Question 1

Which of the following statements is true for an FI that holds €200 000 in assets and €250 000 in liabilities?

Accepted Answer

A)  The FI is in a net short position. 
B)  The FI has net foreign assets of €50 000. 
C)  The FI faces the risk that the euro will fall in value against domestic currency. 
D)  All of the listed options are correct. 
A)  The FI is in a net short position. 
B)  The FI has net foreign assets of €50 000. 
C)  The FI faces the risk that the euro will fall in value against domestic currency. 
D)  All of the listed options are correct.

Question 2

Explain the concept of the interest rate parity theorem (IRPT) and its implications for FIs?

Accepted Answer

Intuitively, the interest rate parity th

Question 3

Which of the following statements is true?

Accepted Answer

A)  The smaller the FI's net exposure in a foreign currency and the larger the foreign currency's exchange rate volatility, the larger is the potential dollar loss or gain to an FI's earnings. 
B)  The smaller the FI's net exposure in a foreign currency and the smaller the foreign currency's exchange rate volatility, the larger is the potential dollar loss or gain to an FI's earnings. 
C)  The larger the FI's net exposure in a foreign currency and the smaller the foreign currency's exchange rate volatility, the larger is the potential dollar loss or gain to an FI's earnings. 
D)  The larger the FI's net exposure in a foreign currency and the larger the foreign currency's exchange rate volatility, the larger is the potential dollar loss or gain to an FI's earnings. 
A)  The smaller the FI's net exposure in a foreign currency and the larger the foreign currency's exchange rate volatility, the larger is the potential dollar loss or gain to an FI's earnings. 
B)  The smaller the FI's net exposure in a foreign currency and the smaller the foreign currency's exchange rate volatility, the larger is the potential dollar loss or gain to an FI's earnings. 
C)  The larger the FI's net exposure in a foreign currency and the smaller the foreign currency's exchange rate volatility, the larger is the potential dollar loss or gain to an FI's earnings. 
D)  The larger the FI's net exposure in a foreign currency and the larger the foreign currency's exchange rate volatility, the larger is the potential dollar loss or gain to an FI's earnings.

Question 4

An FI's net exposure can be measured as:

Accepted Answer

A)  (FX liabilitiesi - FX assetsi) + (FX boughti - FX soldi) 
B)  (FX liabilitiesi - FX assetsi) + (FX soldi - FX boughti) 
C)  (FX assetsi - FX liabilitiesi) + (FX soldi - FX boughti) 
D)  (FX assetsi - FX liabilitiesi) + (FX boughti - FX soldi) 
A)  (FX liabilitiesi - FX assetsi) + (FX boughti - FX soldi) 
B)  (FX liabilitiesi - FX assetsi) + (FX soldi - FX boughti) 
C)  (FX assetsi - FX liabilitiesi) + (FX soldi - FX boughti) 
D)  (FX assetsi - FX liabilitiesi) + (FX boughti - FX soldi)

Question 5

Assume an Australian FI has US$100 000 in assets and US$200 000 in liabilities. Further, the FI has bought US$40 000 and sold US$20 000. What is the net exposure of the Australian FI?

Accepted Answer

A)  -US$20 000 
B)  -US$80 000 
C)  US$20 000 
D)  US$80 000 
A)  -US$20 000 
B)  -US$80 000 
C)  US$20 000 
D)  US$80 000

Question 6

Assume an FI holds US$250 000 in assets and US$350 000 in liabilities. Which of the following statements is true?

Accepted Answer

A)  The FI has a net long in US$. 
B)  The FI has a net short in US$. 
C)  The FI has a net exposure of US$100 000. 
D)  The FI has a net exposure of -US$100 000. 
A)  The FI has a net long in US$. 
B)  The FI has a net short in US$. 
C)  The FI has a net exposure of US$100 000. 
D)  The FI has a net exposure of -US$100 000.

Question 7

Which of the following statements is true?

