Question 1

If one has agreed to buy foreign exchange forward

Accepted Answer

A) you have a short position in the forward contract. 
B) you have a long position in the forward contract. 
C) until the exchange rate moves, you haven't made money, so you're neither short nor long. 
D) you have a long position in the spot market. 
A) you have a short position in the forward contract. 
B) you have a long position in the forward contract. 
C) until the exchange rate moves, you haven't made money, so you're neither short nor long. 
D) you have a long position in the spot market.

Question 2

The current spot exchange rate is $1.50/€ and the three-month forward rate is $1.55/€. Based on your analysis of the exchange rate, you are confident that the spot exchange rate will be $1.62/€ in three months. Assume that you would like to buy or sell €1,000,000. What actions do you need to take to speculate in the forward market? What is the expected dollar profit from speculation?

Accepted Answer

A) Sell €1,000,000 forward for $1.50/€. 
B) Buy €1,000,000 forward for $1.55/€. 
C) Wait three months, if your forecast is correct buy €1,000,000 at $1.62/€. 
D) Buy €1,000,000 today at $1.50/€; wait three months, if your forecast is correct sell €1,000,000 at $1.62/€. 
A) Sell €1,000,000 forward for $1.50/€. 
B) Buy €1,000,000 forward for $1.55/€. 
C) Wait three months, if your forecast is correct buy €1,000,000 at $1.62/€. 
D) Buy €1,000,000 today at $1.50/€; wait three months, if your forecast is correct sell €1,000,000 at $1.62/€.

Question 3

In conversation, interbank foreign exchange traders use a shorthand abbreviation in expressing spot currency quotations. Consider a $/£ bid-ask quote of $1.9072-$1.9077. The currency dealer would likely quote that as _____.

Accepted Answer

A) 72-77 
B) 77-72 
C) 5 points 
D) None of the above 
A) 72-77 
B) 77-72 
C) 5 points 
D) None of the above

Question 4

Nondollar currency transactions

Accepted Answer

A) are priced by looking at the price that must exist to eliminate arbitrage. 
B) allow for triangular arbitrage opportunities to keep the currency dealers employed. 
C) are only for poor people who don't have dollars. 
D) none of the above 
A) are priced by looking at the price that must exist to eliminate arbitrage. 
B) allow for triangular arbitrage opportunities to keep the currency dealers employed. 
C) are only for poor people who don't have dollars. 
D) none of the above

Question 5

You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. If a bank quotes you a cross rate of £1.00 = €1.20 how much money can an astute trader make?

Accepted Answer

A) No arbitrage is possible 
B) $1,160,000 
C) $41,667 
D) $40,000 
A) No arbitrage is possible 
B) $1,160,000 
C) $41,667 
D) $40,000

Question 6

Consider the balance sheets of Bank A and BankB. Bank A is in London, Bank B is in New York. The current exchange rate is £1.00 = $2.00. Show the correct balances in each account if a currency trader employed at Bank A buys £50,000 from a currency trader at Bank B for $100,000 using its correspondent relationship with BankB.

Accepted Answer

(See also the PowerP

Question 7

You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. If a bank quotes you a cross rate of £1.00 = €1.20 how can you make money?

Accepted Answer

A) No arbitrage is possible 
B) Buy euro at $1.60/€, buy £ at €1.20/£, sell £ at $2/£ 
C) Buy £ $2/£, buy € at €1.20/£, sell € at $1.60/€ 
A) No arbitrage is possible 
B) Buy euro at $1.60/€, buy £ at €1.20/£, sell £ at $2/£ 
C) Buy £ $2/£, buy € at €1.20/£, sell € at $1.60/€

Question 8

The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€. Based on your analysis of the exchange rate, you are confident that the spot exchange rate will be $1.62/€ in three months. Assume that you would like to buy or sell €1,000,000. What actions do you need to take to speculate in the forward market? What is the expected dollar profit from speculation?

