Chapter 14

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

46. The FI is acting as a hedger when it 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 a currency. E. advises customers on their international business.

A. buys or sells currency to balance the FI's net exposure.

42. A positive net exposure position in FX implies that the FI is A. net long in a currency and exposed to depreciation of the foreign currency. B. net short in a currency and exposed to depreciation of the foreign currency. C. net long in a currency and exposed to appreciation of the foreign currency. D. net short in a currency and exposed to appreciation of the foreign currency. E. neither long nor short in a currency.

A. net long in a currency and exposed to depreciation of the foreign currency.

58. Most profits or losses on foreign trading for FIs come from 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.

40. The market in which foreign currency is traded for immediate delivery is the A. spot market. B. forward market. C. futures market. D. currency swap market. E. London capital market.

A. spot market.

52. The decline in European FX volatility during the last decade has been offset in part by A. the greater volatilities of Asian currencies. B. a reduction in inflation rates in European countries. C. the fixing of exchange rates among European countries. D. the replacement of domestic currencies with the euro. E. None of the above.

A. the greater volatilities of Asian currencies.

39. Which of the following is NOT a source of foreign exchange risk? A. Trading foreign currencies. B. Making domestic-currency loans to foreign corporations. C. Buying foreign-issued securities. D. Issuing foreign currency-denominated debt. E. Making foreign currency loans.

B. Making domestic-currency loans to foreign corporations.

59. Deviations from the international currency parity relationships may occur because of 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.

B. barriers to cross-border financial flows.

50. The FI is acting as a speculator when it 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 a currency. E. advises customers on their international business.

B. takes a nonzero net position in a particular currency.

53. If foreign currency exchange rates are highly positively correlated, how can a FI reduce its exchange rate risk exposure? A. By taking net long positions in all currencies. B. By taking net short positions in all currencies. C. By taking opposing net short and net long positions in different currencies. D. By maximizing net FX exposure in each currency, independently. E. By minimizing net FX exposure in each currency, independently.

C. By taking opposing net short and net long positions in different currencies.

54. Which of the following FX trading activities is used to hedge FX risk? 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.

C. The purchase and sale of foreign currencies for the purpose of offsetting customer exposure in any given currency.

61. Which of the following is an example of interest rate parity? A. The Japanese yen trades at the same exchange rate as the Swiss franc. B. U.S. dollar rates on one year U.S. Treasury securities equal 1 year Japanese government bond rates. C. U.S. dollar rates on one year U.S. Treasury securities equal 1 year Japanese government bond rates, restated in dollars. D. British pound 2 year forward rates equal 2 year Swiss franc forward rates. E. All currency exchange rates and interest rates move in unison.

C. U.S. dollar rates on one year U.S. Treasury securities equal 1 year Japanese government bond rates, restated in dollars.

62. According to purchasing power parity (PPP), foreign currency exchange rates between two countries adjust to reflect changes in each country's A. unemployment rates. B. export competitiveness. C. inflation rates. D. foreign exchange reserves. E. reserve requirements.

C. inflation rates.

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

C. processes an exporter's transaction in a foreign currency.

44. The reasons nondepository FIs have less FX risk than major money center banks include A. Smaller asset sizes. B. Prudent person concerns. C. Regulations. D. All of the above. E. Answers A and C only.

D. All of the above.

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

D. Purchase and sale of foreign currencies for speculative purposes through forecasting or anticipating future movements in FX rates.

48. When purchasing and selling foreign currencies to allow customers to take positions in foreign real and financial investments, the FI A. acts defensively as a hedger. B. acts aggressively as a speculator. C. assumes the FX risk itself. D. acts as an agent. E. acts as a market maker.

D. acts as an agent.

43. A negative net exposure position in FX implies that the FI is A. net long in a currency and exposed to depreciation of the foreign currency. B. net short in a currency and exposed to depreciation of the foreign currency. C. net long in a currency and exposed to appreciation of the foreign currency. D. net short in a currency and exposed to appreciation of the foreign currency. E. neither long nor short in a currency.

D. net short in a currency and exposed to appreciation of the foreign currency.

60. The nominal interest rate is equal to the A. real interest rate minus the inflation premium. B. real interest rate minus the trailing inflation rate. C. real interest rate plus the expected interest rate increase. D. real interest rate plus the expected inflation rate. E. real interest rate plus the interest rate volatility.

D. real interest rate plus the expected inflation rate.

49. Which of the following factors help explain the decline in FX trading in the early years of this century? A. Introduction of the euro. B. Consolidation in the banking industry. C. Growth of electronic brokering. D. Mergers in the corporate sector. E. All of the above.

E. All of the above.

51. The decrease in European FX volatility during the last decade has occurred because of A. the stabilizing force of the euro. B. reduction in inflation rates in European countries. C. the reduced volatility in many emerging-market countries. D. the greater volatilities of Asian currencies. E. Answers A and B only.

E. Answers A and B only.

56. In which of the following FX trading activities does the FI not assume FX risk? 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. Answers B and D only.

E. Answers B and D only.