Question 1

Most foreign exchange transactions are for

Accepted Answer

A) intervention by central banks. 
B) interbank trades between international banks or nonbank dealers. 
C) retail trade. 
D) purchase of hard currencies.

Question 2

The current spot exchange rate is $1.50/€ and the three-month forward rate is $1.55/€.Based on your analysis of the exchange rate,you are confident that the spot exchange rate will be $1.62/€ in three months.Assume that you would like to buy or sell €1,000,000.What actions do you need to take to speculate in the forward market? What is the expected dollar profit from speculation?

Accepted Answer

A) Sell €1,000,000 forward for $1.50/€. 
B) Buy €1,000,000 forward for $1.55/€. 
C) Wait three months, if your forecast is correct buy €1,000,000 at $1.62/€. 
D) Buy €1,000,000 today at $1.50/€; wait three months, if your forecast is correct sell €1,000,000 at $1.62/€.

Question 3

In conversation,interbank foreign exchange traders use a shorthand abbreviation in expressing spot currency quotations.Consider a $/£ bid-ask quote of $1.9072-$1.9077.The currency dealer would likely quote that as _____.

Accepted Answer

A) 72-77 
B) 77-72 
C) 5 points 
D) None of the above

Question 4

The current spot exchange rate is $1.45/€ and the three-month forward rate is $1.55/€.Based upon your economic forecast,you are pretty confident that the spot exchange rate will be $1.50/€ in three months.Assume that you would like to buy or sell €100,000.What actions would you take to speculate in the forward market? How much will you make if your prediction is correct?

Accepted Answer

A) Take a short position in a forward.If you're right you will make $15,000. 
B) Take a long position in a forward contract on euro.If you're right you will make $5,000. 
C) Take a short position in a forward contract on euro.If you're right you will make $5,000. 
D) Take a long position in a forward contract on euro.If you're right you will make $15,000.

Question 5

An exchange-traded fund (ETF)is

Accepted Answer

A) the same thing as a mutual fund. 
B) a portfolio of financial assets in which shares representing fractional ownership of the fund are sold and redeemed by the fund sponsor. 
C) a portfolio of financial assets in which shares representing fractional ownership of the fund trade on an organized exchange. 
D) none of the above.

Question 6

The forward price

Accepted Answer

A) may be higher than the spot price. 
B) may be the same as the spot price. 
C) may be less than the spot price. 
D) all of the above

Question 7

Market microstructure refers to

Accepted Answer

A) the basic mechanics of how a marketplace operates. 
B) the basics of how to make small (micro-sized) currency trades. 
C) how macroeconomic variables such as GDP and inflation are determined. 
D) none of the above

Question 8

Including the transactions costs of the bid-ask spread,the euro-pound cross exchange rate for a customer who wants to sell euro and buy pounds can be computed as

Accepted Answer

A) Sb(£/€) = Sb($/€) * Sb(£/$) 
B) Sa(€/£) = Sa(€/$) * Sa($/£) 
C) Sb(€/£) = Sb($/€) * $\frac { 1 } { S ^ { a } ( £ / \$ ) }$ 
D) All of the above

Question 9

A dealer in pounds who thinks that the exchange rate is about to increase in volatility

Accepted Answer

A) may want to widen his bid-ask spread. 
B) may want to decrease his bid-ask spread. 
C) may want to lower his ask price. 
D) none of the above.

Question 10

You are a U.S.-based treasurer with $1,000,000 to invest.The dollar-euro exchange rate is quoted as $1.20 = €1.00 and the dollar-pound exchange rate is quoted at $1.80 = £1.00.If a bank quotes you a cross rate of £1.00 = €1.50 how much money can an astute trader make?

Accepted Answer

A) No arbitrage is possible 
B) $1,160,000 
C) $500,000 
D) $250,000

Question 11

When a currency trades at a discount in the forward market

Accepted Answer

A) the forward rate is less than the spot rate. 
B) the forward rate is more than the spot rate. 
C) the forward exchange rate is less than one dollar . 
D) the exchange rate is less than it was yesterday.

