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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 is economic exposure?
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
Firms future international earning power
Relative price differences and ppp
State driven recapitalization are now needed

2. What are the first two things that determine Forex rates?
Borrowing of funds in 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
Relative price differences and ppp
Goods and services of one country can be exchanged for the goods and services of another country

3. What is the purpose of not concentrating assets in countries?
Increase currency values and protect against increases in foreign prices of goods and services
Reserve currency
Delay collection of foreign currency receivables if currency is exception to appreciate
1. distribute productive assets 2. ensure assets are not concentrated in countries

4. How and What is the purpose of distributing assets?
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
Lead and lag strategies
Delay payables if currency is expected to depreciate

5. What are the purposes of fiscal policies?
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
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)

6. Most Transaction inovolve...
Collecting & spending of money by the government
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
u.s. dollar
A common reference

7. What are the two ways to reduce economic exposure?
1. distribute productive assets 2. ensure assets are not concentrated in countries
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
Spot rates - forward rates - and swaps
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)

8. What is the third characteristic of transaction exposure?
A common reference
Obligations for the purchase or sale of goods and services at previously agreed prices
An attempt to collect currency receivables early as result of expected depreciation
Borrowing of funds in foreign currency

9. How do you insure or hedge against a Forex risk?
Collecting & spending of money by the government
Forward exchange or spot exchange
Transaction - translation and economic exposure
Firms future international earning power

10. What is the second issue with EFSF?
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
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
Currency of one country can be exchanged for the currency of another country
True

11. When do countries use foreign exchange market?
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
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
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

12. How can transaction exposure be described?
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
The income form individual transacations
Measurement of past events
Intervention currency (peg country currency)

13. What is a currency swamp?
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
Spot rates - forward rates - and swaps

14. What are two methods of reducing translation and transaction exposure?
Banks stability was measure at a 5% capital adequacy ratio
Group of investors movement in the same direction and same time or government intervention
Lead and lag strategies
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure

15. What are some strategies for managing forex risk?
Currency of one country can be exchanged for the currency of another country
Establish central control and attempts to forecast future exchange rates
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP
Investor psychology

16. What is the fourth thing that determines the forex rates?
Banks stability was measure at a 5% capital adequacy ratio
Exchange rate policies
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
24/7

17. What is the nature of the forex market?
Paying foreign currency payable before dues as a result expected currency appreciation
1. distribute productive assets 2. ensure assets are not concentrated in countries
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
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

18. The euro faces risks fo recapitalization?
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
Monetary and fiscal policies
Banks stability was measure at a 5% capital adequacy ratio
1. distribute productive assets 2. ensure assets are not concentrated in countries

19. What is the real exchange rate?
Goods and services of one country can be exchanged for the goods and services of another country
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
up to date
Productivity and balance payments

20. No single theory can explain explain the causes the value of currencies to change. True or False?
Affected by fluctuation in foreign exchange values
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
True
It helps them understand the influence of exchange rates on profitability of trade investment deals

21. What is the first characteristic of lead strategy?
London - New York - Tokyo - and Singapore
An attempt to collect currency receivables early as result of expected depreciation
Forward exchange or spot exchange
Productivity and balance payments

22. What is the first characteristic of transaction exposure ?
Spot rates - forward rates - and swaps
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
Affected by fluctuation in foreign exchange values
Impact of currency exchange rate changes on reported financial statements

23. Marekts are open...
Affected by fluctuation in foreign exchange values
24/7
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

24. What is hedging?

25. According to economic theories of exchage rate determination?
Lending of funds in foreign currencies
Exchange rates are determined by the demand and supply for different currencies
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
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)

26. What causes big mac prices to vary?
Transportation costs - trade barriers - and not trade inputs such as rents or wages
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
Spot rates - forward rates - and swaps

27. Burger economics!!! Why do we use it?
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
u.s. dollar
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP
Vehicle currency(transaction between 2 less commonly used currencies)

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

29. What is the fourth characteristic of transaction exposure?
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
Lending of funds in foreign currencies
Paying foreign currency payable before dues as a result expected currency appreciation

30. Currently margins require more cash reserves - What is the best method of doing this **** in the Euro Zone?
London - New York - Tokyo - and Singapore
Control the amount of money in circulation - enforced by government policies - focus on growth rate
Issue mo good loans so that profits from new business can eat away the losses form the bad
A common reference

31. What are the three different types of foreign exchange rate risks?
Transaction - translation and economic exposure
True
London - New York - Tokyo - and Singapore
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.

32. In the long run empirical testing has of the PPP Theory has proven to be accurate in the long run. True or False
True
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
Goods and services of one country can be exchanged for the goods and services of another country

33. What is the nominal exchange rate?
Currency of one country can be exchanged for the currency of another country
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
Interest rates and money supply

34. What are other strategies for managing forex risk?
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
Firms future international earning power
Inflation - interest rate - and market psychology
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure

35. What is the fifth thing that determines the forex rates?
Investor psychology
Currency of one country can be exchanged for the currency of another country
Exchange rate policies
Exchange rates are determined by the demand and supply for different currencies

36. It is important to stay __________ with your current events
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)
Transportation costs - trade barriers - and not trade inputs such as rents or wages
Impact of currency exchange rate changes on reported financial statements
up to date

37. What is a spot rate?
Exchange rates are determined by the demand and supply for different currencies
Collecting & spending of money by the government
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

38. What is capital fight when looking at it form investor psychology?
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
Large number of individuals and cos exchange of domestic currencies for a foreign currency
Vehicle currency(transaction between 2 less commonly used currencies)
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency

39. What is the first characteristic of lag strategy?
Interest rates and money supply
Group of investors movement in the same direction and same time or government intervention
Forward exchange or spot exchange
Delay collection of foreign currency receivables if currency is exception to appreciate

40. Because many banks (2/3) are below the capital adequacy ratio of 9% many can not recapitalize on their own as a result
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
State driven recapitalization are now needed
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
Monetary and fiscal policies

41. How can translation exposure be described?
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
24/7
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

42. What are the two ways to quote currency?
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
Spot rates and forward 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

43. What is the second thing that determines the Forex rates?
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
1. distribute productive assets 2. ensure assets are not concentrated in countries
True
Interest rates and money supply

44. How do you establish central control?
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
Borrowing of funds in foreign currency
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

45. What is the fourth roles of the U.S. dollar outside the U.S.?
domino effect
Vehicle currency(transaction between 2 less commonly used currencies)
Interest rates and money supply
Firms future international earning power

46. 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
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
Investor psychology

47. What is free convertible currency?
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
Increase their exposure to banking -'s banking center
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
Currency of one country can be exchanged for the currency of another country

48. What is arbitrage?
Obligations for the purchase or sale of goods and services at previously agreed prices
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
Impact of currency exchange rate changes on reported financial statements
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)

49. When do countries use the foreign exchange market?
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
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
Intervention currency (peg country currency)

50. What is the second role of the U.S. dollar outside the U.S. ?
Relative price differences and ppp
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
Vehicle currency(transaction between 2 less commonly used currencies)
Intervention currency (peg country currency)