Question 1

Off-balance-sheet hedging involves taking a position in FX forward or other derivative securities even though no FX assets or liabilities are on the balance sheet.

Accepted Answer

A) True 
 B)False

Question 2

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 Swiss franc/dollar exchange rate?

Accepted Answer

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

Question 3

The one-year CD rates for financial institutions with AA ratings are 5 percent in the U.S.and 8 percent in France.An AA-rated U.S.financial institution can borrow by issuing CDs or lend by purchasing CDs at these rates in either market.The current spot rate is $0.20/Euro.

If the bank receives a quote of $0.1975/€ for one-year forward rates for the Euro (to buy and to sell),what is the arbitrage profit for the bank if it uses $1,000,000 as the notional amount?

Accepted Answer

A) $5,000. 
B) $16,500. 
C) $19,350. 
D) $22,000. 
A) $5,000. 
B) $16,500. 
C) $19,350. 
D) $22,000.

Question 4

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

Accepted Answer

A) +2,400. 
B) +400. 
C) -2,800. 
D) -2,400. 
A) +2,400. 
B) +400. 
C) -2,800. 
D) -2,400.

Question 5

An FI can eliminate its currency risk exposure by matching its foreign currency assets to its foreign currency liabilities.

Accepted Answer

A) True 
 B)False

Question 6

The market in which foreign currency is traded for immediate delivery is the

Accepted Answer

A) spot market. 
B) forward market. 
C) futures market. 
D) currency swap market. 
A) spot market. 
B) forward market. 
C) futures market. 
D) currency swap market.

Question 7

Directly matching foreign asset and liability books in the same FX currency will allow an FI to hedge or lock in a profit spread regardless of future changes in exchange rates.

Accepted Answer

A) True 
 B)False

Question 8

To transact all cross-currency trades,one must first convert both currencies into U.S.dollars.

Accepted Answer

A) True 
 B)False

Question 9

The one-year CD rates for financial institutions with AA ratings are 5 percent in the U.S.and 8 percent in France.An AA-rated U.S.financial institution can borrow by issuing CDs or lend by purchasing CDs at these rates in either market.The current spot rate is $0.20/Euro.

What should be the one-year forward rate in order to prevent any arbitrage?

Accepted Answer

A) $0.1944/€. 
B) $0.1975/€. 
C) $0.2000/€. 
D) $0.2025/€. 
A) $0.1944/€. 
B) $0.1975/€. 
C) $0.2000/€. 
D) $0.2025/€.

Question 10

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. Your position is exposed to

Accepted Answer

A) interest rate risk only. 
B) credit risk only. 
C) exchange rate risk only. 
D) interest rate and exchange rate risk only. 
E) interest rate risk,exchange rate risk,and credit risk. 
A) interest rate risk only. 
B) credit risk only. 
C) exchange rate risk only. 
D) interest rate and exchange rate risk only. 
E) interest rate risk,exchange rate risk,and credit risk.

Question 11

$\begin{array}{lrr}
\text { Assets } &\text {Liabilities} \
&  \text { \$ 10 million U.S. loans(10 percent) } & \text { \$ 20  million U.S. CDs(9 percent) }  \
 &\text { \$ 10 million UK loans (16 percent) } &\
 &\text { (loans made in sterling)} &\
\end{array}$
 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 when the FI needed to repatriate the principal and interest on the loan.What would the dollar loan revenues at the end of the year be as a return on the original dollar investment?

Accepted Answer

A) 13%. 
B) 12.55%. 
C) 16%. 
D) 8.75%. 
A) 13%. 
B) 12.55%. 
C) 16%. 
D) 8.75%.

Question 12

$\begin{array}{lrr}
\text { Assets } &\text {Liabilities} \
&  \text { \$ 10 million U.S. loans(10 percent) } & \text { \$ 20  million U.S. CDs(9 percent) }  \
 &\text { \$ 10 million UK loans (16 percent) } &\
 &\text { (loans made in sterling)} &\
\end{array}$
 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.
What amount,in sterling,will the FI have to repatriate back to the U.S.after one year if the exchange rate remains constant at $1.60 to $\le$ 1?

Accepted Answer

A) $\le$6.25 million. 
B) $\le$7.875 million. 
C) $\le$7.25 million. 
D) $\le$6.625 million. 
E) $\le$11.26 million. 
A) $\le$6.25 million. 
B) $\le$7.875 million. 
C) $\le$7.25 million. 
D) $\le$6.625 million. 
E) $\le$11.26 million.

Question 13

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 by the bank if the end-of-year exchange rate is €1.77/$?

Accepted Answer

A) -1.00 percent. 
B) -0.70 percent. 
C) -0.25 percent. 
D) 0.00 percent. 
A) -1.00 percent. 
B) -0.70 percent. 
C) -0.25 percent. 
D) 0.00 percent.

