Question 1

If foreign currency exchange rates are highly positively correlated,how can a FI reduce its exchange rate risk exposure?

Accepted Answer

A) By taking net long positions in all currencies. 
B) By taking net short positions in all currencies. 
C) By taking opposing net short and net long positions in different currencies. 
D) By maximizing net FX exposure in each currency,independently. 
A) By taking net long positions in all currencies. 
B) By taking net short positions in all currencies. 
C) By taking opposing net short and net long positions in different currencies. 
D) By maximizing net FX exposure in each currency,independently.

Question 2

The real interest rate reflects the underlying real sector demand and supply for funds denominated in the domestic currency.

Accepted Answer

A) True 
 B)False

Question 3

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.

What is the spread earned if the bank can sell one-year forward Euros at €1.755/$?

Accepted Answer

A) -0.70 percent. 
B) -0.25 percent. 
C) 0.00 percent. 
D) 0.20 percent. 
A) -0.70 percent. 
B) -0.25 percent. 
C) 0.00 percent. 
D) 0.20 percent.

Question 4

Deviations from the international currency parity relationships may occur because of

Accepted Answer

A) free capital movements across national boundaries. 
B) barriers to cross-border financial flows. 
C) perfect rationality of market participants. 
D) differences in each country's productive capacity. 
A) free capital movements across national boundaries. 
B) barriers to cross-border financial flows. 
C) perfect rationality of market participants. 
D) differences in each country's productive capacity.

Question 5

The total FX risk for a domestic bank that is making a one-year loan in a foreign currency is that the interest income expected on the loan is exposed to a depreciation of the foreign currency.

Accepted Answer

A) True 
 B)False

Question 6

Suppose that the current spot exchange rate of U.S.dollars for Russian rubles is $0.15/1ruble.The price of Russian-produced goods increases by 8 percent,and the U.S.price index increases by 3 percent.

According to PPP,the new exchange rate of Russian rubles to U.S.dollars is

Accepted Answer

A) 0.15. 
B) 0.1425. 
C) 0.141. 
D) 0.1605. 
A) 0.15. 
B) 0.1425. 
C) 0.141. 
D) 0.1605.

Question 7

The exposure to foreign exchange risk by U.S.FIs has decreased with the growth of the various derivative markets.

Accepted Answer

A) True 
 B)False

Question 8

The following are the net currency positions of a U.S.FI (stated in U.S.dollars). $\begin{array}{lrrrr}
\text { Currency} &\text { Assets } & \text { Liabilities } & \text { FX Bought } & \text { FX  Sold } \
\text { British pound} &24,600 & 70,000 & 170,400 & 321,000 \
\text { Yen} &31,000 & 20,400 & 250,000 & 220,000 \
\text { Swiss franc} &10,200 & 9,800 & 8,000 & 10,800
\end{array}$ How would you characterize the FI's risk exposure to fluctuations in the British pound to dollar exchange rate?

Accepted Answer

A) The FI is net short in the British pound and therefore faces the risk that the British pound will rise in value against the U.S.dollar. 
B) The FI is net short in the British pound and therefore faces the risk that the British pound will fall in value against the U.S.dollar. 
C) The FI is net long in the British pound and therefore faces the risk that the British pound will fall in value against the U.S.dollar. 
D) The FI is net long in the British pound and therefore faces the risk that the British pound will rise in value against the U.S.dollar. 
A) The FI is net short in the British pound and therefore faces the risk that the British pound will rise in value against the U.S.dollar. 
B) The FI is net short in the British pound and therefore faces the risk that the British pound will fall in value against the U.S.dollar. 
C) The FI is net long in the British pound and therefore faces the risk that the British pound will fall in value against the U.S.dollar. 
D) The FI is net long in the British pound and therefore faces the risk that the British pound will rise in value against the U.S.dollar.

Question 9

The reason an FI receives a fee when purchasing foreign currencies that allow customers to complete international transactions is because the FI assumes some FX risk.

Accepted Answer

A) True 
 B)False

Question 10

As of June 2015,U.S.banks were net short British pounds.

Accepted Answer

A) True 
 B)False

Question 11

As the U.S.dollar appreciates against the Japanese yen,Japanese goods sold in the U.S.become less expensive to the U.S.consumer.

Accepted Answer

A) True 
 B)False

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.

If in one year there is no change to either interest rates or exchange rates,what is the end-of-year profit or loss for the bank? (Hint: Annual interest is paid on both the Canadian bonds and the CD on the date of liquidation in exactly one year. )

Accepted Answer

A) Profit of U.S.$20,000. 
B) Loss of C $224,000. 
C) Profit of U.S.$50,000. 
D) Profit of C $63,700. 
A) Profit of U.S.$20,000. 
B) Loss of C $224,000. 
C) Profit of U.S.$50,000. 
D) Profit of C $63,700.

Question 13

In 2011,during the financial crisis,which country was viewed as a safe haven and saw its currency appreciate in value relative to other currencies because of the demand for the currency?

Accepted Answer

A) Australia. 
B) Dubai. 
C) Canada. 
D) Argentina. 
E) Switzerland. 
A) Australia. 
B) Dubai. 
C) Canada. 
D) Argentina. 
E) Switzerland.

Question 14

The nominal interest rate is equal to the

Accepted Answer

A) real interest rate minus the inflation premium. 
B) real interest rate minus the trailing inflation rate. 
C) real interest rate plus the expected interest rate increase. 
D) real interest rate plus the expected inflation rate. 
A) real interest rate minus the inflation premium. 
B) real interest rate minus the trailing inflation rate. 
C) real interest rate plus the expected interest rate increase. 
D) real interest rate plus the expected inflation rate.

