FIN321 WEEK 2

Match the FX market participant with its description

- International banks: Financial institutions that buy or sell foreign currency for their own account to serve retail clients - Bank customers: Multinational corporations, money managers, and private speculators - 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 - Central banks: A national monetary authority

Which statements about relative purchasing power are correct?

- It may hold even when absolute PPP does not hold. - It is given by the equation e = [π$−π£/1+π£]

Which are characteristics of forward contracts?

- They are derivatives. - Delivery of the asset is commonly made.

Which of the following is true of over-the-counter currency options?

- They are typically European options. - They are written for large amounts,

Purchasing power parity can be thought of as _______.

- an arbitrage opportunity arising when uncovered interest rate parity does not hold - an application of arbitrage equilibrium

If a country's currency ______ by more than is warranted by PPP, the competitiveness of the country's industries will ______ because the real exchange rate has changed.

- appreciates; decrease - depreciates; increase

What are the terms used for the price specified in an options contract at which the underlying asset can be bought or sold?

- strike or striking price - exercise price

When the same (or equivalent) things are trading at the same price across different locations or markets, then what is true?

- there is no arbitrage opportunity - the law of one price holds

Suppose that the interbank bid for a currency is $1.0543 and the ask is $1.0545.

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

What are reasons commonly given for the unfavorable empirical evidence about PPP?

-nontradables -transportation costs

If £1 costs $1.50 and €1.00 costs $1.20, then the €/£ cross-rate is ______.

1.25

Suppose that there are a call option and a put option each with exercise price E. If ST = E at expiration, which of the following is true?

Both the put and the call are at the money

What is the formula for the value of a call at expiration?

Max [ST − E, 0]

Which are currency futures exchanges?

NASDAW OMX and the CME Group

Suppose that there are a call option and a put option each with exercise price E. If ST>E at expiration, which will be exercised?

Only the call

Suppose that there are a call option and a put option each with exercise price E. If ST<E at expiration, which will be exercised?

Only the put is in the money

If P$ is the dollar price of the standard consumption basket in the United States and P£ the pound price of the same basket in the United Kingdom, PPP states that S, the dollar price of one pound, should be ______.

S = P$/P£

Suppose an investor purchased a call option with exercise price E for premium C on an asset that ends up with a terminal value of ST. The investor will at least break even at expiration if ______. (Note: assume that the time value of money is zero.)

ST > E + C

Most foreign exchange trading involves the exchange of _____ for another currency.

U.S. dollars

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.

commercial

A ______ -exchange rate is an exchange rate between a currency pair where neither currency is the U.S. dollar.

cross

The currency of Jordan is the ______, Kuwait's is the ______, and UAE's is the ______.

dinar; dinar; dirham

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.

foreign exchange

a ______ contract is a vehicle for buying or selling a stated amount of foreign exchange at a stated price per unit at a specified time in the future that is brokered over-the-counter.

forward

That any forward premium or discount is equal to the expected change in the exchange rate between two currencies is predicted by______ ______ parity. (Enter one word per blank.)

forward expectations

The currency of Switzerland is the Swiss

franc

An initial performance bond must be deposited into a collateral account to establish a(n) _______ position

future

The process of using foreign currency reserves to buy one's own currency in order to decrease its supply and thus increase its value in the foreign exchange market, or alternatively, selling one's own currency for foreign currency in order to increase its supply and lower its price is referred to as ______.

intervention

Futures contracts are marked-to-_______on a daily basis at the new settlement price

market

Foreign exchange is traded in a(n) ______ market, not in a central marketplace where buyers and sellers congregate.

over-the-counter

Changes in nominal exchange rates can cause changes in real exchange rates, affecting the international competitive positions of countries, when______ ______ parity does not hold.

purchasing power

The theory that states that the exchange rate between currencies of two countries should be equal to the ratio of the countries' price levels is ____ _____ parity

purchasing power

An option provides the ______, but not the ______, to buy or sell an underlying asset for a stated price over a stated time period.

right; obligation

Currency market-makers buy at the ______ price and sell at the ______ ______ price.

D. bid; higher ask

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. c. It is open somewhere in the world 24 hours a day, 365 days a year

The act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making certain, guaranteed profits is referred to as_______

arbitage

A simple and light-hearted approach to PPP is given by the ______ index.

big mac

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

spot