FIN410 Chapter 5 The Foreign Exchange Market

3) The following is an example of an American term foreign exchange quote: A) $20/£ B) €0.85/$ C) ¥100/€ D) none of the above

A) $20/£

5) ________ seek to profit from trading in the market itself rather than having the foreign exchange transaction being incidental to the execution of a commercial or investment transaction. A) Speculators and arbitrageurs B) Foreign exchange brokers C) Central banks D) Treasuries

A) Speculators and arbitrageurs

6) The ________ is a derivative forward contract that was created in the 1990s. It has the same characteristics and documentation requirements as traditional forward contracts except that they are only settled in U.S. dollars and the foreign currency involved in the transaction is not delivered. A) nondeliverable forward B) dollar only forward C) virtual forward D) internet forward

A) nondeliverable forward

2) A ________ transaction in the foreign exchange market requires an almost immediate delivery (typically within two days) of foreign exchange. A) spot B) forward C) futures D) none of the above

A) spot

6) If the direct quote for a U.S. investor for British pounds is $1.43/£, then the indirect quote for the U.S. investor would be ________ and the direct quote for the British investor would be ________. A) £0.699/$; £0.699/$ B) $0.699/£; £0.699/$ C) £1.43/£; £0.699/$ D) £0.699/$; $1.43/£

A) £0.699/$; £0.699/$

7) ________ make money on currency exchanges by the difference between the ________ price, or the price they offer to pay, and the ________ price, or the price at which they offer to sell the currency. A) Dealers; ask; bid B) Dealers; bid; ask C) Brokers; ask; bid D) Brokers; bid; ask

B) Dealers; bid; ask

8) ________ are agents who facilitate trading between dealers without themselves becoming principals in the transaction. A) Central banks B) Foreign exchange brokers C) Arbitrageurs D) Foreign exchange dealers

B) Foreign exchange brokers

7) Foreign exchange ________ earn a profit by a bid-ask spread on currencies they purchase and sell. Foreign exchange ________, on the other hand, earn a profit by bringing together buyers and sellers of foreign currencies and earning a commission on each sale and purchase. A) central banks; treasuries B) dealers; brokers C) brokers; dealers D) speculators; arbitrageurs

B) dealers; brokers

3) A ________ transaction in the foreign exchange market requires delivery of foreign exchange at some future date. A) spot B) forward C) swap D) currency

B) forward

7) Which of the following is NOT true regarding nondeliverable forward (NDF) contracts? A) NDFs are used primarily for emerging market currencies. B) Pricing of NDFs reflects basic interest rate differentials plus an additional premium charged for dollar settlement. C) NDFs can only be traded by central banks. D) All of the above are true.

C) NDFs can only be traded by central banks

1) ________ are NOT one of the three categories reported for foreign exchange. A) Spot transactions B) Swap transactions C) Strip transactions D) Futures transactions

C) Strip transactions

3) The ________ is the mechanism by which participants transfer purchasing power between countries, obtain or provide credit for international trade transactions, and minimize exposure to the risks of exchange rate changes. A) futures market B) federal open market C) foreign exchange market D) LIBOR

C) foreign exchange market

2) A/An ________ is an agreement between a buyer and seller that a fixed amount of one currency will be delivered at a specified rate for some other currency. A) Eurodollar transaction B) import/export exchange C) foreign exchange transaction D) interbank market transaction

C) foreign exchange transaction

1) A foreign exchange ________ is the price of one currency expressed in terms of another currency. A foreign exchange ________ is a willingness to buy or sell at the announced rate. A) quote; rate B) quote; quote C) rate; quote D) rate; rate

C) rate; quote

4) A forward contract to deliver British pounds for U.S. dollars could be described either as ________ or ________. A) buying dollars forward; buying pounds forward B) selling pounds forward; selling dollars forward C) selling pounds forward; buying dollars forward D) selling dollars forward; buying pounds forward

