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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 two methods of reducing translation and transaction exposure?
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
Lead and lag strategies
Exchange rate policies
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure

2. What is non convertible currency?
Goods and services of one country can be exchanged for the goods and services of another country
Productivity and balance payments
Inflation - interest rate - and market psychology
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency

3. According to economic theories of exchage rate determination?
Spot rates and forward rates
1. distribute productive assets 2. ensure assets are not concentrated in countries
Exchange rates are determined by the demand and supply for different currencies
It helps them understand the influence of exchange rates on profitability of trade investment deals

4. 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
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
up to date
State driven recapitalization are now needed

5. What is the second role of the U.S. dollar outside the U.S. ?
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
Intervention currency (peg country currency)
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
An attempt to collect currency receivables early as result of expected depreciation

6. What are other strategies for managing forex risk?
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
Spot rates and forward rates
1. distribute productive assets 2. ensure assets are not concentrated in countries
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure

7. What is the third characteristic of transaction exposure?
Lending of funds in foreign currencies
Exchange rate policies
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
Borrowing of funds in foreign currency

8. What is the fourth thing that determines the forex 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
Exchange rate policies
Large number of individuals and cos exchange of domestic currencies for a foreign currency
Spot rates and forward rates

9. 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 income form individual transacations
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
London - New York - Tokyo - and Singapore

10. What are the types of Exchange Rate Fluctuations?
Supply & demand of the currency -Interest rates -Inflation -Investor expectations
Investor psychology
Monetary and fiscal policies
Productivity and balance payments

11. What are the two ways to quote currency?
Spot rates and forward rates
Inflation - interest rate - and market psychology
Goods and services of one country can be exchanged for the goods and services of another country
True

12. What is the third thing that determines the forex rates?
Lead and lag strategies
Productivity and balance payments
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP
Supply & demand of the currency -Interest rates -Inflation -Investor expectations

13. What is the first characteristic of transaction exposure ?
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
Investor psychology
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
Affected by fluctuation in foreign exchange values

14. What is the law of one price?
An attempt to collect currency receivables early as result of expected depreciation
Lead and lag strategies
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
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

15. How can transaction exposure be described?
The income form individual transacations
True
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
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates

16. Burger economics!!! Why do we use it?
Group of investors movement in the same direction and same time or government intervention
Investor psychology
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP
It helps them understand the influence of exchange rates on profitability of trade investment deals

17. What is arbitrage?
Large number of individuals and cos exchange of domestic currencies for a foreign currency
Inflation - interest rate - and market psychology
An attempt to collect currency receivables early as result of expected depreciation
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)

18. Defaulting on debt has a __________ that intertwines all countries in Europe.
Increase their exposure to banking -'s banking center
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
domino effect
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

19. How can translation exposure be described?
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
Impact of currency exchange rate changes on reported financial statements
Currency of one country can be exchanged for the currency of another country

20. What is the third role of the U.S. dollar outside the U.S.?
Reserve currency
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
Obligations for the purchase or sale of goods and services at previously agreed prices

21. What is free convertible currency?
Goods and services of one country can be exchanged for the goods and services of another country
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
Establish central control and attempts to forecast future exchange rates
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency

22. What is the fourth roles of the U.S. dollar outside the U.S.?
agreed upon austerity
A common reference
Vehicle currency(transaction between 2 less commonly used currencies)
1. protect resources efficiently 2. ensure correct mix of tactics and strategies

23. The euro faces risks fo recapitalization?
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
Measurement of past events
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

24. What is the second characteristic of transaction exposure?
Delay payables if currency is expected to depreciate
domino effect
Obligations for the purchase or sale of goods and services at previously agreed prices
Spot rates and forward rates

25. What are the characteristics of economic exposure?
24/7
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
Currency of one country can be exchanged for the currency of another country
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

26. What are the three different types of foreign exchange rate risks?
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
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
Transaction - translation and economic exposure

27. What are the first two things that determine Forex rates?
Relative price differences and ppp
24/7
Reserve currency
up to date

28. What is the first roels 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
A common reference
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates

29. No single theory can explain explain the causes the value of currencies to change. True or False?
Exchange rate policies
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
True

30. What are three factors that impact a country's future exchange rate movements?
Transportation costs - trade barriers - and not trade inputs such as rents or wages
Inflation - interest rate - and market psychology
Spot rates and forward rates
Exchange rates are determined by the demand and supply for different currencies

31. What is hedging?

32. What is the second characteristic of lead strategy?
Inflation - interest rate - and market psychology
Investor psychology
Lead and lag strategies
Paying foreign currency payable before dues as a result expected currency appreciation

33. What is the second issue with EFSF?
Measurement of past events
1. distribute productive assets 2. ensure assets are not concentrated in countries
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
Exchange rates are determined by the demand and supply for different currencies

34. Bailout Fund of EFSF - What is this shiz nitz?
A common reference
Obligations for the purchase or sale of goods and services at previously agreed prices
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates

35. What is a spot rate?
Increase currency values and protect against increases in foreign prices of goods and services
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
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)
Lending of funds in foreign currencies

36. What is the second characteristic of lag strategy?
Productivity and balance payments
Delay payables if currency is expected to depreciate
It helps them understand the influence of exchange rates on profitability of trade investment deals
Paying foreign currency payable before dues as a result expected currency appreciation

37. Greece has not defaulted because it has not been able to fully implement its...
agreed upon austerity
Relative price differences and ppp
State driven recapitalization are now needed
A common reference

38. What causes big mac prices to vary?
Transportation costs - trade barriers - and not trade inputs such as rents or wages
Establish central control and attempts to forecast future exchange rates
Control the amount of money in circulation - enforced by government policies - focus on growth rate
State driven recapitalization are now needed

39. 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
Delay payables if currency is expected to depreciate
Spot rates - forward rates - and swaps
A common reference

40. Most Transaction inovolve...
u.s. dollar
It helps them understand the influence of exchange rates on profitability of trade investment deals
Transportation costs - trade barriers - and not trade inputs such as rents or wages
Borrowing of funds in foreign currency

41. What is the fourth characteristic of transaction 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
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
Lending of funds in foreign currencies

42. What are some strategies for managing forex risk?
Establish central control and attempts to forecast future exchange 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
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP

43. Currently margins require more cash reserves - What is the best method of doing this **** in the Euro Zone?
Issue mo good loans so that profits from new business can eat away the losses form the bad
Group of investors movement in the same direction and same time or government intervention
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
Vehicle currency(transaction between 2 less commonly used currencies)

44. When do countries use foreign exchange market?
domino effect
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 and forward rates
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days

45. What is the first issue with EFSF?
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
domino effect
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

46. What is the first characteristic of lag strategy?
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
Establish central control and attempts to forecast future exchange rates
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates

47. Marekts are open...
24/7
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
Spot rates and forward rates
A common reference

48. What is the real exchange rate?
Increase currency values and protect against increases in foreign prices of goods and services
Goods and services of one country can be exchanged for the goods and services of another country
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency
Spot rates and forward rates

49. What is economic exposure?
Firms future international earning power
It helps them understand the influence of exchange rates on profitability of trade investment deals
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

50. What are the important trading centers?
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
Reserve currency
London - New York - Tokyo - and Singapore
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure