Question 1

Which of the following is NOT a source of foreign exchange risk?

Accepted Answer

A) Trading foreign currencies. 
B) Making domestic-currency loans to foreign corporations. 
C) Buying foreign-issued securities. 
D) Issuing foreign currency-denominated debt. 
A) Trading foreign currencies. 
B) Making domestic-currency loans to foreign corporations. 
C) Buying foreign-issued securities. 
D) Issuing foreign currency-denominated debt. B

Question 2

Your U.S.bank issues a one-year U.S.CD at 5 percent annual interest to finance a C $1.274 million (Canadian dollar)investment in two-year,fixed rate Canadian bonds selling at par and paying 7 percent annually.You expect to liquidate your position in one year.Currently,spot exchange rates are U.S.$0.78493 per Canadian dollar.

If you wanted to hedge your bank's risk exposure,what hedge position would you take?

Accepted Answer

A) A short interest rate hedge to protect against interest rate declines and a short currency hedge to protect against increases in the value of the Canadian dollar with respect to the U.S.dollar. 
B) A short interest rate hedge to protect against interest rate increases and a short currency hedge to protect against declines in the value of the Canadian dollar with respect to the U.S.dollar. 
C) A long interest rate hedge to protect against interest rate increases and a long currency hedge to protect against declines in the value of the Canadian dollar with respect to the U.S.dollar. 
D) A long interest rate hedge to protect against interest rate declines and a long currency hedge to protect against increases in the value of the Canadian dollar with respect to the U.S.dollar. 
A) A short interest rate hedge to protect against interest rate declines and a short currency hedge to protect against increases in the value of the Canadian dollar with respect to the U.S.dollar. 
B) A short interest rate hedge to protect against interest rate increases and a short currency hedge to protect against declines in the value of the Canadian dollar with respect to the U.S.dollar. 
C) A long interest rate hedge to protect against interest rate increases and a long currency hedge to protect against declines in the value of the Canadian dollar with respect to the U.S.dollar. 
D) A long interest rate hedge to protect against interest rate declines and a long currency hedge to protect against increases in the value of the Canadian dollar with respect to the U.S.dollar. B

Question 3

Since forward contracts are negotiated over-the-counter and the parties have maximum flexibility when setting the terms and conditions,credit and counterparty risk does not exist.

Accepted Answer

A) True 
 B)False  False

Question 4

Which of the following FX trading activities is used for purposes of speculation?

Accepted Answer

A) The purchase and sale of foreign currencies for the purpose of profiting from forecasting or anticipating future movements in FX rates. 
B) The purchase and sale of foreign currencies to allow customers to partake in and complete international commercial trade transactions. 
C) The purchase and sale of foreign currencies for the purpose of offsetting customer exposure in any given currency. 
D) The purchase and sale of foreign currencies to allow customers to take positions in foreign real and financial investments. 
A) The purchase and sale of foreign currencies for the purpose of profiting from forecasting or anticipating future movements in FX rates. 
B) The purchase and sale of foreign currencies to allow customers to partake in and complete international commercial trade transactions. 
C) The purchase and sale of foreign currencies for the purpose of offsetting customer exposure in any given currency. 
D) The purchase and sale of foreign currencies to allow customers to take positions in foreign real and financial investments.

Question 5

Long-term violations of the interest rate parity relationship may occur if imperfections in the international financial markets are allowed to exist.

Accepted Answer

A) True 
 B)False

Question 6

An FI has purchased (borrowed)a one-year $10 million Eurodollar deposit at an annual interest rate of 6 percent.It has invested these proceeds in one-year Euro (€)bonds at an annual rate of 6.5 percent after converting them at the current spot rate of €1.75/$.Both interest and principal are paid at the end of the year.

At what one-year forward rate will the bank earn a 1 percent spread?

Accepted Answer

A) €1.7344/$. 
B) €1.7418/$. 
C) €1.7478/$. 
D) €1.7750/$. 
A) €1.7344/$. 
B) €1.7418/$. 
C) €1.7478/$. 
D) €1.7750/$.

Question 7

The FI is acting as a speculator when it

Accepted Answer

A) buys or sells currency to balance the FI's net exposure. 
B) takes a nonzero net position in a particular currency. 
C) processes an exporter's transaction in a foreign currency. 
D) makes a market in a currency. 
A) buys or sells currency to balance the FI's net exposure. 
B) takes a nonzero net position in a particular currency. 
C) processes an exporter's transaction in a foreign currency. 
D) makes a market in a currency.

Question 8

The FI is acting as a FX market agent for its customers when it

Accepted Answer

A) buys or sells currency to balance the FI's net exposure. 
B) takes a nonzero net position in a particular currency. 
C) processes an exporter's transaction in a foreign currency. 
D) makes a market in its domestic currency. 
A) buys or sells currency to balance the FI's net exposure. 
B) takes a nonzero net position in a particular currency. 
C) processes an exporter's transaction in a foreign currency. 
D) makes a market in its domestic currency.

