Multinational Finance: Foreign Exchange Market

Daily trading volume in the foreign exchange market was about ________ per ________ in 2007.

$3,200 billion; day

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/$; £0.699/$

The following is an example of an American term foreign exchange quote:

A. $20/£

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

A. A nondeliverable forward

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

A. London, NY, Tokyo

________ 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 Arbitragers

A ________ transaction in the foreign exchange market requires an almost immediate delivery of foreign exchange.

A. Spot

The U.S. dollar suddenly changes in value against the euro moving from an exchange rate of $0.8909/euro to $0.08709/euro. Thus, the dollar has ________ by ________.

A. appreciated; 2.30%

41) ________ 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.

B. Dealers; bid; ask

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.

B. Foreign Exchange Transaction

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

B. Forward

Major exceptions to using European terms in foreign exchange include

B. Pounds and Euros

It is characteristic of foreign exchange dealers to

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

Given the following exchange rates, which of the multiple-choice choices represents a potentially profitable intermarket arbitrage opportunity? ¥129.87/$ euro 1.1226/$ euro 0.00864/¥

B. ¥114.96/euro

Given the following pair wise exchange rates, estimate the cross-rate of pounds per euro. $0.8410/£ $1.2223/euro

C) £0.6639/euro

A forward contract to deliver British pounds for U.S. dollars could be described either as ________ or ________.

C. Selling Pounds forward; buying dollars forward

The four currencies that constitute about 80% of all foreign exchange trading are

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.

C. rate; quote

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.

C. speculators; arbitragers

From the viewpoint of a British investor, which of the following would be a direct quote in the foreign exchange market?

C. £0.55/euro

Currency trading increased tremendously between 2004 and 2007 with daily trading volume jumping from $1.9 trillion to $3.2 trillion. Which of the following do experts think was a major driving force behind the increased daily volume?

D. All of the Above

Foreign exchange swaps were larger in 1998 than in 2001. The Bank for International Settlements attributes this to

D. All of the Above

Dealers sometimes use brokers in the foreign exchange market because the dealers desire

D. All of the above

For arbitrage opportunities to be practical,

D. All of the above

Which of the following is NOT a motivation identified by the authors as a function of the foreign exchange market?

D. All of the above

Which of the following is NOT true regarding the market for foreign exchange?

D. All of the above

Which of the following may be participants in the foreign exchange markets?

D. All of the above.

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.

D. European terms; American terms

The foreign exchange market is NOT efficient because

D. None of the above

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.

D. Spot against forward

American and British meanings differ for the word billion. Therefore, when traders refer to an American billion, they call it a/an ________.

D. Yard

Given the following quotations (where the dollar is the home currency), what is the annualized forward premium (discount) on the U.S. dollar? Spot rate: $1.305/euro 6-month forward rate: $1.335/euro

D. discount; 4.5977%

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.

D. indirect; direct

Because the market for foreign exchange is worldwide, the volume of foreign exchange currency transactions is level throughout the 24-hour day.

False

Currency trading lacks profitability for large commercial and investment banks but is maintained as a service for corporate and institutional customers.

False

Daily trading volume of foreign exchange had actually decreased in 2004 from the levels reported in 2001.

False

Global daily foreign exchange turnover (combined swaps, spot, and forward transactions) has declined from roughly $1,500 billion in 2001, to $1,200 in 2004, to $1,000 in 2007.

False

New York City has the greatest volume of foreign exchange activity in the world.

False

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

False

The primary motive of foreign exchange activities by most central banks is profit.

False

Swap and forward transactions account for an insignificant portion of the foreign exchange market.

False, they are significant

The authors identify two tiers of foreign exchange markets:

Interbank and Client markets

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

Dealers in foreign exchange departments at large international banks act as market makers and maintain inventories of the securities in which they specialize.

True

Most transactions in the interbank foreign exchange trading are primarily conducted via telecommunication techniques and little is conducted face-to-face.

True

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

With several exceptions, most interbank quotes are stated in European terms (meaning foreign currency unit per U.S. dollar).

True

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.

dealers; brokers

Which of the following is NOT true regarding nondeliverable forward (NDF) contracts?

NDFs can only be traded by central banks

________ are NOT one of the three categories reported for foreign exchange.

Strip Transactions