IF4

27 Suppose you observe the following exchange rates: €1 = $1.60; £1 = $2.00. Calculate the euro-pound exchange rate. a) €1.3333 = £1.00 b) £1.3333 = €1.00 c) €3.00 = £1 d) €1.25 = £1.00

D

31 What is the ASK cross-exchange rate for Swiss Francs priced in euro? Hint: Find the price that a currency dealer will take in euro to sell Swiss francs. a) €0.5386/CHF b) €0.5389/CHF c) €0.5463/CHF d) €0.5466/CHF

D

36 The forward price 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

D

37 Relative to the spot price the forward price will be a) usually less than the spot price. b) usually more than the spot price. c) usually equal to the spot price. d) usually less than or more than the spot price more often than it is equal to the spot price.

D

44 When a currency trades at a premium in the forward market a) the exchange rate is more than one dollar (e.g. €1.00 = $1.28). b) the exchange rate is less than one dollar. c) the forward rate is less than the spot rate. d) the forward rate is more than the spot rate.

D

14 Suppose that the current exchange rate is €1.00 = $1.60. The indirect quote, from the U.S. perspective is a) €1.00 = $1.60. b) €0.6250 = $1.00. c) €1.60 = $1.00. d) None of the above

B

15 Indirect exchange rate quotations from the U.S. perspective are a) the price of one unit of the foreign currency in terms of the U.S. dollar. b) the price of one U.S. dollar in the foreign currency.

B

46 Swap transactions a) involve the simultaneous sale (or purchase) of spot foreign exchange against a forward purchase (or sale) of approximately an equal amount of the foreign currency. b) account for about half of Interbank FX trading. c) involve trades of one foreign currency for another without going through the U.S. dollar. d) all of the above

A

7 The standard size foreign exchange transactions are for a) $10 million U.S. b) $1 million U.S. c) €1 million.

A

10 The current exchange rate is €1.00 = $1.50. Compute the correct balances in Bank A's correspondent account(s) with bank B if a currency trader employed at Bank A buys €100,000 from a currency trader at bank B for $150,000 using its correspondent relationship with Bank B. a) Bank A's dollar-denominated account at B will fall by $150,000. b) Bank B's dollar-denominated account at A will fall by $150,000. c) Bank A's pound-denominated account at B will fall by €100,000. d) Bank B's pound-denominated account at A will rise by €100,000.

A

11 The spot market a) involves the almost-immediate purchase or sale of foreign exchange. b) involves the sale of futures, forwards, and options on foreign exchange. c) takes place only on the floor of a physical exchange. d) all of the above.

A

13 Suppose that the current exchange rate is €0.80 = $1.00. The direct quote, from the U.S. perspective is a) €1.00 = $1.25. b) €0.80 = $1.00. c) £1.00 = $1.80. d) None of the above

A

2 The foreign exchange market closes a) Never. b) 4:00 p.m. EST (New York time). c) 4:00 p.m. GMT (London time). d) 4:00 p.m. (Tokyo time).

A

20 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 _____. a) 72-77 b) 77-72 c) 5 points d) None of the above

A

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

A

23 The dollar-euro exchange rate is $1.25 = €1.00 and the dollar-yen exchange rate is ¥100 = $1.00. What is the euro-yen cross rate? a) ¥125 = €1.00 b) ¥1.00 = €125 c) ¥1.00 = €0.80 d) None of the above

A

24 Suppose you observe the following exchange rates: €1 = $1.25; £1 = $2.00. Calculate the euro-pound exchange rate. a) €1 = £1.60 b) €1 = £0.625 c) €2.50 = £1 d) €1 = £2.50

A

26 Suppose you observe the following exchange rates: €1 = $1.50; £1 = $2.00. Calculate the euro-pound exchange rate. a) €1.3333 = £1.00 b) £1.3333 = €1.00 c) €3.00 = £1 d) €1.25 = £1.00

A

28 Suppose you observe the following exchange rates: €1 = $1.50; ¥120 = $1.00. Calculate the euro-pound exchange rate. a) ¥133.33 = €1.00 b) €1.00 = ¥180 c) ¥80 = €1.00 d) €1 = £2.50

A

29 Suppose you observe the following exchange rates: €1 = $1.45; £1 = $1.90. Calculate the euro-pound exchange rate. a) €1.3103 = £1.00 b) £1.3333 = €1.00 c) €2.00 = £1 d) €3 = £1

A

30 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. a) €0.5386/CHF b) €0.5389/CHF c) €0.5463/CHF d) €0.5466/CHF

A

32 Find the no-arbitrage cross exchange rate. The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-yen exchange rate is quoted at $1.00 = ¥120. a) ¥192/€1.00 b) €1.92/¥100 c) €1.25/¥1.00 d) €1.00/¥1.92

A

33 Suppose a bank customer with €1,000,000 wishes to trade out of euro and into Japanese yen. The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-yen exchange rate is quoted at $1.00 = ¥120. How many yen will the customer get? a) ¥192,000,000 b) ¥5,208,333 c) ¥75,000,000 d) ¥5,208.33

A

34 Market microstructure refers to 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

A

4 Most interbank trades are a) speculative or arbitrage transactions. b) simple order processing for the retail client. c) overnight loans from one bank to another. d) brokered by dealers.

