Question 1

Most profits or losses on foreign trading for FIs come from

Accepted Answer

A) open positions or speculation. 
B) market making. 
C) acting as agents for retail customers. 
D) acting as agents for wholesale customers. 
A) open positions or speculation. 
B) market making. 
C) acting as agents for retail customers. 
D) acting as agents for wholesale customers.

Question 2

Most nonbank FIs have foreign exchange risk exposure that is smaller than the exposure of the large U.S.money-center banks.

Accepted Answer

A) True 
 B)False

Question 3

The spot foreign exchange market is where forward and futures contracts and swap agreements are transacted.

Accepted Answer

A) True 
 B)False

Question 4

The greater the volatility of foreign exchange rates given any net exposure position,the greater the fluctuations in value of the foreign exchange portfolio.

Accepted Answer

A) True 
 B)False

Question 5

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 yen/dollar exchange rate?

Accepted Answer

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

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 8 percent rise in the price of Russian goods relative to the 3 percent rise in the price of U.S.goods results in a(n)

Accepted Answer

A) depreciation of the Russian ruble by 5 percent. 
B) depreciation of the Russian ruble by 6 percent. 
C) appreciation of the Russian ruble by 5 percent. 
D) appreciation of the Russian ruble by 6 percent. 
A) depreciation of the Russian ruble by 5 percent. 
B) depreciation of the Russian ruble by 6 percent. 
C) appreciation of the Russian ruble by 5 percent. 
D) appreciation of the Russian ruble by 6 percent.

Question 7

U.S.pension funds invest approximately one percent (1%)of their portfolios in foreign securities.

Accepted Answer

A) True 
 B)False

Question 8

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,the FI invests them in variable rates of LIBOR + 1.5 percent,reset every six months.The current LIBOR rate is 5 percent.LIBOR at the end of six months is 5.5 percent.Assume both interest and principal will be reinvested in six months.Assume the spot exchange rate is €1.75/$.What should be the one-year forward rate in order for the bank to earn a spread of 1 percent?

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 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 spot rate in order for no arbitrage to take place,assuming the one-year forward rate is $0.1975/€?

Accepted Answer

A) $0.1944/€. 
B) $0.1975/€. 
C) $0.2000/€. 
D) $0.2025/€. 
E) $0.2031/€. 
A) $0.1944/€. 
B) $0.1975/€. 
C) $0.2000/€. 
D) $0.2025/€. 
E) $0.2031/€.

Question 10

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

Accepted Answer

A) $6.25 million. 
B) $11.6 million. 
C) $7.25 million. 
D) $6.625 million. 
E) $10.875 million. 
A) $6.25 million. 
B) $11.6 million. 
C) $7.25 million. 
D) $6.625 million. 
E) $10.875 million.

Question 11

A positive net exposure position in FX implies that the FI is

Accepted Answer

A) net long in a currency and exposed to depreciation of the foreign currency. 
B) net short in a currency and exposed to depreciation of the foreign currency. 
C) net long in a currency and exposed to appreciation of the foreign currency. 
D) net short in a currency and exposed to appreciation of the foreign currency. 
A) net long in a currency and exposed to depreciation of the foreign currency. 
B) net short in a currency and exposed to depreciation of the foreign currency. 
C) net long in a currency and exposed to appreciation of the foreign currency. 
D) net short in a currency and exposed to appreciation of the foreign currency.

Question 12

A positive net exposure position in FX implies the FI is net short in a currency.

Accepted Answer

A) True 
 B)False

Question 13

Forward contracts in FX are typically written for a period of one-,three-,or six-months.

Accepted Answer

A) True 
 B)False

Question 14

An indirect quote of a foreign currency indicates the amount of foreign currency received for one unit of the domestic currency.

Accepted Answer

A) True 
 B)False

Question 15

U.S.life insurance companies generally hold less than ten percent (10%)of their portfolios in foreign securities.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following FX trading activities is used to hedge FX risk?

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 17

Yen Bank wishes to invest in Yen loans at a rate of 10 percent.The bank will fund the loans in the domestic CD market at a rate of 6.3 percent.This on-balance-sheet FX risk will be hedged in the spot market at a forward rate of $0.62/$\times$.The spot rate on yen is $0.60/$\times$.

What must be the forward exchange rate to eliminate the preference for the yen loans?

Accepted Answer

A) $0.6416/$\times$. 
B) $0.5798/$\times$. 
C) $0.6118/$\times$. 
D) $0.5991/$\times$. 
A) $0.6416/$\times$. 
B) $0.5798/$\times$. 
C) $0.6118/$\times$. 
D) $0.5991/$\times$.

