Analysis: Market Analysis

Spot trades of foreign currencies settle:

1 or 2 business days after trade date Spot trades of foreign currencies settle in either 1 or 2 business days after trade date. Trades of the more actively traded currencies settle in 1 day; trades of the less frequently traded currencies settle in 2 days.

The Federal Reserve Bank has made a policy decision to devalue the U.S. Dollar versus the Japanese Yen. Which of the following intervention actions would decrease the U.S. Dollar's exchange value?

Buy Japanese Yen Sell U.S. Dollars If the Federal Reserve wishes to devalue the U.S. Dollar against the Japanese Yen (which would make our goods cheaper to the Japanese and would increase exports), it would sell U.S. Dollars and buy Japanese Yen. To increase the value of the dollar, it would do just the opposite - buy the dollar and sell the yen.

Which index is the narrowest measure of the market? Wilshire Index Value Line Index NYSE Composite Index Dow Jones Industrial Average

Dow Jones Industrial Average The Dow Jones Industrial Average consists of 30 stocks (principally NYSE listed issues). This is the narrowest measure of the market. The Value Line Index is broader, including 1,700 issues. The NYSE Composite Index consists of the approximately 2,500 issues listed on the NYSE. The Wilshire Index is the broadest measure since it includes about 3,500 issues of companies headquartered in the United States that are listed on the NYSE, NYSE American (AMEX), or NASDAQ. The Wilshire started at 5,000 stocks in 1974 but the number of listed companies in the U.S. has been declining over the years, mainly because of the high regulatory cost of a company "going public."

Which of the following statements are TRUE about the interbank market? I Foreign currency values are determined in this market II The market is centralized III Trading is regulated IV Foreign policy actions affect values in the market

I Foreign currency values are determined in this market IV Foreign policy actions affect values in the market The Interbank market is a free wheeling, unregulated, worldwide currency trading market open 24 hours a day. It is completely unregulated, but is influenced by central bank trading. Central bank trading actions are directed by each country's government.

Which of the following statements are TRUE regarding International Bond Funds? I The fund will hold securities denominated in foreign currencies II The fund will hold securities denominated in U.S. dollars III The fund will have a currency exchange gain when the dollar falls in value IV The fund will have a currency exchange gain when the dollar rises in value

I The fund will hold securities denominated in foreign currencies III The fund will have a currency exchange gain when the dollar falls in value An international bond fund will have securities that are denominated in foreign currencies. (A Global fund would have both foreign and U.S. securities.) If the foreign currency value rises against the dollar, then when the fund's NAV is converted into dollars, proportionately more dollars will be created, since each unit of foreign currency buys more dollars. Similarly, if the U.S. Dollar drops against the foreign currency, when the fund's NAV is converted into dollars, proportionately more dollars will be created, since each unit of foreign currency buys more dollars.

Trading in the Interbank market will affect : I foreign currency prices in terms of U.S. dollars II future trade deficit or surplus figures III future economic growth IV future inflation levels

I foreign currency prices in terms of U.S. dollars II future trade deficit or surplus figures III future economic growth Foreign currencies trade in the "Interbank" market. If the dollar declines against foreign currencies, U.S. goods become cheaper to foreigners. This will stimulate exports and domestic economic growth. If the dollar rises against foreign currencies, foreign goods become cheaper in the U.S. This will stimulate imports, and shift production out of the U.S. to other countries. Inflation levels are determined by the relative balance of output of goods and services versus the U.S. dollars available to "pay" for these. If the money supply is allowed to grow too quickly by the Fed relative to real economic growth, then there will be inflation. Therefore, future inflation levels are basically determined by Federal Reserve actions, not by the interbank market.

The dollar has depreciated against foreign currencies. The likely result is a(n): I increasing trade surplus II decreasing trade surplus III increasing trade deficit IV decreasing trade deficit

I increasing trade surplus IV decreasing trade deficit If the dollar depreciates, U.S. goods become cheaper to foreigners and foreign goods become more expensive in the U.S. Thus, we are likely to export more, increasing any trade surpluses or decreasing any trade deficits.

