Question 1

Which of the following does NOT influence the supply of and demand for a currency?

Accepted Answer

A) differential interest rates 
B) differential inflation rates 
C) direct government intervention 
D) indirect government intervention 
E) All of these affect the supply of and demand for a currency. 
A) differential interest rates 
B) differential inflation rates 
C) direct government intervention 
D) indirect government intervention 
E) All of these affect the supply of and demand for a currency.

Question 2

The forward rate premium is dictated by the national income differential of the two currencies.

Accepted Answer

A) True 
 B)False

Question 3

Direct intervention is always extremely effective.

Accepted Answer

A) True 
 B)False

Question 4

If the demand for British pounds ____, the pound will ____, other things being equal.

Accepted Answer

A) increases; appreciate 
B) decreases; appreciate 
C) increases; depreciate 
D) decreases; appreciate AND increases; depreciate 
A) increases; appreciate 
B) decreases; appreciate 
C) increases; depreciate 
D) decreases; appreciate AND increases; depreciate

Question 5

At any given point in time, the price at which banks will buy a currency is ____ the price at which they sell it.

Accepted Answer

A) higher than 
B) lower than 
C) the same as 
D) None of these are correct. 
A) higher than 
B) lower than 
C) the same as 
D) None of these are correct.

Question 6

____ serve as financial intermediaries in the foreign exchange market by buying or selling currencies to accommodate customers.

Accepted Answer

A) Pension funds 
B) International mutual funds 
C) Insurance companies 
D) Commercial banks 
E) None of these are correct. 
A) Pension funds 
B) International mutual funds 
C) Insurance companies 
D) Commercial banks 
E) None of these are correct.

Question 7

Financial institutions rarely use the forward market.

Accepted Answer

A) True 
 B)False

Question 8

Exchange rates usually change precisely as suggested by the purchasing power parity (PPP)theory.

Accepted Answer

A) True 
 B)False

Question 9

The forward rate premium reflects the percentage by which the spot rate exceeds the forward rate on an annualized basis.

Accepted Answer

A) True 
 B)False

Question 10

If the spot rate ____ the exercise price, a currency ____ option will not be exercised.

Accepted Answer

A) remains below; call 
B) remains below; put 
C) remains above; call 
D) remains below; call AND remains below; put 
A) remains below; call 
B) remains below; put 
C) remains above; call 
D) remains below; call AND remains below; put

Question 11

The devaluation of a country's currency

Accepted Answer

A) makes foreign products more expensive for consumers in that country. 
B) increases foreign demand for that country's exports. 
C) can lead to deflation in that country. 
D) makes foreign products more expensive for consumers in that country AND increases foreign demand for that country's exports. 
A) makes foreign products more expensive for consumers in that country. 
B) increases foreign demand for that country's exports. 
C) can lead to deflation in that country. 
D) makes foreign products more expensive for consumers in that country AND increases foreign demand for that country's exports.

Question 12

A speculator who expects the euro to appreciate might

Accepted Answer

A) purchase euros forward, and when they are received, sell them in the spot market. 
B) sell euros forward, and then purchase them in the spot market just before fulfilling the forward obligation. 
C) sell futures contracts on euros, and then purchase euros in the spot market just before fulfilling the futures obligation. 
D) All of these are correct. 
A) purchase euros forward, and when they are received, sell them in the spot market. 
B) sell euros forward, and then purchase them in the spot market just before fulfilling the forward obligation. 
C) sell futures contracts on euros, and then purchase euros in the spot market just before fulfilling the futures obligation. 
D) All of these are correct.

Question 13

A system whereby exchange rates are market determined without boundaries but subject to government intervention is called

Accepted Answer

A) a dirty float. 
B) a free float. 
C) the gold standard. 
D) the Bretton Woods era. 
A) a dirty float. 
B) a free float. 
C) the gold standard. 
D) the Bretton Woods era.

Question 14

Purchasing power parity suggests that the forward rate premium (or discount)should be about equal to the differential in interest rates between the countries of concern.

Accepted Answer

A) True 
 B)False

Question 15

According to interest rate parity, if the interest rate in a foreign country is ____ than in the home country, the forward rate of the foreign currency will have a ____.