Question 9

FX trading risk exposure continues into the night until all FI operations are closed.

Accepted Answer

A) True 
 B)False

Question 10

An FI has purchased (borrowed)a one-year $10 million Eurodollar deposit at an annual interest rate of 6 percent.It has invested these proceeds in one-year Euro (€)bonds at an annual rate of 6.5 percent after converting them at the current spot rate of €1.75/$.Both interest and principal are paid at the end of the year.

Assume that instead of investing in Euro bonds at a fixed rate of 6.5 percent,it invests them in variable rates of LIBOR + 1.5 percent,reset every six months.The current LIBOR rate is 5 percent.What is the annual spread earned by the bank if LIBOR at the end of six months is 5.5 percent? Assume both interest and principal will be reinvested in six months.Assume the exchange rate remains at €1.75/$ at the end of the year.

Accepted Answer

A) 0.50 percent. 
B) 0.68 percent. 
C) 0.86 percent. 
D) 0.90 percent. 
A) 0.50 percent. 
B) 0.68 percent. 
C) 0.86 percent. 
D) 0.90 percent.

Question 11

In recent years,average daily trading volume at foreign exchange markets has been ______ the average daily trading volume of the NYSE?

Accepted Answer

A) one-half 
B) 20 times 
C) 40 times 
D) 70 times 
A) one-half 
B) 20 times 
C) 40 times 
D) 70 times

Question 12

Your U.S.bank issues a one-year U.S.CD at 5 percent annual interest to finance a C $1.274 million (Canadian dollar)investment in two-year,fixed rate Canadian bonds selling at par and paying 7 percent annually.You expect to liquidate your position in one year.Currently,spot exchange rates are U.S.$0.78493 per Canadian dollar.

What is the end of year profit or loss on the bank's cash position if in one year both Canadian bond rates increase to 7.538 percent and the exchange rate falls to U.S.$0.765 per Canadian dollar? (Assume no change in U.S.interest rates. )

Accepted Answer

A) Loss of U.S.$12,000. 
B) Loss of U.S.$75,000. 
C) Profit of C $9,000. 
D) Profit of U.S.$50,000. 
A) Loss of U.S.$12,000. 
B) Loss of U.S.$75,000. 
C) Profit of C $9,000. 
D) Profit of U.S.$50,000.

Question 13

The underlying cause of foreign exchange volatility reflects fluctuations in the demand and supply of a country's currency.

Accepted Answer

A) True 
 B)False

Question 14

An FI can control its FX risk exposure by on-balance-sheet and off-balance-sheet hedging.

Accepted Answer

A) True 
 B)False

Question 15

Your U.S.bank issues a one-year U.S.CD at 5 percent annual interest to finance a C $1.274 million (Canadian dollar)investment in two-year,fixed rate Canadian bonds selling at par and paying 7 percent annually.You expect to liquidate your position in one year.Currently,spot exchange rates are U.S.$0.78493 per Canadian dollar.

What is the end-of-year profit or loss to the bank if in one year Canadian bond rates increase to 7.538 percent? (Assume no change in either current U.S.interest rates or current exchange rates,U.S.$0.78493/C $1. )

Accepted Answer

A) Loss of U.S.$5,000. 
B) Profit of U.S.$15,000. 
C) Loss of C $119,000. 
D) Profit of C $50,000. 
A) Loss of U.S.$5,000. 
B) Profit of U.S.$15,000. 
C) Loss of C $119,000. 
D) Profit of C $50,000.

Question 16

Your U.S.bank issues a one-year U.S.CD at 5 percent annual interest to finance a C $1.274 million (Canadian dollar)investment in two-year,fixed rate Canadian bonds selling at par and paying 7 percent annually.You expect to liquidate your position in one year.Currently,spot exchange rates are U.S.$0.78493 per Canadian dollar.

What is the end-of-year profit or loss to the bank if in one year the exchange rate falls to U.S.$0.765 per Canadian dollar? (Assume that there is no change in interest rates. )

Accepted Answer

A) Loss of U.S.$75,000. 
B) Profit of C $274,000. 
C) Loss of U.S.$7,000. 
D) Profit of C $9,000. 
A) Loss of U.S.$75,000. 
B) Profit of C $274,000. 
C) Loss of U.S.$7,000. 
D) Profit of C $9,000.

Question 17

On January 1,2016,the exchange rate of U.S.dollars for Australian dollars was 0.730 USD/AUD.On January 15,2016,the exchange rate was 0.6863 USD/AUD.If a mining company had a net exposure to Australian dollars of 9,750,000 AUD,what is the company's U.S.dollar gain or loss during this two week period?

