Exam 13: Foreign Exchange Risk

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

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

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

Which of the following factors help explain the decline in FX trading in the early years of this century?

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

State regulation of the U.S. insurance industry has an effect on the ability of insurance companies to invest in foreign securities.

Profits in foreign exchange trading have grown despite the decreased volatility in FX rates in European countries.

The nominal interest rate is equal to the

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/×. The spot rate on yen is $0.60/×. -What must be the forward exchange rate to eliminate the preference for the yen loans?

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

The market in which foreign currency is traded for future delivery is the forward foreign exchange market.

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

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

As of 2012, which of the following FX "markets" is the largest?

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

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

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. -The weighted return on the bank's portfolio of investments would be

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

Interest rate parity implies that the discounted spread between interest rates in two currencies should equal the percentage spread between forward and spot exchange rates.

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