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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 the second characteristic of transaction exposure?
Obligations for the purchase or sale of goods and services at previously agreed prices
up to date
Spot rates and forward rates
Control the amount of money in circulation - enforced by government policies - focus on growth rate

2. What causes big mac prices to vary?
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign 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
Transportation costs - trade barriers - and not trade inputs such as rents or wages

3. What are the two ways to reduce economic exposure?
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)
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
Measurement of past events

4. What is non convertible currency?
Establish central control and attempts to forecast future exchange rates
u.s. dollar
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign 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

5. What is the real exchange rate?
Reserve currency
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
Delay collection of foreign currency receivables if currency is exception to appreciate
Goods and services of one country can be exchanged for the goods and services of another country

6. When do countries use foreign exchange market?
Transportation costs - trade barriers - and not trade inputs such as rents or wages
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
Measurement of past events
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

7. What are three factors that impact a country's future exchange rate movements?
Banks stability was measure at a 5% capital adequacy ratio
Obligations for the purchase or sale of goods and services at previously agreed prices
Inflation - interest rate - and market psychology
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

8. What is the bandwagon effect when looking at form investor psychology ?
Group of investors movement in the same direction and same time or government intervention
Delay payables if currency is expected to depreciate
Exchange rate policies
True

9. What is the second characteristic of lead strategy?
Paying foreign currency payable before dues as a result expected currency appreciation
Exchange rate policies
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

10. In the long run empirical testing has of the PPP Theory has proven to be accurate in the long run. True or False
Banks stability was measure at a 5% capital adequacy ratio
Relative price differences and ppp
24/7
True

11. What is the purpose of not concentrating assets in countries?
True
Increase currency values and protect against increases in foreign prices of goods and services
u.s. dollar
1. protect resources efficiently 2. ensure correct mix of tactics and strategies

12. How do you establish central control?
Impact of currency exchange rate changes on reported financial statements
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
Obligations for the purchase or sale of goods and services at previously agreed prices
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency

13. What is the first characteristic of transaction exposure ?
Affected by fluctuation in foreign exchange values
u.s. dollar
Intervention currency (peg country currency)
1. protect resources efficiently 2. ensure correct mix of tactics and strategies

14. What are the types of Exchange Rate Fluctuations?
Monetary and fiscal policies
True
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
Investor psychology

15. What are some factors that influence 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
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
Inflation - interest rate - and market psychology
Supply & demand of the currency -Interest rates -Inflation -Investor expectations

16. What is the characteristic of translation expose?
Reserve currency
Transportation costs - trade barriers - and not trade inputs such as rents or wages
Measurement of past events
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

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

18. What are the first two things that determine Forex rates?
Large number of individuals and cos exchange of domestic currencies for a foreign currency
Impact of currency exchange rate changes on reported financial statements
Relative price differences and ppp
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure

19. What is the third thing that determines the forex rates?
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy (no risk)
Productivity and balance payments
u.s. dollar
Measurement of past events

20. What is economic exposure?
Measurement of past events
Firms future international earning power
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
Supply & demand of the currency -Interest rates -Inflation -Investor expectations

21. What holds true to Purchase Power Parity Theory?
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
Intervention currency (peg country currency)
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are 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

22. What are the important trading centers?
Productivity and balance payments
London - New York - Tokyo - and Singapore
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
An attempt to collect currency receivables early as result of expected depreciation

23. What do monetary policies do?
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
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
Banks stability was measure at a 5% capital adequacy ratio
Control the amount of money in circulation - enforced by government policies - focus on growth rate

24. What is free convertible currency?
It helps them understand the influence of exchange rates on profitability of trade investment deals
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic 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

25. What are two methods of reducing translation and transaction exposure?
Lead and lag strategies
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
Delay collection of foreign currency receivables if currency is exception to appreciate
An attempt to collect currency receivables early as result of expected depreciation

26. 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
True
Collecting & spending of money by the government
Goods and services of one country can be exchanged for the goods and services of another country

27. What is the first roels of the U.S. dollar outside the U.S.?
It helps them understand the influence of exchange rates on profitability of trade investment deals
Intervention currency (peg country currency)
A common reference
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency

28. According to economic theories of exchage rate determination?
1. distribute productive assets 2. ensure assets are not concentrated in countries
Exchange rates are determined by the demand and supply for different currencies
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)
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