Accepted Answer

A) higher; discount 
B) lower; premium 
C) higher; premium 
D) higher; discount AND lower; premium 
A) higher; discount 
B) lower; premium 
C) higher; premium 
D) higher; discount AND lower; premium

Question 16

In reality, exchange rates do not always change as suggested by purchasing power parity.

Accepted Answer

A) True 
 B)False

Question 17

The act of capitalizing on the discrepancy between the forward rate premium and the interest rate differential is called ​

Accepted Answer

A) triangular arbitrage. 
B) locational arbitrage. 
C) covered interest arbitrage. 
D) interest rate parity. 
A) triangular arbitrage. 
B) locational arbitrage. 
C) covered interest arbitrage. 
D) interest rate parity.

Question 18

Fundamental forecasting has been found to be consistently superior to the other forecasting techniques.

Accepted Answer

A) True 
 B)False

Question 19

____ are not foreign exchange derivatives.

Accepted Answer

A) Forward contracts 
B) Currency futures contracts 
C) Currency swaps 
D) Currency options 
E) All of these are foreign exchange derivatives. 
A) Forward contracts 
B) Currency futures contracts 
C) Currency swaps 
D) Currency options 
E) All of these are foreign exchange derivatives.

Question 20

Assume the following information. ​· Interest rate on borrowed euros is 5 percent annualized.
· Interest rate on dollars loaned out is 6 percent annualized.
· Spot rate is 1.10 euros per dollar (one euro = $0.909).
· Expected spot rate in five days is 1.15 euros per dollar.
· Fabrizio Bank can borrow 10 million euros.
If Fabrizio Bank attempts to capitalize on the above information, its profit over the five-day period is

Accepted Answer

A) 2,653,597.22 euros. 
B) 455,266.81 euros. 
C) 452,426.04 euros. 
D) None of these are correct. 
A) 2,653,597.22 euros. 
B) 455,266.81 euros. 
C) 452,426.04 euros. 
D) None of these are correct.

Exam 16: Foreign Exchange Derivative Markets

Which of the following does NOT influence the supply of and demand for a currency?

The forward rate premium is dictated by the national income differential of the two currencies.

Direct intervention is always extremely effective.

If the demand for British pounds ____, the pound will ____, other things being equal.

At any given point in time, the price at which banks will buy a currency is ____ the price at which they sell it.

____ serve as financial intermediaries in the foreign exchange market by buying or selling currencies to accommodate customers.

Financial institutions rarely use the forward market.

Exchange rates usually change precisely as suggested by the purchasing power parity (PPP)theory.

The forward rate premium reflects the percentage by which the spot rate exceeds the forward rate on an annualized basis.

If the spot rate ____ the exercise price, a currency ____ option will not be exercised.

The devaluation of a country's currency

A speculator who expects the euro to appreciate might

A system whereby exchange rates are market determined without boundaries but subject to government intervention is called

Purchasing power parity suggests that the forward rate premium (or discount)should be about equal to the differential in interest rates between the countries of concern.

According to interest rate parity, if the interest rate in a foreign country is ____ than in the home country, the forward rate of the foreign currency will have a ____.

In reality, exchange rates do not always change as suggested by purchasing power parity.

The act of capitalizing on the discrepancy between the forward rate premium and the interest rate differential is called ​

Fundamental forecasting has been found to be consistently superior to the other forecasting techniques.

____ are not foreign exchange derivatives.

Role of Financial Markets and Institutions

Determination of Interest Rates

Structure of Interest Rates

Functions of the Fed

Monetary Policy

Money Markets

Bond Markets

Bond Valuation and Risk

Mortgage Markets

Stock Offerings and Investor Monitoring

Stock Valuation and Risk

Market Microstructure and Strategies

Financial Futures Markets

Options Markets

Swap Markets

Commercial Bank Operations

Bank Regulation

Bank Management

Bank Performance

Thrift Operations

Finance Company Operations

Mutual Fund Operations

Securities Operations

Insurance and Pension Fund Operations

Pension Fund Operations

Filters

If the demand for British pounds , the pound will , other things being equal.

If the spot rate the exercise price, a currency option will not be exercised.

According to interest rate parity, if the interest rate in a foreign country is than in the home country, the forward rate of the foreign currency will have a .

The act of capitalizing on the discrepancy between the forward rate premium and the interest rate differential is called