Which of the following actions are likely to cause the value of the U.S. Dollar to rise? I The Federal Reserve lowers the discount rate II The Federal Reserve raises the discount rate III United States investors purchase foreign securities IV Foreign investors purchase U.S. securities

II The Federal Reserve raises the discount rate IV Foreign investors purchase U.S. securities If the Federal Reserve raises the discount rate, then interest rates would rise in the U.S. As interest rates rise, so does the U.S. Dollar's value, since dollar denominated investments are more attractive to foreign purchasers. If foreign investors make large purchases of U.S. securities, then they must sell their foreign currency to buy the U.S. dollars needed to pay for that security. As dollars are bought, the value will rise. Conversely, if U.S. investors make large purchases of foreign securities, then they must sell their dollars to buy the foreign currency needed to pay for that foreign security. As dollars are sold, the value will drop.

The dollar has appreciated against foreign currencies. The likely result is a(n): I increasing trade surplus II decreasing trade surplus III increasing trade deficit IV decreasing trade deficit

II decreasing trade surplus III increasing trade deficit If the dollar appreciates, U.S. goods become more expensive to foreigners and foreign goods become cheaper in the U.S. Thus, we are likely to import more, reducing any trade surpluses; or increasing any trade deficits.

Which of the following economic events would have a positive long term impact on common stock prices? I Rising interest rates II Rising capital gains tax rates III Rising employment rates IV Falling inflation rates

III Rising employment rates IV Falling inflation rates Rising interest rates are bad for stock prices. More investors will switch from investments in stocks to bond investments. A rising capital gains tax rate also makes stocks less attractive to investors (why would an investor want to invest in stocks if the capital gains tax is so high?) Rising employment indicates that the economy is expanding. This is bullish (not bearish) for corporate profits and hence, stock prices. Low inflation means that interest rates are low, making debt investments unattractive. Thus, investors are more likely to invest in the stock market than in the bond market.

Foreign exchange rates are set in which market?

Interbank Market Trading of foreign currencies occurs in the Interbank Market. This is an institutional market trading very large units of currency from money-center bank to money-center bank.

Value Line index:

a geometrically weighted index consisting of some 1,700 selected issues that are on the NYSE, NYSE American (AMEX), and NASDAQ markets. These are the securities that are followed and rated by the Value Line Investment Survey.

NYSE Composite index:

a weighted index that includes all of the common issues (approximately 3,000) that trade on the New York Stock Exchange.

The Bank of England is concerned that the British Pound is weakening against the U.S. Dollar. The appropriate action for the British central bank is to:

buy British Pounds sell U.S. Dollars To protect the British Pound from falling, the Bank of Britain would buy British Pounds in the interbank market (raising the value of the Pound) and would sell U.S. Dollars (depressing the value of the dollar). Thus, two currency values would be driven closer to the desired level.

Wilshire index:

considered the broadest measure of the activity and movement of the overall stock market, this index consists of about 3,500 issues of companies headquartered in the United States, that trade on the NYSE, NYSE American (AMEX), and on NASDAQ. Note that the index originally started with 5,000 issues in the mid-1970s, but has shrunk as the number of listed companies has fallen.

If the dollar falls against foreign currencies, all of the following statements are true EXCEPT: U.S. goods are cheaper to foreign countries U.S. exports are likely to rise foreign currencies buy fewer dollars foreign imports are likely to fall

foreign currencies buy fewer dollars if the dollar falls, U.S. goods become cheaper to foreigners and foreign goods become more expensive in the U.S. Thus, exports are likely to rise and imports are likely to fall. Since the dollar is cheaper, foreign currencies buy more dollars and/or goods.