29. The euro faces risks fo recapitalization?
1. non residents can convert their holdings of domestic currency 2. residents are limited in some way to convert currency
Banks stability was measure at a 5% capital adequacy ratio
1. protect resources efficiently 2. ensure correct mix of tactics and strategies
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps

30. How do you insure or hedge against a Forex risk?
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign currencies.
Vehicle currency(transaction between 2 less commonly used currencies)
Forward exchange or spot exchange

31. What is the law of one price?
Vehicle currency(transaction between 2 less commonly used 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 exchange rate between 2 currencies; delivery within two days (conversion on a particular day)
Measurement of past events

32. What is the nature of the forex market?
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
Collecting & spending of money by the government
24/7
It helps them understand the influence of exchange rates on profitability of trade investment deals

33. What are some characteristics of swaps?
The exchange rate between 2 currencies;future delievery in 30/60/90/180 days
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
Exchange rates are determined by the demand and supply for different currencies
Both residents and on residents are prohibited from converting their holdings of domestic currency into a foreign currency

34. 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.
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure
It helps them understand the influence of exchange rates on profitability of trade investment deals
Delay collection of foreign currency receivables if currency is exception to appreciate

35. Currently margins require more cash reserves - What is the best method of doing this **** in the Euro Zone?
London - New York - Tokyo - and Singapore
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
Issue mo good loans so that profits from new business can eat away the losses form the bad
Lending of funds in foreign currencies

36. 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
Goods and services of one country can be exchanged for the goods and services of another country
Issue mo good loans so that profits from new business can eat away the losses form the bad
Affected by fluctuation in foreign exchange values

37. How and What is the purpose of distributing assets?
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
Delay payables if currency is expected to depreciate
Spot rates and forward rates
u.s. dollar

38. What are some strategies for managing forex risk?
Investor psychology
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
Transportation costs - trade barriers - and not trade inputs such as rents or wages
Establish central control and attempts to forecast future exchange rates

39. What is a spot rate?
Inflation - interest rate - and market psychology
The exchange rate between 2 currencies; delivery within two days (conversion on a particular day)
London - New York - Tokyo - and Singapore
Estb. good reporting systems - check monthly foreign exchange reports and distinguish between transaction - economic and translation exposure

40. 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
Transaction - translation and economic exposure
A common reference
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency

41. Greece has not defaulted because it has not been able to fully implement its...
Increase currency values and protect against increases in foreign prices of goods and services
Affected by fluctuation in foreign exchange values
Government allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency
agreed upon austerity

42. Most Transaction inovolve...
The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
u.s. dollar
Large number of individuals and cos exchange of domestic currencies for a foreign currency
Monetary and fiscal policies

43. What is the second issue with EFSF?
Forward exchange or spot exchange
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
Distribute to various locatoij so firms long term financial well being is not severly affected by changes in exchange rates
u.s. dollar

44. What is arbitrage?
Lead and lag strategies
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)
up to date

45. What is the third characteristic of transaction exposure?
Borrowing of funds in foreign currency
It is used to measure how far the nominal exchange rate deviate from the one that would create PPP
1. receive payments for exports 2. receive income from FDI 3. Receive income from licensing agreements with foreign firms are in foreign 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

46. What are the three different types of foreign exchange rate risks?
up to date
Spot rates - forward rates - and swaps
Increase currency values and protect against increases in foreign prices of goods and services
Transaction - translation and economic exposure

47. What is the fifth thing that determines the forex rates?
Group of investors movement in the same direction and same time or government intervention
Transaction - translation and economic exposure
Investor psychology
State driven recapitalization are now needed

48. What implications does understanding foreign exchange rates have on managers?
Interest rates and money supply
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
Reserve currency

49. What is the first characteristic of lead strategy?
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
Manages the Greeks - the Irish - and Portuguese bailouts and has passed recent amendments to legally assit euro banks and govs
True
An attempt to collect currency receivables early as result of expected depreciation

50. What are the characteristics of economic exposure?
Increase currency values and protect against increases in foreign prices of goods and services
Delay payables if currency is expected to depreciate
Affected by changes in exchange rates aslo long term effect of changes in exchange rates on future prices - sales - and costs
Delay collection of foreign currency receivables if currency is exception to appreciate