C) selling pounds forward; buying dollars forward

6) In the foreign exchange market, ________ seek all of their profit from exchange rate changes while ________ seek to profit from simultaneous exchange rate differences in different markets. A) wholesalers; retailers B) central banks; treasuries C) speculators; arbitrageurs D) dealers; brokers

C) speculators; arbitrageurs

8) A ________ transaction in the interbank market is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates. A) spot B) forward-forward C) swap D) futures

C) swap

4) From the viewpoint of a British investor, which of the following would be a direct quote in the foreign exchange market? A) SF2.40/£ B) $1.50/£ C) £0.55/€ D) $0.90/€

C) £0.55/€

5) A common type of swap transaction in the foreign exchange market is the ________ where the dealer buys the currency in the spot market and sells the same amount back to the same bank in the forward market. A) "forward against spot" B) "forspot" C) "repurchase agreement" D) "spot against forward"

D) "spot against forward"

1) Which of the following is NOT true regarding the market for foreign exchange? A) The market provides the physical and institutional structure through which the money of one country is exchanged for another. B) The rate of exchange is determined in the market. C) Foreign exchange transactions are physically completed in the foreign exchange market. D) All of the above are true.

D) All of the above are true.

4) Which of the following is NOT a motivation identified by the authors as a function of the foreign exchange market? A) the transfer of purchasing power between countries B) obtaining or providing credit for international trade transactions C) minimizing the risks of exchange rate changes D) All of the above were identified as functions of the foreign exchange market.

D) All of the above were identified as functions of the foreign exchange market

2) Most foreign exchange transactions are through the U.S. dollar. If the transaction is expressed as the foreign currency per dollar this known as ________ whereas ________ are expressed as dollars per foreign unit. A) European terms; indirect B) American terms; direct C) American terms; European terms D) European terms; American terms

D) European terms; American terms

4) Which of the following may be participants in the foreign exchange markets? A) bank and nonbank foreign exchange dealers B) central banks and treasuries C) speculators and arbitrageurs D) all of the above

D) all of the above

5) A/an ________ quote in the United States would be foreign units per dollar, while a/an ________ quote would be in dollars per foreign currency unit. A) direct; direct B) direct; indirect C) indirect; indirect D) indirect; direct

D) indirect; direct

15) The European and American terms for foreign currency exchange are square roots of one another.

False

16) Nondeliverable Forwards were originally envisioned as a method of currency speculation, but it is now estimated that 70% of NDFs are trading for hedging purposes.

False

17) A confusing "quirk" of international exchange rates occurs when calculating the percentage change in spot rates from one period to another. The percent change in the spot rate from one period to another when quoted using foreign currency terms is always greater than the percent changes quoted when using home currency terms.

False

18) NDFs are traded and settled inside the country of the subject currency, and therefore are within the control of the country's government.

False

15) A spot transaction in the interbank market for foreign exchange would typically involve a two-day delay in the actual delivery of the currencies, while such a transaction between a bank and its commercial customer would not necessarily involve a two-day wait.

True

16) When the cross rate for currencies offered by two banks differs from the exchange rate offered by a third bank, a triangular arbitrage opportunity exists.

True

17) In general, NDF markets normally develop for country currencies having large cross-border capital movements, but still subject to convertibility restrictions.

True

18) The most commonly quoted currency exchange is that between the U.S. dollar and the European euro. For example, a quotation of EUR/USD 1.2174. The euro is the base currency and the dollar the price currency.

True

19) A contract to deliver dollars for euros in six months is both "buying euros forward for dollars" and "selling dollars forward for euros."

True

19) Since in the U.S. the home currency is the dollar and the foreign currency is the euro, in New York USD 1.2174 = EUR 1.00 would be a direct quote on the euro and an indirect quote on the dollar.

True

5) Business firms in countries with exchange controls, for example, China (mainland), often must surrender foreign exchange earned from exports to the central bank at the daily fixing price.

True