A U.S. balance of payments deficit would be widened by all of the following EXCEPT: increased levels of U.S. imports increased levels of foreign tourists visiting the United States increased dividends paid to foreign holders of U.S. securities decreased sales of U.S. securities to foreign holders

increased levels of foreign tourists visiting the United States If the balance of payments is running a deficit, then more U.S. Dollars are being spent abroad for foreign goods and services than are being spent in the United States by foreigners for domestic goods and services. Increased levels of U.S. imports will cause more dollars to leave the U.S., widening the deficit. Increased levels of foreign tourists visiting the U.S. will narrow the deficit, since dollars are being spent in the U.S. by more foreigners. Increased dividends paid to foreign holders of U.S. securities will cause dollars to leave the U.S., widening the deficit. Finally, decreased sales of U.S. securities to foreign holders will reduce the inflow of dollars resulting from these purchases, widening the balance of payments deficit.

The largest component of the Dow Jones Averages is:

industrials the Dow Jones Averages is the oldest and most widely quoted of the indexes. It consists of 65 stocks in total. The components are 30 Industrials; 20 Transportations; and 15 Utilities. Thus, the industrials are the largest component.

Speculators in foreign currencies would NOT be subject to which of the following risks? interest rate risk exchange rate risk market risk political risk

interest rate risk Interest rate risk only affects fixed income securities. As interest rates rise, the stream of future fixed interest payments and final principal repayment are devalued, reducing the current value of the bond. This risk would not affect foreign currencies, which do not give investors an income stream. Speculators in foreign currencies are simply placing bets on the future value of that currency. They assume political risk, exchange rate risk, and market risk. Market risk in this case is simply the risk of being on the wrong "side" of the market - e.g., being long the currency only to have its value fall; or short the currency only to have its value rise.

Speculators in foreign currencies would be subject to all of the following risks EXCEPT: political risk Market risk reinvestment risk exchange rate risk

reinvestment risk Reinvestment risk only affects securities that pay an income stream. If interest rates fall over the time period that an investment is held; any dividends or interest payments received over this time period are reinvested at lower rates, lowering the overall rate of return. This risk would not affect foreign currencies, which do not give investors an income stream. Speculators in foreign currencies are simply placing bets on the future value of that currency. They assume political risk, exchange rate risk, and market risk. Market risk in this case is simply the risk of being on the wrong "side" of the market - e.g., being long the currency only to have its value fall; or short the currency only to have its value rise.

The largest component of the Standard and Poor's 500 Average is the:

technology The best answer is B. The S&P 500 Index was "recategorized" about 15 years ago into different sectors to allow the creation of "Sector SPDRs" - index funds based on these sectors. The new breakdown, by approximate size, is: Technology 24% Financials 15% Healthcare 14% Consumer Discretionary 12% Industrials 10% Consumer Staples9% Energy 6% Utilities 3% Materials 3% Real Estate 3% Telecoms 2% By far the largest weighting in the revised sector breakdown is technology stocks.

Dow Jones Industrial Average:

the most widely quoted index, consisting of 30 companies (principally NYSE listed issues), selected to mirror the make-up of the largest sectors of the United States economy.

Dow Jones Averages:

the oldest measure of the activity and movement of the overall market, which consists of 30 industrial stocks, 20 transportation stocks and 15 utility stocks. Thus, there is a total of 65 stocks in the Dow Jones Averages. Note that the average for the 30 industrial stocks, called the Dow Jones Industrial Average (DJIA), is the most widely quoted and narrowest measure of stock market movement.

Balance Of Payments Deficit or Surplus:

the relative level of sales of goods and services to foreign countries by the United States; versus purchases of goods and services from foreign countries by the United States. A balance of payments surplus means that the U.S. is exporting more than it is importing; a balance of payments deficit means that the U.S. is importing more than it is exporting.

Interbank market:

the unregulated global market in which large foreign currency transactions occur between foreign and domestic banks. Trading in the interbank market determines the relative value of these currencies. The Interbank market is a free wheeling, unregulated, worldwide currency trading market open 24 hours a day. It is completely unregulated, but is influenced by central bank trading. Central bank trading actions are directed by each country's government.