Accepted Answer

A)  Net exposure refers to the degree to which a bank is net long (negative) or net short (positive) in a given currency. 
B)  Gross exposure refers to the degree to which a bank is net long (negative) or net short (positive) in a given currency. 
C)  Net exposure refers to the degree to which a bank is net long (positive) or net short (negative) in a given currency. 
D)  Gross exposure refers to the degree to which a bank is net long (positive) or net short (negative) in a given currency. 
A)  Net exposure refers to the degree to which a bank is net long (negative) or net short (positive) in a given currency. 
B)  Gross exposure refers to the degree to which a bank is net long (negative) or net short (positive) in a given currency. 
C)  Net exposure refers to the degree to which a bank is net long (positive) or net short (negative) in a given currency. 
D)  Gross exposure refers to the degree to which a bank is net long (positive) or net short (negative) in a given currency.

Question 8

Which of the following statements is true?

Accepted Answer

A)  The implications of the interest rate parity theorem is that in a competitive market for deposits, loans and foreign exchange, the potential profit opportunities from overseas investment for the FI manager are likely to be large. 
B)  The implications of the interest rate parity theorem is that in a competitive market for deposits, loans and foreign exchange, the potential profit opportunities from overseas investment for the FI manager are likely to be non-existent. 
C)  The implications of the interest rate parity theorem is that in a competitive market for deposits, loans and foreign exchange, the potential profit opportunities from overseas investment for the FI manager are likely to be small. 
D)  None of the listed options are correct. 
A)  The implications of the interest rate parity theorem is that in a competitive market for deposits, loans and foreign exchange, the potential profit opportunities from overseas investment for the FI manager are likely to be large. 
B)  The implications of the interest rate parity theorem is that in a competitive market for deposits, loans and foreign exchange, the potential profit opportunities from overseas investment for the FI manager are likely to be non-existent. 
C)  The implications of the interest rate parity theorem is that in a competitive market for deposits, loans and foreign exchange, the potential profit opportunities from overseas investment for the FI manager are likely to be small. 
D)  None of the listed options are correct.

Question 9

Assume an FI sells A$100 million for US$ on the spot currency markets at an exchange rate of A$1.20 to $US1.00. What is the US$ value of the investment (round to two decimals)?

Accepted Answer

A)  $100 million $\times$ $1.2 = US$120 000.00 million 
B)  $100 million / $1.2 = US$83 333.33 million 
C)  $100 million / ($1.2 - US$1.0) = US$500 000.00 million 
D)  $100 million $\times$ ($1.2 - US$1.0) = US$20 000.00 million 
A)  $100 million $\times$ $1.2 = US$120 000.00 million 
B)  $100 million / $1.2 = US$83 333.33 million 
C)  $100 million / ($1.2 - US$1.0) = US$500 000.00 million 
D)  $100 million $\times$ ($1.2 - US$1.0) = US$20 000.00 million

Question 10

The interest rate parity theorem implies that by hedging in the forward exchange rate market, an investor realises the same returns whether investing domestically or in a foreign country.

Accepted Answer

A) True 
 B)False

Question 11

Currency swaps are used to hedge against exchange rate risk from mismatched currencies on assets and liabilities.

Accepted Answer

A) True 
 B)False

Question 12

Assume an FI sells A$100 million for euros at the spot exchange rate today and receives A$100 million/ A$1.15 = €86.96 million. Further assume that the FI immediately lends the €86.96 to a German customer at 12 per cent p.a. for one year. Which of the following statements is true regarding this transaction?

Accepted Answer

A)  The FI can sell the expected principal and interest proceeds from the euro loan forward for Australian dollars today at today's forward rate for one-year delivery to hedge its position. 
B)  Assuming the FI decides to enter into a forward contract on its FX exposure at the current forward one-year exchange rate between Australian dollars and euros at A$1.10/€1, then it means that the buyer of the forward contract promises to pay €86.96 $\times$ (A$1.10/€1) = A$95.57 million to the FI. 
C)  At maturity, the German borrower repays the loan to the FI plus interest in dollars, i.e. (€86.96 × 1.12) $\times$ (A$1.15/€1) = A$112.00 million. 
D)  All of the listed options are correct. 
A)  The FI can sell the expected principal and interest proceeds from the euro loan forward for Australian dollars today at today's forward rate for one-year delivery to hedge its position. 
B)  Assuming the FI decides to enter into a forward contract on its FX exposure at the current forward one-year exchange rate between Australian dollars and euros at A$1.10/€1, then it means that the buyer of the forward contract promises to pay €86.96 $\times$ (A$1.10/€1) = A$95.57 million to the FI. 
C)  At maturity, the German borrower repays the loan to the FI plus interest in dollars, i.e. (€86.96 × 1.12) $\times$ (A$1.15/€1) = A$112.00 million. 
D)  All of the listed options are correct.

Question 13

Which of the following is an example of interest rate parity?

Accepted Answer

A)  The Japanese yen trades at the same exchange rate as the Swiss franc. 
B)  US dollar rates on one-year US Treasury securities equal one-year Japanese government bond rates. 
C)  US dollar rates on one-year US Treasury securities equal one-year Japanese government bond rates, restated in dollars. 
D)  British pound two-year forward rates equal two-year Swiss franc forward rates. 
A)  The Japanese yen trades at the same exchange rate as the Swiss franc. 
B)  US dollar rates on one-year US Treasury securities equal one-year Japanese government bond rates. 
C)  US dollar rates on one-year US Treasury securities equal one-year Japanese government bond rates, restated in dollars. 
D)  British pound two-year forward rates equal two-year Swiss franc forward rates.

Question 14

Which of the following statements is true?

Accepted Answer

A)  FX trading is becoming increasingly popular globally. 
B)  FX trading has become redundant due to stable foreign exchange rates. 
C)  FX trading is a popular tool to generate profits, as there is little risk involved. 
D)  The number of FX traders has decreased over the years due to merger activities and as a consequence the number of FX transactions has decreased over time. 
A)  FX trading is becoming increasingly popular globally. 
B)  FX trading has become redundant due to stable foreign exchange rates. 
C)  FX trading is a popular tool to generate profits, as there is little risk involved. 
D)  The number of FX traders has decreased over the years due to merger activities and as a consequence the number of FX transactions has decreased over time.

Question 15

Assume that an FI has the following assets and liabilities:   Which of the following statements is true?

Accepted Answer

A)  The FI has a net long position in euros. 
B)  The FI has mismatched the currency composition of its asset and liabilities portfolio. 
C)  The FI has matched the maturities of its assets and liabilities. 
D)  All of the listed options are correct. 
A)  The FI has a net long position in euros. 
B)  The FI has mismatched the currency composition of its asset and liabilities portfolio. 
C)  The FI has matched the maturities of its assets and liabilities. 
D)  All of the listed options are correct.

Question 16

In a currency swap it is usual to include both principal and interest payments as part of the swap agreement.

Accepted Answer

A) True 
 B)False

Question 17

An FI that holds more foreign currency liabilities than assets has a net long position.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following statements is true?

Accepted Answer

A)  By directly matching its foreign asset and liability book, an FI can lock in a positive return on profit spread if exchange rates rise over the investment period. 
B)  By directly matching its foreign asset and liability book, an FI can lock in a positive return on profit spread if exchange rates fall over the investment period. 
C)  By directly matching its foreign asset and liability book, an FI can lock in a positive return on profit spread whichever direction exchange rates change over the investment period. 
D)  By directly matching its foreign asset and liability book, an FI holds a neutral position, i.e. earnings equalling zero, whichever direction exchange rates change over the investment period. 
A)  By directly matching its foreign asset and liability book, an FI can lock in a positive return on profit spread if exchange rates rise over the investment period. 
B)  By directly matching its foreign asset and liability book, an FI can lock in a positive return on profit spread if exchange rates fall over the investment period. 
C)  By directly matching its foreign asset and liability book, an FI can lock in a positive return on profit spread whichever direction exchange rates change over the investment period. 
D)  By directly matching its foreign asset and liability book, an FI holds a neutral position, i.e. earnings equalling zero, whichever direction exchange rates change over the investment period.

Question 19

According to PPP, foreign currency exchange rates between two countries adjust to reflect changes in each country's:

Accepted Answer

A)  unemployment rates. 
B)  export competitiveness. 
C)  inflation rates. 
D)  foreign exchange reserves. 
A)  unemployment rates. 
B)  export competitiveness. 
C)  inflation rates. 
D)  foreign exchange reserves.

Question 20

An FI usually creates an open position by taking an unhedged position in a foreign currency in its FX trading with other FIs.