Accepted Answer

A) Gain of 620,829 USD 
B) Loss of 620,829 USD 
C) Loss of 426,075 AUD 
D) Gain of 426,075 AUD 
E) Loss of 426,075 USD 
A) Gain of 620,829 USD 
B) Loss of 620,829 USD 
C) Loss of 426,075 AUD 
D) Gain of 426,075 AUD 
E) Loss of 426,075 USD

Question 18

The following are the net currency positions of a U.S.FI (stated in U.S.dollars). 
Note: Net currency positions are foreign exchange bought minus foreign exchange sold restated in U.S.dollar terms.
$\begin{array}{l}
\begin{array}{lll}
\text {Currency}\
\text {Canaclian Dollay}\
\text {Euro}\
\text {Japane se Yen}\
\text {SWiss: Fiadc}\
\text {British Pound.}\
\end{array}
\begin{array}{lll}
\text {Net Position}\
\text {+U.S.  \$ 1,200}\
\text {-U.S.  \$ 245,900}\
\text {+U.S. \$ 505,000 }\
\text {-U.S. \$ 36,700}\
\text {+U.S. \$447,900}\
\end{array}
\end{array}$
 What is the FI's total FX investment?

Accepted Answer

A) U.S.$671,500. 
B) U.S.$1,236,700. 
C) -U.S.$671,500. 
D) -U.S.$1,236,700. 
A) U.S.$671,500. 
B) U.S.$1,236,700. 
C) -U.S.$671,500. 
D) -U.S.$1,236,700.

Question 19

Foreign exchange trading has been called the fairest market in the world because

Accepted Answer

A) no single institution can control the direction of the market. 
B) trading may take place at any time during a 24-hour period. 
C) the volume of trading is very large and liquid. 
D) trading may take place anywhere as there is no central location for foreign exchange trading. 
E) all of the options are correct. 
A) no single institution can control the direction of the market. 
B) trading may take place at any time during a 24-hour period. 
C) the volume of trading is very large and liquid. 
D) trading may take place anywhere as there is no central location for foreign exchange trading. 
E) all of the options are correct.

Question 20

The foreign exchange market in Tokyo is the largest FX trading market.

Accepted Answer

A) True 
 B)False

Which of the following is NOT a source of foreign exchange risk?

Since forward contracts are negotiated over-the-counter and the parties have maximum flexibility when setting the terms and conditions,credit and counterparty risk does not exist.

Which of the following FX trading activities is used for purposes of speculation?

Long-term violations of the interest rate parity relationship may occur if imperfections in the international financial markets are allowed to exist.

The FI is acting as a speculator when it

The FI is acting as a FX market agent for its customers when it

FX trading risk exposure continues into the night until all FI operations are closed.

In recent years,average daily trading volume at foreign exchange markets has been ______ the average daily trading volume of the NYSE?

The underlying cause of foreign exchange volatility reflects fluctuations in the demand and supply of a country's currency.

An FI can control its FX risk exposure by on-balance-sheet and off-balance-sheet hedging.

On January 1,2016,the exchange rate of U.S.dollars for Australian dollars was 0.730 USD/AUD.On January 15,2016,the exchange rate was 0.6863 USD/AUD.If a mining company had a net exposure to Australian dollars of 9,750,000 AUD,what is the company's U.S.dollar gain or loss during this two week period?

Foreign exchange trading has been called the fairest market in the world because

The foreign exchange market in Tokyo is the largest FX trading market.

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Firms and Investment Banks

Financial Services: Mutual Fund and Hedge Fund Companies

Financial Services: Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization

Filters

Exam 13: Foreign Exchange Risk

Which of the following is NOT a source of foreign exchange risk?

Since forward contracts are negotiated over-the-counter and the parties have maximum flexibility when setting the terms and conditions,credit and counterparty risk does not exist.

Which of the following FX trading activities is used for purposes of speculation?

Long-term violations of the interest rate parity relationship may occur if imperfections in the international financial markets are allowed to exist.

The FI is acting as a speculator when it

The FI is acting as a FX market agent for its customers when it

FX trading risk exposure continues into the night until all FI operations are closed.

In recent years,average daily trading volume at foreign exchange markets has been ______ the average daily trading volume of the NYSE?

The underlying cause of foreign exchange volatility reflects fluctuations in the demand and supply of a country's currency.

An FI can control its FX risk exposure by on-balance-sheet and off-balance-sheet hedging.

Foreign exchange trading has been called the fairest market in the world because

The foreign exchange market in Tokyo is the largest FX trading market.

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Firms and Investment Banks

Financial Services: Mutual Fund and Hedge Fund Companies

Financial Services: Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization

Filters