Question 14

The FI is acting as a hedger 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 15

Most profits and losses in foreign currency markets come from taking an open position or speculating in currencies.

Accepted Answer

A) True 
 B)False

Question 16

During 2012,the top four banks that operate in foreign currency trading comprised almost half of the market.

Accepted Answer

A) True 
 B)False

Question 17

In 2015,approximately _______ of the daily foreign exchange transactions occurred outside of the spot market?

Accepted Answer

A) 35 percent 
B) 60 percent 
C) 15 percent 
D) 75 percent 
A) 35 percent 
B) 60 percent 
C) 15 percent 
D) 75 percent

Question 18

The Federal Reserve estimates that _______ financial institutions are active market makers in foreign currencies in the U.S. ,of which _______ are commercial and investment banks.

Accepted Answer

A) 200;50 
B) 60;15 
C) 100;10 
D) 200;25 
A) 200;50 
B) 60;15 
C) 100;10 
D) 200;25

Question 19

On May 31,2016,the exchange rate of U.S.dollars for Bitcoins was Ƀ535.592.Three months later on August 31,2016,the exchange rate was Ƀ572.187.If a Learjet 85 carries a price of $21 million,what is the difference in price a purchaser would pay in Bitcoins if the jet were purchased on August 31 rather than May 31,2016?

Accepted Answer

A) $2,508,000 
B) (Ƀ2,508) 
C) ($2,508,000) 
D) (Ƀ36.6) 
A) $2,508,000 
B) (Ƀ2,508) 
C) ($2,508,000) 
D) (Ƀ36.6)

Question 20

When purchasing and selling foreign currencies to allow customers to take positions in foreign real and financial investments,the FI

Accepted Answer

A) acts defensively as a hedger. 
B) acts aggressively as a speculator. 
C) assumes the FX risk itself. 
D) acts as an agent. 
A) acts defensively as a hedger. 
B) acts aggressively as a speculator. 
C) assumes the FX risk itself. 
D) acts as an agent.

Off-balance-sheet hedging involves taking a position in FX forward or other derivative securities even though no FX assets or liabilities are on the balance sheet.

The following are the net currency positions of a U.S.FI (stated in U.S.dollars). Currency Assets Liabilities FX Bought FX Sold British pound 24,600 70,000 170,400 321,000 Yen 31,000 20,400 250,000 220,000 Swiss franc 10,200 9,800 8,000 10,800 What is the FI's net exposure in the Swiss franc?

An FI can eliminate its currency risk exposure by matching its foreign currency assets to its foreign currency liabilities.

The market in which foreign currency is traded for immediate delivery is the

Directly matching foreign asset and liability books in the same FX currency will allow an FI to hedge or lock in a profit spread regardless of future changes in exchange rates.

To transact all cross-currency trades,one must first convert both currencies into U.S.dollars.

The FI is acting as a hedger when it

Most profits and losses in foreign currency markets come from taking an open position or speculating in currencies.

During 2012,the top four banks that operate in foreign currency trading comprised almost half of the market.

In 2015,approximately _______ of the daily foreign exchange transactions occurred outside of the spot market?

The Federal Reserve estimates that _ financial institutions are active market makers in foreign currencies in the U.S. ,of which _ are commercial and investment banks.

When purchasing and selling foreign currencies to allow customers to take positions in foreign real and financial investments,the FI

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

Off-balance-sheet hedging involves taking a position in FX forward or other derivative securities even though no FX assets or liabilities are on the balance sheet.

The following are the net currency positions of a U.S.FI (stated in U.S.dollars). Currency Assets Liabilities FX Bought FX Sold British pound 24,600 70,000 170,400 321,000 Yen 31,000 20,400 250,000 220,000 Swiss franc 10,200 9,800 8,000 10,800 What is the FI's net exposure in the Swiss franc?

An FI can eliminate its currency risk exposure by matching its foreign currency assets to its foreign currency liabilities.

The market in which foreign currency is traded for immediate delivery is the

Directly matching foreign asset and liability books in the same FX currency will allow an FI to hedge or lock in a profit spread regardless of future changes in exchange rates.

To transact all cross-currency trades,one must first convert both currencies into U.S.dollars.

The FI is acting as a hedger when it

Most profits and losses in foreign currency markets come from taking an open position or speculating in currencies.

During 2012,the top four banks that operate in foreign currency trading comprised almost half of the market.

In 2015,approximately _______ of the daily foreign exchange transactions occurred outside of the spot market?

The Federal Reserve estimates that _______ financial institutions are active market makers in foreign currencies in the U.S. ,of which _______ are commercial and investment banks.

When purchasing and selling foreign currencies to allow customers to take positions in foreign real and financial investments,the FI

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

The Federal Reserve estimates that _ financial institutions are active market makers in foreign currencies in the U.S. ,of which _ are commercial and investment banks.