Question 18

U.S.pension funds hold approximately _______ of their assets in foreign securities,while British pension funds have traditionally invested over _______ of their funds in foreign assets.

Accepted Answer

A) 20 percent;5 percent 
B) 15 percent;20 percent 
C) 0 percent;30 percent 
D) 30 percent;10 percent 
A) 20 percent;5 percent 
B) 15 percent;20 percent 
C) 0 percent;30 percent 
D) 30 percent;10 percent

Question 19

FX risk exposure of an FI essentially relates to which of the following activities?

Accepted Answer

A) Purchase and sale of foreign currencies to allow customers to participate in and complete international commercial trade transactions. 
B) Purchase and sale of foreign currencies to allow customers to take positions in foreign real and financial investments. 
C) Purchase and sale of foreign currencies for hedging purposes to offset customer exposure in any given currency. 
D) Purchase and sale of foreign currencies for speculative purposes through forecasting or anticipating future movements in FX rates. 
A) Purchase and sale of foreign currencies to allow customers to participate in and complete international commercial trade transactions. 
B) Purchase and sale of foreign currencies to allow customers to take positions in foreign real and financial investments. 
C) Purchase and sale of foreign currencies for hedging purposes to offset customer exposure in any given currency. 
D) Purchase and sale of foreign currencies for speculative purposes through forecasting or anticipating future movements in FX rates.

Question 20

The decrease in European FX volatility during the last decade has occurred because of

Accepted Answer

A) the stabilizing force of the euro. 
B) reduction in inflation rates in European countries. 
C) the reduced volatility in many emerging-market countries. 
D) the greater volatilities of Asian currencies. 
E) the stabilizing force of the euro and reduction in inflation rates in European countries. 
A) the stabilizing force of the euro. 
B) reduction in inflation rates in European countries. 
C) the reduced volatility in many emerging-market countries. 
D) the greater volatilities of Asian currencies. 
E) the stabilizing force of the euro and reduction in inflation rates in European countries.

Most profits or losses on foreign trading for FIs come from

Most nonbank FIs have foreign exchange risk exposure that is smaller than the exposure of the large U.S.money-center banks.

The spot foreign exchange market is where forward and futures contracts and swap agreements are transacted.

The greater the volatility of foreign exchange rates given any net exposure position,the greater the fluctuations in value of the foreign exchange portfolio.

U.S.pension funds invest approximately one percent (1%)of their portfolios in foreign securities.

A positive net exposure position in FX implies that the FI is

A positive net exposure position in FX implies the FI is net short in a currency.

Forward contracts in FX are typically written for a period of one-,three-,or six-months.

An indirect quote of a foreign currency indicates the amount of foreign currency received for one unit of the domestic currency.

U.S.life insurance companies generally hold less than ten percent (10%)of their portfolios in foreign securities.

Which of the following FX trading activities is used to hedge FX risk?

U.S.pension funds hold approximately _ of their assets in foreign securities,while British pension funds have traditionally invested over _ of their funds in foreign assets.

FX risk exposure of an FI essentially relates to which of the following activities?

The decrease in European FX volatility during the last decade has occurred because of

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

Most profits or losses on foreign trading for FIs come from

Most nonbank FIs have foreign exchange risk exposure that is smaller than the exposure of the large U.S.money-center banks.

The spot foreign exchange market is where forward and futures contracts and swap agreements are transacted.

The greater the volatility of foreign exchange rates given any net exposure position,the greater the fluctuations in value of the foreign exchange portfolio.

U.S.pension funds invest approximately one percent (1%)of their portfolios in foreign securities.

A positive net exposure position in FX implies that the FI is

A positive net exposure position in FX implies the FI is net short in a currency.

Forward contracts in FX are typically written for a period of one-,three-,or six-months.

An indirect quote of a foreign currency indicates the amount of foreign currency received for one unit of the domestic currency.

U.S.life insurance companies generally hold less than ten percent (10%)of their portfolios in foreign securities.

Which of the following FX trading activities is used to hedge FX risk?

U.S.pension funds hold approximately _______ of their assets in foreign securities,while British pension funds have traditionally invested over _______ of their funds in foreign assets.

FX risk exposure of an FI essentially relates to which of the following activities?

The decrease in European FX volatility during the last decade has occurred because of

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

U.S.pension funds hold approximately _ of their assets in foreign securities,while British pension funds have traditionally invested over _ of their funds in foreign assets.