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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 holds true to Purchase Power Parity Theory?
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
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 - forward rates - and swaps
Reserve currency

2. What is a currency swamp?
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
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
True
u.s. dollar

3. What is externally convertible currency
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
Investor psychology
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
Currency of one country can be exchanged for the currency of another country

4. What are the two ways to quote currency?
Group of investors movement in the same direction and same time or government intervention
Paying foreign currency payable before dues as a result expected currency appreciation
Spot rates and forward rates
24/7

5. What is the first issue with EFSF?
Control the amount of money in circulation - enforced by government policies - focus on growth rate
Establish central control and attempts to forecast future exchange rates
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. 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

6. 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
Transaction - translation and economic exposure
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
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

7. The euro faces risks fo recapitalization?
Affected by fluctuation in foreign exchange values
An attempt to collect currency receivables early as result of expected depreciation
Banks stability was measure at a 5% capital adequacy ratio
Reserve currency

8. 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)
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
Productivity and balance payments
Supply & demand of the currency -Interest rates -Inflation -Investor expectations

9. What is the third role of the U.S. dollar outside the U.S.?
Group of investors movement in the same direction and same time or government intervention
Reserve 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
Spot rates - forward rates - and swaps

10. 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
Lending of funds in foreign currencies
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs

11. What implications does understanding foreign exchange rates have on managers?
Delay payables if currency is expected to depreciate
Transportation costs - trade barriers - and not trade inputs such as rents or wages
Lead and lag strategies
It helps them understand the influence of exchange rates on profitability of trade investment deals

12. What do monetary policies do?
Control the amount of money in circulation - enforced by government policies - focus on growth rate
True
London - New York - Tokyo - and Singapore
It helps them understand the influence of exchange rates on profitability of trade investment deals

13. 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
Inflation - interest rate - and market psychology
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
State driven recapitalization are now needed

14. What is arbitrage?
The income form individual transacations
Intervention currency (peg country currency)
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)

15. When do countries use foreign exchange market?
1. distribute productive assets 2. ensure assets are not concentrated in countries
Borrowing of funds in foreign currency
Obligations for the purchase or sale of goods and services at previously agreed prices
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

16. What is the purpose of not concentrating assets in countries?
Increase currency values and protect against increases in foreign prices of goods and services
True
Currency of one country can be exchanged for the currency of another country
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

17. How can transaction exposure be described?
London - New York - Tokyo - and Singapore
The income form individual transacations
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 rates are determined by the demand and supply for different currencies

18. What is the real exchange rate?
Goods and services of one country can be exchanged for the goods and services of another country
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)
domino effect
Delay collection of foreign currency receivables if currency is exception to appreciate

19. What is free convertible currency?
Inflation - interest rate - and market psychology
Monetary and fiscal policies
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
Spot rates and forward rates

20. How do you establish central control?
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
A common reference
State driven recapitalization are now needed
1. protect resources efficiently 2. ensure correct mix of tactics and strategies

21. What are two methods of reducing translation and transaction 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
Investor psychology
Lead and lag strategies
Control the amount of money in circulation - enforced by government policies - focus on growth rate

22. In the long run empirical testing has of the PPP Theory has proven to be accurate in the long run. True or False
Goods and services of one country can be exchanged for the goods and services of another country
True
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
Measurement of past events

23. What is the first characteristic of transaction exposure ?
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
Affected by fluctuation in foreign exchange values
Transaction - translation and economic exposure
Currency of one country can be exchanged for the currency of another country

24. What is the first characteristic of lag strategy?
Establish central control and attempts to forecast future exchange rates
24/7
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
Delay collection of foreign currency receivables if currency is exception to appreciate

25. What is hedging?

26. Greece has not defaulted because it has not been able to fully implement its...
Group of investors movement in the same direction and same time or government intervention
Productivity and balance payments
agreed upon austerity
Spot rates - forward rates - and swaps

27. What are the purposes of fiscal policies?
up to date
London - New York - Tokyo - and Singapore
Currency of one country can be exchanged for the currency of another country
Collecting & spending of money by the government

28. No single theory can explain explain the causes the value of currencies to change. True or False?
Banks stability was measure at a 5% capital adequacy ratio
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
True
Forward exchange or spot exchange

29. 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)
Borrowing of funds in foreign currency
Supply & demand of the currency -Interest rates -Inflation -Investor expectations

30. According to economic theories of exchage rate determination?
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)
Borrowing of funds in foreign currency
Establish central control and attempts to forecast future exchange rates
Exchange rates are determined by the demand and supply for different currencies

31. What are some strategies for managing forex risk?
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
Establish central control and attempts to forecast future exchange rates

32. What are the two ways to reduce economic exposure?
1. distribute productive assets 2. ensure assets are not concentrated in countries
Banks stability was measure at a 5% capital adequacy ratio
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
Lead and lag strategies

33. What is the fourth roles of the U.S. dollar outside the U.S.?
Transaction - translation and economic exposure
Vehicle currency(transaction between 2 less commonly used currencies)
Goods and services of one country can be exchanged for the goods and services of another country
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

34. Most Transaction inovolve...
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
Paying foreign currency payable before dues as a result expected currency appreciation
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP
u.s. dollar

35. What are the important trading centers?
London - New York - Tokyo - and Singapore
Firms future international earning power
Intervention currency (peg country currency)
Collecting & spending of money by the government

36. What causes big mac prices to vary?
Collecting & spending of money by the government
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
Transportation costs - trade barriers - and not trade inputs such as rents or wages
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP

37. What are the types of Exchange Rate Fluctuations?
Reserve currency
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
Monetary and fiscal policies

38. What is the law of one price?
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
Forward exchange or spot exchange
up to date
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

39. Burger economics!!! Why do we use it?
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency

40. How and What is the purpose of distributing assets?
Transaction - translation and economic exposure
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
Impact of currency exchange rate changes on reported financial statements
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates

41. Bailout Fund of EFSF - What is this shiz nitz?
Impact of currency exchange rate changes on reported financial statements
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
Reserve currency
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs

42. What is a spot rate?
It helps them understand the influence of exchange rates on profitability of trade investment deals
Monetary and fiscal policies
24/7
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)

43. What is the second thing that determines the Forex rates?
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
Group of investors movement in the same direction and same time or government intervention
Reserve currency
Interest rates and money supply

44. What is the fifth thing that determines the forex rates?
Measurement of past events
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)
Increase their exposure to banking -'s banking center
Investor psychology

45. What is the nature of the forex market?
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
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
1. distribute productive assets 2. ensure assets are not concentrated in countries

46. How do you insure or hedge against a Forex risk?
Delay payables if currency is expected to depreciate
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
Banks stability was measure at a 5% capital adequacy ratio

47. What is the characteristic of translation expose?
It helps them understand the influence of exchange rates on profitability of trade investment deals
Lead and lag strategies
Measurement of past events
Investor psychology

48. Defaulting on debt has a __________ that intertwines all countries in Europe.
Transaction - translation and economic exposure
1. distribute productive assets 2. ensure assets are not concentrated in countries
domino effect
Supply & demand of the currency -Interest rates -Inflation -Investor expectations

49. What is the first roels of the U.S. dollar outside the U.S.?
True
A common reference
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. 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

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