Question 15

Average daily turnover in the FX market has recently been over $5 trillion.

Accepted Answer

A) True 
 B)False

Question 16

Most profits or losses on foreign trading come from taking an open position in currencies.

Accepted Answer

A) True 
 B)False

Question 17

The use of an exchange rate forward contract assures the FI of the opportunity to buy (or sell)the foreign currency at a future time at a known price.

Accepted Answer

A) True 
 B)False

Question 18

The FX markets of the world have become one of the largest of all financial markets.

Accepted Answer

A) True 
 B)False

Question 19

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.
$\begin{array}{l}
\begin{array}{lll}
\text {Currency}\
\text {Canaclian Dollay}\
\text {Euro}\
\text {Japane se Yen}\
\text {SWiss: Fiadc}\
\text {British Pound.}\
\end{array}
\begin{array}{lll}
\text {Net Position}\
\text {+U.S.  \$ 1,200}\
\text {-U.S.  \$ 245,900}\
\text {+U.S. \$ 505,000 }\
\text {-U.S. \$ 36,700}\
\text {+U.S. \$447,900}\
\end{array}
\end{array}$
 How would you characterize the FI's risk exposure to fluctuations in the Euro to dollar exchange rate?

Accepted Answer

A) The FI is net short in the Euro and therefore faces the risk that the Euro will rise in value against the U.S.dollar. 
B) The FI is net short in the Euro and therefore faces the risk that the Euro will fall in value against the U.S.dollar. 
C) The FI is net long in the Euro and therefore faces the risk that the Euro will fall in value against the U.S.dollar. 
D) The FI is net long in the Euro and therefore faces the risk that the Euro will rise in value against the U.S.dollar. 
A) The FI is net short in the Euro and therefore faces the risk that the Euro will rise in value against the U.S.dollar. 
B) The FI is net short in the Euro and therefore faces the risk that the Euro will fall in value against the U.S.dollar. 
C) The FI is net long in the Euro and therefore faces the risk that the Euro will fall in value against the U.S.dollar. 
D) The FI is net long in the Euro and therefore faces the risk that the Euro will rise in value against the U.S.dollar.

Question 20

$\begin{array}{lrr}
\text { Assets } &\text {Liabilities} \
&  \text { \$ 10 million U.S. loans(10 percent) } & \text { \$ 20  million U.S. CDs(9 percent) }  \
 &\text { \$ 10 million UK loans (16 percent) } &\
 &\text { (loans made in sterling)} &\
\end{array}$
 A U.S.FI is raising all of its $20 million liabilities in dollars (one-year CDs)but investing 50 percent in U.S.dollar assets (one-year maturity loans)and 50 percent in UK pound sterling assets (one-year maturity loans).Suppose the promised one-year U.S.CD rate is 9 percent,to be paid in dollars at the end of the year,and that one-year,credit risk-free loans in the United States are yielding only 10 percent.Credit risk-free one-year loans are yielding 16 percent in the United Kingdom.

If the exchange rate had fallen from $1.60/$\le$1 at the beginning of the year to $1.50/$\le$1 at the end of the year,the net interest margin for the FI on its balance sheet investments is

Accepted Answer

A) 3.2875%. 
B) -3.2875%. 
C) 4%. 
D) 8.75%. 
E) 0.375%. 
A) 3.2875%. 
B) -3.2875%. 
C) 4%. 
D) 8.75%. 
E) 0.375%.

Exam 13: Foreign Exchange Risk

If foreign currency exchange rates are highly positively correlated,how can a FI reduce its exchange rate risk exposure?

The real interest rate reflects the underlying real sector demand and supply for funds denominated in the domestic currency.

Deviations from the international currency parity relationships may occur because of

The total FX risk for a domestic bank that is making a one-year loan in a foreign currency is that the interest income expected on the loan is exposed to a depreciation of the foreign currency.

Suppose that the current spot exchange rate of U.S.dollars for Russian rubles is $0.15/1ruble.The price of Russian-produced goods increases by 8 percent,and the U.S.price index increases by 3 percent. According to PPP,the new exchange rate of Russian rubles to U.S.dollars is

The exposure to foreign exchange risk by U.S.FIs has decreased with the growth of the various derivative markets.

The reason an FI receives a fee when purchasing foreign currencies that allow customers to complete international transactions is because the FI assumes some FX risk.

As of June 2015,U.S.banks were net short British pounds.

As the U.S.dollar appreciates against the Japanese yen,Japanese goods sold in the U.S.become less expensive to the U.S.consumer.

In 2011,during the financial crisis,which country was viewed as a safe haven and saw its currency appreciate in value relative to other currencies because of the demand for the currency?

The nominal interest rate is equal to the

Average daily turnover in the FX market has recently been over $5 trillion.

Most profits or losses on foreign trading come from taking an open position in currencies.

The use of an exchange rate forward contract assures the FI of the opportunity to buy (or sell)the foreign currency at a future time at a known price.

The FX markets of the world have become one of the largest of all financial markets.

Why Are Financial Institutions Special

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Interest Rate Risk I

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Liquidity Risk

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Technology and Other Operational Risks

Liability and Liquidity Management

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Capital Adequacy

Product and Geographic Expansion

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Swaps

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