Accepted Answer

A) Sell €1,000,000 forward for $1.50/€. 
B) Buy €1,000,000 forward for $1.50/€. 
C) Wait three months, if your forecast is correct buy €1,000,000 at $1.52/€. 
D) Buy €1,000,000 today at $1.55/€; wait three months, if your forecast is correct sell €1,000,000 at $1.62/€. 
A) Sell €1,000,000 forward for $1.50/€. 
B) Buy €1,000,000 forward for $1.50/€. 
C) Wait three months, if your forecast is correct buy €1,000,000 at $1.52/€. 
D) Buy €1,000,000 today at $1.55/€; wait three months, if your forecast is correct sell €1,000,000 at $1.62/€.

Question 9

The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€. Based on your analysis of the exchange rate, you are confident that the spot exchange rate will be $1.52/€ in three months. Assume that you would like to buy or sell €1,000,000. What actions do you need to take to speculate in the forward market?

Accepted Answer

A) Take a long position in a forward contract on €1,000,000 at $1.50/€. 
B) Take a short position in a forward contract on €1,000,000 at $1.50/€. 
C) Buy euro today at the spot rate, sell them forward. 
D) Sell euro today at the spot rate, buy them forward. 
A) Take a long position in a forward contract on €1,000,000 at $1.50/€. 
B) Take a short position in a forward contract on €1,000,000 at $1.50/€. 
C) Buy euro today at the spot rate, sell them forward. 
D) Sell euro today at the spot rate, buy them forward.

Question 10

You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is quoted as $1.50 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. If a bank quotes you a cross rate of £1.00 = €1.25 how can you make money?

Accepted Answer

A) No arbitrage is possible. 
B) Buy euro at $1.50/€, buy £ at €1.25/£, sell £ at $2/£. 
C) Buy £ $2/£, buy € at €1.25/£, sell € at $1.50/€. 
A) No arbitrage is possible. 
B) Buy euro at $1.50/€, buy £ at €1.25/£, sell £ at $2/£. 
C) Buy £ $2/£, buy € at €1.25/£, sell € at $1.50/€.

Question 11

The standard size foreign exchange transactions are for

Accepted Answer

A) $10 million U.S. 
B) $1 million U.S. 
C) €1 million. 
A) $10 million U.S. 
B) $1 million U.S. 
C) €1 million.

Question 12

The SF/$ 180-day forward exchange rate is SF1.30/$ and the 180 day forward premium is 8 percent. What is the outright spot exchange rate?

Accepted Answer

A) SF1.30/$ 
B) SF1.35/$ 
C) SF1.25/$ 
D) None of the above 
A) SF1.30/$ 
B) SF1.35/$ 
C) SF1.25/$ 
D) None of the above

Question 13

An exchange-traded fund (ETF) is

Accepted Answer

A) the same thing as a mutual fund. 
B) a portfolio of financial assets in which shares representing fractional ownership of the fund are sold and redeemed by the fund sponsor. 
C) a portfolio of financial assets in which shares representing fractional ownership of the fund trade on an organized exchange. 
D) none of the above. 
A) the same thing as a mutual fund. 
B) a portfolio of financial assets in which shares representing fractional ownership of the fund are sold and redeemed by the fund sponsor. 
C) a portfolio of financial assets in which shares representing fractional ownership of the fund trade on an organized exchange. 
D) none of the above.

Question 14

Including the transactions costs of the bid-ask spread, the euro-pound cross exchange rate for a customer who wants to sell euro and buy pounds can be computed as

Accepted Answer

A)    
B)    
C)    
D) All of the above 
A)    
B)    
C)    
D) All of the above

Question 15

Suppose you observe the following exchange rates: €1 = $.85; £1 = $1.60; and €2.00 = £1.00. Starting with $1,000,000, how can you make money?

Accepted Answer

A) Exchange $1m for £625,000 at £1 = $1.60. Buy €1,250,000 at €2 = £1.00; trade for $1,062,500 at €1 = $.85. 
B) Start with dollars, exchange for euros at €1 = $.85; exchange for pounds at €2.00 = £1.00; exchange for dollars at £1 = $1.60. 
C) Start with euros; exchange for pounds; exchange for dollars; exchange for euros. 
D) No arbitrage profit is possible. 
A) Exchange $1m for £625,000 at £1 = $1.60. Buy €1,250,000 at €2 = £1.00; trade for $1,062,500 at €1 = $.85. 
B) Start with dollars, exchange for euros at €1 = $.85; exchange for pounds at €2.00 = £1.00; exchange for dollars at £1 = $1.60. 
C) Start with euros; exchange for pounds; exchange for dollars; exchange for euros. 
D) No arbitrage profit is possible.

Question 16

Spot foreign exchange trading

Accepted Answer

A) accounts for about 5 percent of all foreign exchange trading. 
B) accounts for about 20 percent of all foreign exchange trading. 
C) accounts for about 33 percent of all foreign exchange trading. 
D) accounts for about 70 percent of all foreign exchange trading. 
A) accounts for about 5 percent of all foreign exchange trading. 
B) accounts for about 20 percent of all foreign exchange trading. 
C) accounts for about 33 percent of all foreign exchange trading. 
D) accounts for about 70 percent of all foreign exchange trading.

Question 17

Market microstructure refers to

Accepted Answer

A) the basic mechanics of how a marketplace operates. 
B) the basics of how to make small (micro-sized) currency trades. 
C) how macroeconomic variables such as GDP and inflation are determined. 
D) none of the above 
A) the basic mechanics of how a marketplace operates. 
B) the basics of how to make small (micro-sized) currency trades. 
C) how macroeconomic variables such as GDP and inflation are determined. 
D) none of the above

Question 18

Suppose that the current exchange rate is £1.00 = $2.00. The indirect quote, from the U.S. perspective is

Accepted Answer

A) £1.00 = $2.00. 
B) £1.00 = $0.50. 
C) £0.50 = $1.00. 
D) None of the above 
A) £1.00 = $2.00. 
B) £1.00 = $0.50. 
C) £0.50 = $1.00. 
D) None of the above

Question 19

The current spot exchange rate is $1.45/€ and the three-month forward rate is $1.55/€. Based upon your economic forecast, you are pretty confident that the spot exchange rate will be $1.50/€ in three months. Assume that you would like to buy or sell €100,000. What actions would you take to speculate in the forward market? How much will you make if your prediction is correct?

Accepted Answer

A) Take a short position in a forward. If you're right you will make $15,000. 
B) Take a long position in a forward contract on euro. If you're right you will make $5,000. 
C) Take a short position in a forward contract on euro. If you're right you will make $5,000. 
D) Take a long position in a forward contract on euro. If you're right you will make $15,000. 
A) Take a short position in a forward. If you're right you will make $15,000. 
B) Take a long position in a forward contract on euro. If you're right you will make $5,000. 
C) Take a short position in a forward contract on euro. If you're right you will make $5,000. 
D) Take a long position in a forward contract on euro. If you're right you will make $15,000.

Question 20

Suppose the spot ask exchange rate, Sa($|£), is $1.90 = £1.00 and the spot bid exchange rate, Sb($|£), is $1.89 = £1.00. If you were to buy $10,000,000 worth of British pounds and then sell them five minutes later, how much of your $10,000,000 would be "eaten" by the bid-ask spread?

Accepted Answer

A) $1,000,000 
B) $52,910.05 
C) $100,000 
D) $52,631.58 
A) $1,000,000 
B) $52,910.05 
C) $100,000 
D) $52,631.58

If one has agreed to buy foreign exchange forward

In conversation, interbank foreign exchange traders use a shorthand abbreviation in expressing spot currency quotations. Consider a $/£ bid-ask quote of $1.9072-$1.9077. The currency dealer would likely quote that as _____.

Nondollar currency transactions

You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. If a bank quotes you a cross rate of £1.00 = €1.20 how much money can an astute trader make?

You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. If a bank quotes you a cross rate of £1.00 = €1.20 how can you make money?

You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is quoted as $1.50 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. If a bank quotes you a cross rate of £1.00 = €1.25 how can you make money?

The standard size foreign exchange transactions are for

The SF/$ 180-day forward exchange rate is SF1.30/$ and the 180 day forward premium is 8 percent. What is the outright spot exchange rate?

An exchange-traded fund (ETF) is

Including the transactions costs of the bid-ask spread, the euro-pound cross exchange rate for a customer who wants to sell euro and buy pounds can be computed as

Suppose you observe the following exchange rates: €1 = $.85; £1 = $1.60; and €2.00 = £1.00. Starting with $1,000,000, how can you make money?

Spot foreign exchange trading

Market microstructure refers to

Suppose that the current exchange rate is £1.00 = $2.00. The indirect quote, from the U.S. perspective is

Suppose the spot ask exchange rate, S^a($|£), is $1.90 = £1.00 and the spot bid exchange rate, S^b($|£), is $1.89 = £1.00. If you were to buy $10,000,000 worth of British pounds and then sell them five minutes later, how much of your $10,000,000 would be "eaten" by the bid-ask spread?

Globalization and the Multinational Firm

International Monetary System

Balance of Payments

Corporate Governance Around the World

International Parity Relationships and Forecasting Foreign Exchange Rates

Futures and Options on Foreign Exchange

Management of Transaction Exposure

Management of Economic Exposure

Management of Translation Exposure

International Banking and Money Market

International Bond Market

International Equity Markets

Interest Rate and Currency Swaps

International Portfolio Investment

Foreign Direct Investment and Cross-Border Acquisitions

International Capital Structure and the Cost of Capital

International Capital Budgeting

Multinational Cash Management

International Trade Finance

International Tax Environment and Transfer Pricing

Filters

Exam 5: The Market for Foreign Exchange

If one has agreed to buy foreign exchange forward

In conversation, interbank foreign exchange traders use a shorthand abbreviation in expressing spot currency quotations. Consider a $/£ bid-ask quote of $1.9072-$1.9077. The currency dealer would likely quote that as _____.

Nondollar currency transactions

You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. If a bank quotes you a cross rate of £1.00 = €1.20 how much money can an astute trader make?

You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. If a bank quotes you a cross rate of £1.00 = €1.20 how can you make money?

You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is quoted as $1.50 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. If a bank quotes you a cross rate of £1.00 = €1.25 how can you make money?

The standard size foreign exchange transactions are for

The SF/$ 180-day forward exchange rate is SF1.30/$ and the 180 day forward premium is 8 percent. What is the outright spot exchange rate?

An exchange-traded fund (ETF) is

Including the transactions costs of the bid-ask spread, the euro-pound cross exchange rate for a customer who wants to sell euro and buy pounds can be computed as

Suppose you observe the following exchange rates: €1 = $.85; £1 = $1.60; and €2.00 = £1.00. Starting with $1,000,000, how can you make money?

Spot foreign exchange trading

Market microstructure refers to

Suppose that the current exchange rate is £1.00 = $2.00. The indirect quote, from the U.S. perspective is

Suppose the spot ask exchange rate, Sa($|£), is $1.90 = £1.00 and the spot bid exchange rate, Sb($|£), is $1.89 = £1.00. If you were to buy $10,000,000 worth of British pounds and then sell them five minutes later, how much of your $10,000,000 would be "eaten" by the bid-ask spread?

Globalization and the Multinational Firm

International Monetary System

Balance of Payments

Corporate Governance Around the World

International Parity Relationships and Forecasting Foreign Exchange Rates

Futures and Options on Foreign Exchange

Management of Transaction Exposure

Management of Economic Exposure

Management of Translation Exposure

International Banking and Money Market

International Bond Market

International Equity Markets

Interest Rate and Currency Swaps

International Portfolio Investment

Foreign Direct Investment and Cross-Border Acquisitions

International Capital Structure and the Cost of Capital

International Capital Budgeting

Multinational Cash Management

International Trade Finance

International Tax Environment and Transfer Pricing

Filters

Suppose the spot ask exchange rate, S^a($|£), is $1.90 = £1.00 and the spot bid exchange rate, S^b($|£), is $1.89 = £1.00. If you were to buy $10,000,000 worth of British pounds and then sell them five minutes later, how much of your $10,000,000 would be "eaten" by the bid-ask spread?