Question 12

The current exchange rate is £1.00 = $2.00.Compute the correct balances in Bank A's correspondent account(s)with bank B if a currency trader employed at Bank A buys £45,000 from a currency trader at bank B for $90,000 using its correspondent relationship with Bank B.

Accepted Answer

A) Bank A's dollar-denominated account at B will fall by $90,000. 
B) Bank B's dollar-denominated account at A will rise by $90,000. 
C) Bank A's pound-denominated account at B will rise by £45,000. 
D) Bank B's pound-denominated account at A will fall by £45,000. 
E) All of the above are correct

Question 13

Function and Structure of the FX Market 
-Using the table,what is the Canadian dollar-euro spot cross-exchange rate?

Accepted Answer

The answer of Function and Structure of the FX Market...

Question 14

You are a U.S.-based treasurer with $1,000,000 to invest.The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00.If a bank quotes you a cross rate of £1.00 = €1.20 how can you make money?

Accepted Answer

A) No arbitrage is possible 
B) Buy euro at $1.60/€, buy £ at €1.20/£, sell £ at $2/£ 
C) Buy £ $2/£, buy € at €1.20/£, sell € at $1.60/€

Question 15

What is the BID cross-exchange rate for Swiss Francs priced in euro? Hint: Find the price that a currency dealer will pay in euro to buy Swiss francs.

Accepted Answer

A) €0.5386/CHF 
B) €0.5389/CHF 
C) €0.5463/CHF 
D) €0.5466/CHF

Question 16

Suppose that the current exchange rate is £1.00 = $2.00.The indirect quote,from the U.S.perspective is

Accepted Answer

A) £1.00 = $2.00. 
B) £1.00 = $0.50. 
C) £0.50 = $1.00. 
D) None of the above

Question 17

The Bid price

Accepted Answer

A) is the price that the dealer has just paid for something, his historical cost of the most recent trade. 
B) is the price that a dealer stands ready to pay. 
C) refers only to auctions like eBay, not over the counter transactions with dealers. 
D) is the price that a dealer stands ready to sell at.

Question 18

The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€.Based on your analysis of the exchange rate,you are confident that the spot exchange rate will be $1.62/€ in three months.Assume that you would like to buy or sell €1,000,000.What actions do you need to take to speculate in the forward market? What is the expected dollar profit from speculation?

Accepted Answer

A) Sell €1,000,000 forward for $1.50/€. 
B) Buy €1,000,000 forward for $1.50/€. 
C) Wait three months, if your forecast is correct buy €1,000,000 at $1.52/€. 
D) Buy €1,000,000 today at $1.55/€; wait three months, if your forecast is correct sell €1,000,000 at $1.62/€.

Question 19

Bank dealers in conversations among themselves use a shorthand notation to quote bid and ask forward prices in terms of forward points.This is convenient because

Accepted Answer

A) forward points may change faster than spot and forward quotes. 
B) forward points may remain constant for long periods of time, even if the spot rates change frequently. 
C) traders who are looking for violations of covered interest arbitrage are less interested in the actual spot and forward exchange rates, but are interested in the premium or discount differential measured in forward points. 
D) both c and d are correct

Question 20

Which of the following are correct?

Accepted Answer

A)  $F _ { N } ( j / k ) = \frac { F _ { N } ( \$ / k ) } { F _ { N } ( \$ / j ) }$ 
B)  $F _ { N } ( k / j ) = \frac { F _ { N } ( j / \$ ) } { F _ { N } ( k / \$ ) }$ 
C)  $F _ { N } ( k / j ) = \frac { F _ { N } ( \$ / j ) } { F _ { N } ( \$ / k ) }$ 
D) All of the above are correct

Exam 5: The Market for Foreign Exchange