A

40 The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€. You enter into a short position on €1,000. At maturity, the spot exchange rate is $1.60/€. How much have you made or lost? a) Lost $100 b) Made €100 c) Lost $50 d) Made $150

A

41 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 $1.52/€ 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? a) Take a long position in a forward contract on €1,000,000 at $1.50/€. b) Take a short position in a forward contract on €1,000,000 at $1.50/€. c) Buy euro today at the spot rate, sell them forward. d) Sell euro today at the spot rate, buy them forward.

A

45 When a currency trades at a discount in the forward market 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 (e.g. €1.00 = $0.928). d) the exchange rate is less than it was yesterday.

A

8 Consider a U.S. importer desiring to purchase merchandise from a Dutch exporter invoiced in euros, at a cost of €512,100. The U.S. importer will contact his U.S. bank (where of course he has an account denominated in U.S. dollars) and inquire about the exchange rate, which the bank quotes as €1.0242/$1.00. The importer accepts this price, so his bank will ____________the importer's account in the amount of ____________. a) Debit, $500,000 b) Credit, €512,100 c) Credit, $500,000 d) Debit, €512,100

A

16 The Bid price 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.

B

21 In the Interbank market, the standard size of a trade among large banks in the major currencies is a) for the U.S.-dollar equivalent of $10,000,000,000. b) for the U.S.-dollar equivalent of $10,000,000. c) for the U.S.-dollar equivalent of $100,000. d) for the U.S.-dollar equivalent of $1,000.

B

3 Most foreign exchange transactions are for a) intervention by central banks. b) interbank trades between international banks or nonbank dealers. c) retail trade. d) purchase of hard currencies.

B

35 A recent survey of U.S. foreign exchange traders measured traders perceptions about how fast news events that cause movements in exchange rates actually change the exchange rate. The survey respondents claim that the bulk of the adjustment to economic announcements regarding unemployment, trade deficits, inflation, GDP, and the Federal funds rate takes place within a) ten seconds. b) one minute. c) five minutes. d) one hour.

B

12 Using the table shown, what is the most current spot exchange rate shown for British pounds? Use a direct quote from a U.S. perspective. a) $1.61 = £1.00 b) $1.60 = £1.00 c) $1.00 = £0.625 d) $1.72 = £1.00

B

38 The forward market a) involves contracting today for the future purchase of sale of foreign exchange at the spot rate that will prevail at the maturity of the contract. b) involves contracting today for the future purchase of sale of foreign exchange at a price agreed upon today. c) involves contracting today for the right but not obligation to the future purchase of sale of foreign exchange at a price agreed upon today. d) none of the above

B

39 If one has agreed to buy foreign exchange forward a) you have a short position in the forward contract. b) you have a long position in the forward contract. c) until the exchange rate moves, you haven't made money, so you're neither short nor long. d) you have a long position in the spot market.

B

42 Consider a trader who takes a long position in a six-month forward contract on the euro. The forward rate is $1.75 = €1.00; the contract size is €62,500. At the maturity of the contract the spot exchange rate is $1.65 = €1.00. a) The trader has lost $625. b) The trader has lost $6,250. c) The trader has made $6,250. d) The trader has lost $66,287.88

B

43 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? 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/€.

B

1 The world's largest foreign exchange trading center is a) New York. b) Tokyo. c) London. d) Hong Kong.

C

18 If the $/€ bid and ask prices are $1.50/€ and $1.51/€, respectively, the corresponding €/$ bid and ask prices are a) €0.6667 and €0.6623. b) $1.51 and $1.50. c) €0.6623 and €0.6667. d) cannot be determined with the information given.

C

19 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 "big figure", assumed to be known to all traders is _____. a) 1.9077 b) 1 c) 1.90 d) 77

C

25 The AUD/$ spot exchange rate is AUD1.60/$ and the SF/$ is SF1.25/$. The AUD/SF cross exchange rate is _____. a) 0.7813 b) 2.0000 c) 1.2800 d) 0.3500

C

47 An exchange-traded fund (ETF) is 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.

C

48 The largest and most active financial market in the world is a) the Fleet Street Exchange in London. b) the NYSE in New York. c) the FX market. d) none of the above.

C

5 At the wholesale level a) most trading takes place OTC between individuals on the floor of the exchange. b) most trading takes place over the phone. c) most trading flows over Reuters and EBS platforms. d) most trading flows through specialized "broking" firms.

C

6 Intervention in the foreign exchange market is the process of a) a central bank requiring the commercial banks of that country to trade at a set price level. b) commercial banks in different countries coordinating efforts in order to stabilize one or more currencies. c) a central bank buying or selling its currency in order to influence its value. d) the government of a country prohibiting transactions in one or more currencies.

C

17 Suppose the spot ask exchange rate, Sa($|£), is $1.90 = £1.00 and the spot bid exchange rate, Sb($|£), is $1.89 = £1.00. If you were to buy $10,000,000 worth of British pounds and then sell them five minutes later, how much of your $10,000,000 would be "eaten" by the bid-ask spread? a) $1,000,000 b) $52,910.05 c) $100,000 d) $52,631.58

D

9 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. 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

E