Accepted Answer

A) True 
 B)False

Which of the following statements is true for an FI that holds €200 000 in assets and €250 000 in liabilities?

Explain the concept of the interest rate parity theorem (IRPT) and its implications for FIs?

Which of the following statements is true?

An FI's net exposure can be measured as:

Assume an Australian FI has US$100 000 in assets and US$200 000 in liabilities. Further, the FI has bought US$40 000 and sold US$20 000. What is the net exposure of the Australian FI?

Assume an FI holds US$250 000 in assets and US$350 000 in liabilities. Which of the following statements is true?

Which of the following statements is true?

Which of the following statements is true?

Assume an FI sells A$100 million for US$ on the spot currency markets at an exchange rate of A$1.20 to $US1.00. What is the US$ value of the investment (round to two decimals)?

The interest rate parity theorem implies that by hedging in the forward exchange rate market, an investor realises the same returns whether investing domestically or in a foreign country.

Currency swaps are used to hedge against exchange rate risk from mismatched currencies on assets and liabilities.

Which of the following is an example of interest rate parity?

Which of the following statements is true?

Assume that an FI has the following assets and liabilities: Which of the following statements is true?

In a currency swap it is usual to include both principal and interest payments as part of the swap agreement.

An FI that holds more foreign currency liabilities than assets has a net long position.

Which of the following statements is true?

According to PPP, foreign currency exchange rates between two countries adjust to reflect changes in each country's:

An FI usually creates an open position by taking an unhedged position in a foreign currency in its FX trading with other FIs.

Why Are Financial Institutions Special

The Financial Services Industry: Depository Institutions

The Financial Services Industry: Other Financial Institutions

Risk of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: the Duration Model

Managing Interest Rate Risk Using Off Balance Sheet Instruments

Credit Risk I: Individual Loan Risk

Market Risk

Credit Risk I: Individual Loan Risk

Credit Risk II: Loan Portfolio and Concentration Risk

Sovereign Risk

Liquidity Risk

Liability and Liquidity Management

Off-Balance-Sheet Activities

Technology and Other Operational Risk

Capital Management and Adequacy

Filters

Exam 13: Foreign Exchange Risk

Which of the following statements is true for an FI that holds €200 000 in assets and €250 000 in liabilities?

Explain the concept of the interest rate parity theorem (IRPT) and its implications for FIs?

Which of the following statements is true?

An FI's net exposure can be measured as:

Assume an Australian FI has US$100 000 in assets and US$200 000 in liabilities. Further, the FI has bought US$40 000 and sold US$20 000. What is the net exposure of the Australian FI?

Assume an FI holds US$250 000 in assets and US$350 000 in liabilities. Which of the following statements is true?

Which of the following statements is true?

Which of the following statements is true?

Assume an FI sells A$100 million for US$ on the spot currency markets at an exchange rate of A$1.20 to $US1.00. What is the US$ value of the investment (round to two decimals)?

The interest rate parity theorem implies that by hedging in the forward exchange rate market, an investor realises the same returns whether investing domestically or in a foreign country.

Currency swaps are used to hedge against exchange rate risk from mismatched currencies on assets and liabilities.

Which of the following is an example of interest rate parity?

Which of the following statements is true?

Assume that an FI has the following assets and liabilities: Which of the following statements is true?

In a currency swap it is usual to include both principal and interest payments as part of the swap agreement.

An FI that holds more foreign currency liabilities than assets has a net long position.

Which of the following statements is true?

According to PPP, foreign currency exchange rates between two countries adjust to reflect changes in each country's:

An FI usually creates an open position by taking an unhedged position in a foreign currency in its FX trading with other FIs.

Why Are Financial Institutions Special

The Financial Services Industry: Depository Institutions

The Financial Services Industry: Other Financial Institutions

Risk of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: the Duration Model

Managing Interest Rate Risk Using Off Balance Sheet Instruments

Credit Risk I: Individual Loan Risk

Market Risk

Credit Risk I: Individual Loan Risk

Credit Risk II: Loan Portfolio and Concentration Risk

Sovereign Risk

Liquidity Risk

Liability and Liquidity Management

Off-Balance-Sheet Activities

Technology and Other Operational Risk

Capital Management and Adequacy

Filters