencies)
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure

9. What is the fourth thing that determines the forex rates?
Exchange rate policies
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
Obligations for the purchase or sale of goods and services at previously agreed prices
Exchange rates are determined by the demand and supply for different currencies

10. What is the fourth characteristic of transaction exposure?
Currency of one country can be exchanged for the currency of another country
Lending of funds in foreign currencies
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

11. What are the three different types of foreign exchange rate risks?
Large number of individuals and cos exchange of domestic currencies for a foreign currency
An attempt to collect currency receivables early as result of expected depreciation
Transaction - translation and economic exposure
Lead and lag strategies

12. What is the law of one price?
Inflation - interest rate - and market psychology
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
It helps them understand the influence of exchange rates on profitability of trade investment deals
u.s. dollar

13. What are the two ways to quote currency?
Spot rates and forward rates
Lead and lag strategies
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
London - New York - Tokyo - and Singapore

14. What is the first roels of the U.S. dollar outside the U.S.?
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
24/7
A common reference
Spot rates and forward rates

15. When do countries use the foreign exchange market?
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
agreed upon austerity
Reserve currency
An attempt to collect currency receivables early as result of expected depreciation

16. What is a currency swamp?
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
up to date
Delay collection of foreign currency receivables if currency is exception to appreciate
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates

17. What are some factors that influence exchange rates?
Transaction - translation and economic exposure
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
Investor psychology
Firms future international earning power

18. According to economic theories of exchage rate determination?
Exchange rates are determined by the demand and supply for different 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
Issue mo good loans so that profits from new business can eat away the losses form the bad
24/7

19. What implications does understanding foreign exchange rates have on managers?
Forward exchange or spot exchange
Paying foreign currency payable before dues as a result expected currency appreciation
It helps them understand the influence of exchange rates on profitability of trade investment deals
Interest rates and money supply

20. What is the first characteristic of lag strategy?
True
State driven recapitalization are now needed
Delay collection of foreign currency receivables if currency is exception to appreciate
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps

21. What is free convertible currency?
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
Banks stability was measure at a 5% capital adequacy ratio
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP

22. In the long run empirical testing has of the PPP Theory has proven to be accurate in the long run. True or False
True
domino effect
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)
Supply & demand of the currency -Interest rates -Inflation -Investor expectations

23. What are the two ways to reduce economic 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
agreed upon austerity
Transportation costs - trade barriers - and not trade inputs such as rents or wages
1. distribute productive assets 2. ensure assets are not concentrated in countries

24. 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
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
Intervention currency (peg country currency)

25. What is the third role of the U.S. dollar outside the U.S.?
Spot rates and forward rates
True
Reserve currency
Inflation - interest rate - and market psychology

26. What are the types of Exchange Rate Fluctuations?
Establish central control and attempts to forecast future exchange rates
Forward exchange or spot exchange
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
Monetary and fiscal policies

27. What are other strategies for managing forex risk?
Exchange rates are determined by the demand and supply for different currencies
Monetary and fiscal policies
Large number of individuals and cos exchange of domestic currencies for a foreign currency
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure

28. What are the three ways of insuring against a Forex risk?
domino effect
Spot rates - forward rates - and swaps
Monetary and fiscal policies
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

29. What is the second role of the U.S. dollar outside the U.S. ?
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
A common reference
Intervention currency (peg country currency)
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure

30. What is the second characteristic of transaction exposure?
State driven recapitalization are now needed
Reserve currency
Collecting & spending of money by the government
Obligations for the purchase or sale of goods and services at previously agreed prices

31. What is the purpose of not concentrating assets in countries?
Firms future international earning power
Banks stability was measure at a 5% capital adequacy ratio
Large number of individuals and cos exchange of domestic currencies for a foreign currency
Increase currency values and protect against increases in foreign prices of goods and services

32. What is arbitrage?
Delay payables if currency is expected to depreciate
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)
Collecting & spending of money by the government
agreed upon austerity

33. How and What is the purpose of distributing assets?
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)

34. What are three factors that impact a country's future exchange rate movements?
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
Interest rates and money supply
Inflation - interest rate - and market psychology
1. distribute productive assets 2. ensure assets are not concentrated in countries

35. Defaulting on debt has a __________ that intertwines all countries in Europe.
domino effect
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)
It helps them understand the influence of exchange rates on profitability of trade investment deals
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)

36. What is the fifth thing that determines the forex rates?
u.s. dollar
Investor psychology
24/7
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

37. Bailout Fund of EFSF - What is this shiz nitz?
Monetary and fiscal policies
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
Relative price differences and ppp

38. What are some characteristics of swaps?
up to date
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
Obligations for the purchase or sale of goods and services at previously agreed prices
Investor psychology

39. What is the fourth roles of the U.S. dollar outside the U.S.?
Lead and lag strategies
Obligations for the purchase or sale of goods and services at previously agreed prices
Currency of one country can be exchanged for the currency of another country
Vehicle currency(transaction between 2 less commonly used currencies)

40. It is important to stay __________ with your current events
Group of investors movement in the same direction and same time or government intervention
up to date
Interest rates and money supply
Goods and services of one country can be exchanged for the goods and services of another country

41. When do countries use foreign exchange market?
Issue mo good loans so that profits from new business can eat away the losses form the bad
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
Delay payables if currency is expected to depreciate
Control the amount of money in circulation - enforced by government policies - focus on growth rate

42. What is the first issue with EFSF?
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
An attempt to collect currency receivables early as result of expected depreciation
Inflation - interest rate - and market psychology
State driven recapitalization are now needed

43. Marekts are open...
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
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
24/7
An attempt to collect currency receivables early as result of expected depreciation

44. What is the first characteristic of lead strategy?
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
An attempt to collect currency receivables early as result of expected depreciation
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
1. protect resources efficiently 2. ensure correct mix of tactics and strategies

45. What is the nominal exchange rate?
24/7
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
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP

46. What is a spot rate?
Investor psychology
Interest rates and money supply
The income form individual transacations
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)

47. How do you insure or hedge against a Forex risk?
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
24/7
Interest rates and money supply
Forward exchange or spot exchange

48. What is the nature of the forex market?
True
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
Delay collection of foreign currency receivables if currency is exception to appreciate

49. What is a forward 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
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
It helps them understand the influence of exchange rates on profitability of trade investment deals
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days

50. What is the third characteristic of transaction exposure?
Monetary and fiscal policies
Relative price differences and ppp
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
Borrowing of funds in foreign currency