FINA 450 Chapter 5

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/$; £0.699/$

It is characteristic of foreign exchange dealers to: A) bring buyers and sellers of currencies together but never to buy and hold an inventory of currency for resale. B) act as market makers, willing to buy and sell the currencies in which they specialize. C) trade only with clients in the retail market and never operate in the wholesale market for foreign exchange. D) All of the above are characteristics of foreign exchange dealers.

B) Act as market makers, willing to buy and sell the currencies in which they specialize

_______ 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

___________ 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

A ________ transaction in the foreign exchange market requires delivery of foreign exchange at some future date

B) Forward

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

B) dealers; brokers

Given the following exchange rates, which of the multiple-choice choices represents a potentially profitable intermarket arbitrage opportunity? ¥129.87/$ €1.1226/$ €0.00864/¥ A) ¥115.69/€ B) ¥114.96/€ C) $0.8908/€ D) $0.0077/¥

B) ¥114.96/€

Daily trading volume in the foreign exchange market was about ________ per ________ in 2013. A) $5,300 billion; month B) $3,300 billion; month C) $5,300 billion; day D) $3,300 billion; day

C) $5,300 billion; day

The __________ is the 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

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

The authors identify two tiers of foreign exchange markets: A) bank and nonbank foreign exchange. B) commercial and investment transactions. C) interbank and client markets. D) client and retail market.

C) Interbank and client markets

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

A forward contract to deliver British pound 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

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

C) Speculators and arbitrageurs

________ 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

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

The top three currency pairs traded with the U.S. dollar are: A) U.K. pound, Chinese Yuan, Japanese yen. B) Swiss franc, euro, Japanese yen. C) U.K. pound, euro, Japanese yen. D) euro, Chinese Yuan, Japanese yen.

C) U.K. pound, euro, Japanese yen.

The four currencies that constitute about 80% of all foreign exchange trading are: A) U.K pound, Chinese yuan, euro, and Japanese yen. B) U.S. dollar, euro, Chinese yuan, and U.K. pound. C) U.S. dollar, Japanese yen, euro, and U.K. pound. D) U.S. dollar, U.K. pound, yen, and Chinese yuan.

C) U.S. dollar, Japanese yen, euro, and U.K. pound.

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

The greatest volume of daily foreign exchange transactions are: A) spot transactions. B) forward transactions. C) swap transactions. D) This question is inappropriate because the volume of transactions are approximately equal across the three categories above.

C) swap transactions.

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/€

The United Kingdom and United States together make up nearly ________ of daily currency trading. A) 30% B) 40% C) 50% D) 60%

D) 60%

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

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

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.

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

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

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

A ________ transaction in the foreign exchange market requires an almost immediate delivery (typically within two days) of foreign exchange

A) Spot

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/£

While trading in foreign exchange takes place worldwide, the major currency trading centers are located in:

A) London, New York, and Tokyo

The greatest amount of foreign exchange trading takes place in the following three cities: A) New York, London, and Tokyo. B) New York, Singapore, and Zurich. C) London, Frankfurt, and Paris. D) London, Tokyo, and Zurich.

A) New York, London, and Tokyo.

The __________ is a derivative forward contract that was created in the 1990's. It has the same characteristics and documentation requirements as traditional forwards 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

_______ 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