Chapter 5- Market for Foreign Exchange

Central banks

A national monetary authority

Most currencies in the interbank market are quoted in ______ terms, that is, the U.S. dollar is priced in terms of the foreign currency (an indirect quote from the U.S. perspective). A. European B. British C. American D. German

A. European

What are ways that cross-exchange rates can be calculated? A. The quotient of two American term exchange rates B. The quotient of an American term and a European term exchange rate C. The quotient of two European term exchange rates D. The product of an American term and a European term exchange rate

A. The quotient of two American term exchange rates C. The quotient of two European term exchange rates D. The product of an American term and a European term exchange rate

Suppose that the interbank bid for a currency is $1.0543 and the ask is $1.0545. A. The retail bid could be 1.0542. B. The big figure for the bid is 1.05. C. The retail ask could be 1.0544. D. The small figure for the ask is 43.

A. The retail bid could be 1.0542. B. The big figure for the bid is 1.05.

Most foreign exchange trading involves the exchange of _____ for another currency. A. U.S. dollars B. Chinese yuan C. euros D. U.K. pounds

A. U.S. dollars

A zero-risk, zero-investment strategy from which a profit is guaranteed is called ______

Arbitrage

International commercial banks communicate instructions through the private, nonprofit message transfer system headquartered in Brussels known by its acronym ______. A. CHIPS B. SWIFT C. ECHO D. ETF

B. SWIFT

The structure of the foreign exchange market is an outgrowth of one of the primary functions of a(n) ______ banker: to assist clients in the conduct of international commerce. A. retail B. commercial C. private D. investment

B. commercial

The formula for calculating the annualized forward premium or discount for currency j in American terms is ______. A. fN,j = [(S($/j)−FN($/j))/ S($/j)] × 360/days B. fN,j = [(FN($/j)−S($/j))/ S($/j)] × 360/days C. fN,j = [(S($/j)−FN($/j)) / FN($/j) ] × 360/days D. fN,j = [(FN($/j)−S($/j)) /FN($/j)] × 360/days

B. fN,j = [FN($/j)−S($/j)) / S($/j)] × 360/days

Broadly defined, the ______ market includes the conversion of purchasing power from one currency into another, bank deposits of foreign currency, the extension of credit denominated in a foreign currency, foreign trade financing, trading in foreign currency options and futures contracts, and currency swaps. A. derivatives B. foreign exchange C. equity D. fixed income

B. foreign exchange

If £1 costs $1.50 and €1.00 costs $1.20, then the €/£ cross-rate is ______. A. 0.80 B. 0.83 C. 1.25 D. 0.66

C. 1.25

A security that trades on a stock exchange and allows small investors to invest in a currency or a portfolios of assets is known by the initials ______. A. NDF B. SWIFT C. ETF D. CHIPS

C. ETF

Currency market-makers buy at the ______ price and sell at the ______ ______ price. A. ask; higher bid B. ask; lower bid C. bid; lower ask D. bid; higher ask

D. bid; higher ask

Foreign exchange is traded in a(n) ______ market, not in a central marketplace where buyers and sellers congregate. A. exchange-traded B. derivative C. double auction D. over-the-counter

D. over-the-counter

From the U.S. perspective, a(n) _____ quotation is the price of one unit of the foreign currency in U.S. dollar.

Direct

International banks

Financial institutions that buy or sell foreign currency for their own account to serve retail clients

From the U.S. perspective, a(n) _____ quotation is the price of one U.S. dollar in the foreign currency.

Indirect

Nonbank dealers

Large financial institutions such as investment banks, mutual funds, pension funds, and hedge funds

FX brokers

Match dealer orders to buy and sell currencies for a fee, but do not take a position themselves

Bank customers

Multinational corporations, money managers, and private speculators

An emerging market currency that is not freely obtainable may trade in a type of contract that settles in cash and is known as a _____ contract.

Non-deliverable forward

Which of the following statements about the foreign exchange market is correct? a. It is the largest and most active financial market in the world. b. The average daily trading volume is expected to surpass $1 trillion soon. c. It is open somewhere in the world 24 hours a day, 365 days a year.

a. It is the largest and most active financial market in the world. c. It is open somewhere in the world 24 hours a day, 365 days a year.

Currency ETFs can be used by investors for optimal portfolio construction since currency is now recognized as a distinct _____ class, like stocks and bonds.

asset

When a currency is trading at a premium to the dollar in American terms in the forward market, the dollar is usually expected to _____ in value.

depreciate/ decrease

Contracting today for the future purchase or sale of foreign exchange occurs in the _____ market.

forward

The currency of Switzerland is the Swiss _____

franc

In the formula fN,j = FN(i/j)−S(i/j)S(i/j)FN(i/j)−S(i/j)S(i/j) × 360/days, which of the variables represents dollars, in American terms? S F i j

i

A bank's uncovered speculative position in a currency is referred to as a(n) _____ forward transaction.

outright

A shorthand method for expressing forward quotes from spot rate quotations is the use of forward_____

points

The almost immediate (two-day) purchase or sale of foreign exchange occurs on the ______ market.

spot

The cash settlement of non-deliverable forward contracts is based on the difference between the NDF rate and the ________ rate.

spot exchange

The process of trading out of the U.S. dollar into a second currency, then trading it for a third currency, which is in turn traded for U.S. dollars to make a profit is referred to as ______ arbitrage.

triangular