Question 1

The reasons nondepository FIs have less FX risk than major money center banks include

Accepted Answer

A) Smaller asset sizes. 
B) Prudent person concerns. 
C) Regulations. 
D) All of the above. 
E) Answers A and C only. 
A) Smaller asset sizes. 
B) Prudent person concerns. 
C) Regulations. 
D) All of the above. 
E) Answers A and C only.

Question 2

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. 
E) None of the above. 
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. 
E) None of the above.

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

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 5

FX trading income is derived only from profit (or loss) on the FI's speculative currency positions.

Accepted Answer

A) True 
 B)False

Question 6

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 U.K. 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/≤1 at the beginning of the year to $1.50/≤1 at the end of the year, the weighted return on the FI's asset portfolio would be

Accepted Answer

A) 13.29%. 
B) 12.56%. 
C) 16%. 
D) 8.75%. 
E) 9.375%. 
A) 13.29%. 
B) 12.56%. 
C) 16%. 
D) 8.75%. 
E) 9.375%.

Question 7

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. 
E) advises customers on their international business. 
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. 
E) advises customers on their international business.

Question 8

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 9

What is the FI's net exposure in the Japanese yen?

Accepted Answer

A) +30,000. 
B) +40,600. 
C) -19,400. 
D) -40,600. 
E) +20,600. 
A) +30,000. 
B) +40,600. 
C) -19,400. 
D) -40,600. 
E) +20,600.

Question 10

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 11

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

Accepted Answer

A) True 
 B)False

Question 12

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. 
E) None of the above. 
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. 
E) None of the above.

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

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

Question 15

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

Question 16

What is the FI's net exposure in the Swiss franc?

Accepted Answer

A) +2,400. 
B) +400. 
C) -2,800. 
D) -2,400. 
E) +3,200. 
A) +2,400. 
B) +400. 
C) -2,800. 
D) -2,400. 
E) +3,200.

Question 17

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. 
E) The FI has a balanced position in the Japanese yen. 
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. 
E) The FI has a balanced position in the Japanese yen.

Question 18

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 U.K. 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 ≤1.

Accepted Answer

A) ≤6.25 million. 
B) ≤7.875 million. 
C) ≤7.25 million. 
D) ≤6.625 million. 
E) ≤11.26 million. 
A) ≤6.25 million. 
B) ≤7.875 million. 
C) ≤7.25 million. 
D) ≤6.625 million. 
E) ≤11.26 million.

Question 19

Purchasing power parity is based on the difference in productive output (GDP) that exists between two countries.

Accepted Answer

A) True 
 B)False

Question 20

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. 
E) Basel capital regulations. 
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. 
E) Basel capital regulations.

Exam 13: Foreign Exchange Risk

The reasons nondepository FIs have less FX risk than major money center banks include

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

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

FX trading income is derived only from profit (or loss) on the FI's speculative currency positions.

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

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

What is the FI's net exposure in the Japanese yen?

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.

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

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

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

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

Most profits or losses on foreign trading for FIs come from

What is the FI's net exposure in the Swiss franc?

How would you characterize the FI's risk exposure to fluctuations in the yen/dollar exchange rate?

Purchasing power parity is based on the difference in productive output (GDP) that exists between two countries.

Deviations from the international currency parity relationships may occur because of

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

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