FRL3151 Exam 2

- Less than, less than - Greater than, greater than

According to interest rate parity, if the interest rate in the US is ____than the interest rate in a foreign country, the forward rate between the two currencies will be _____the spot rate, by an approximately equal amount.

Direct quote

An exchange rate quote that gives the cost of one unit of foreign currency in U.S. dollar is called a

Hedging

As firms and investors increase their volume of transactions in foreign currencies,____ foreign exchange risk has become a more important activity

commercial banks ; non-bank currency dealers

Spot transactions can be conducted through ___ or ___.

Interest rate parity theorem

The theory that asserts that the return an investor would earn on an investment in their home country is the same as the return they would earn on a hedged foreign investment

Purchasing power parity

The theory that describes how the exchange rate between two countries will adjust due to differences in inflation between the two countries is called

Dollarization

The use of a foreign currency in parallel to or instead of the local currency if referred to as

Depreciation and devaluation

The____of a country's currency means that the country's goods are less expensive for foreign buyers through foreign goods are more expensive for domestic buyers

- revaluation - appreciation

The____of a country's currency means that the country's goods are more expensive for foreign buyers, though foreign goods are more cheaper for domestic buyers

- Low repel; decreases - High attract increases

_____ interest rate in a country____capital which____demand for that country's currency

forward contract

a financial institution that wishes to hedge a foreign currency mismatch on its balance sheet without changing its assets or liabilities could use a ___.

Off balance sheet

a foreign currency forward contract is a(n) ___ hedge.

the best prices available; multiple dealers

electronic trading platforms automatically provide traders with ___ gathered from ___.

Hedges

Managers use____to manage their exposure to currency risk, not to eliminate it

Net exposure

A firm could avoid exposure to exchange rate risk in a currency by reducing its net exposure in that currency to zero.

Depreciates; appreciates

A firm that is net short in a currency will profit if that currency____against the dollar, and will lose if that currency____against the dollar.

FX bought; FX sold

A firm's "net FX bought' in a currency is equal to its ____minus its ___in that currency/

Net exposure

A firm's overall exposure to foreign exchange risk in any currency can be measured by its ___ in that currency.

Net Short

A negative net exposure to a foreign currency implies that a firm is overall ___ in that currency.

Net long

A positive net exposure to a foreign currency implies that a firm is overall_____ in that currency

Depreciate

A prediction of the international fisher effect is that the currency of a country with higher interest rates will depreciate relative to the currency of a country with lower interest rates

Depreciate

A prediction of the international fisher effect is that the currency of a country with higher interest rates will____ relative to the currency of a country with lower interest rates

U.S. dollar

Before the advent of cross currency exchange rates, most cross currency trades had to go through the ___.

Appreciated, U.S. treasury securities

During the start of the financial crisis, the dollar sharply____against most other currencies as global investors sought a safe haven investment in

- In support of customers' positions in foreign real and financial investments - In support of international commercial trade transactions

Financial instiutions engage in two types of foreign exchange transactions in which they act as an agent for one of their customers for a fee,but take on no risk themselves. They are FX transactions

asset, liability, maturity.

Financial instutions can implement an on balance sheet hedge by matching a foreign-currency denominated____with a ____denominated in the same currency, and having the same ___

Deposit rate, loan rates

Financial instutions could use an on balance sheet hedging strategy to lock-in the larger spread between ____and_____that may be obtainable in forign markets

- Depreciates; loses - Appreciates; gains

If foreign currency___ between the time an investor buys it and the time the investor sells it, the investor ___.

Fixed

If two countries both fixed the value of a unit of their currency to a quantity of gold, then the exchange rate between those two currencies was

Hong Kong

In 2009, china began a program of internationalizing its currency by allowing the yuan to be traded by banks In

widening the yuan's trading band against the dollar

In 2012 China allowed the yuan to fluctuate much more broadly by

be fixed

The bredwood Woods agreement called for currencies to ___ relative to one another within narrow boundaries with the help of government intervention.

spot rate

The current exchange rate that is used for the immediate exchange of currencies is the __.

22; the European Union

The euro is the single common currency of ___ countries in ____.

Forward rate

The exchange rate that is written into a forward contract is called the

24 hours a day

The fact that the major money centers are globally distributed makes it possible to trade foreign exchange

4.8 trillion

The foreign exchange market is the largest of all financial markets, with daily turnover exceeding ___ per day in 2015

London; New York

The largest foreign exchange trading center is ___ followed by ____.

Foreign exchange risk

The need to periodically exchange cash flows in one currency to another currency exposes the global firm to

Difference in the inflation rates in the two countries

The purchasing power parity theorem states that the change in the spot exchange rate between two countries' currencies is proportional to the

Change relative to the dollar

The risk involved with a spot foreign exchange transaction is that the value of the foreign currency may____ over the holding period

flight to quality

The selling of risky securities by investors and their replacement with safe U.S. treasury securities has been referred to as a