Ch 2

Question 1

Foreign exchange markets

Answer 1

Currencies are exchanged or traded in foreign exchange markets

Question 2

Three reasons entities participate

Answer 2

1) MNCs and others have business-related needs to buy or sell foreign exchange
2) Banks and other intermediaries profit from facilitating foreign exchange transactions.
3) Investment funds have portfolio-related needs to buy and sell foreign exchange

Question 3

Participants in the foreign exchange markets

Answer 3

MNC, banks, Other financial institutions, governments, individuals

Question 4

Which financial market is the largest

Answer 4

Foreign exchange market

Question 5

Most transactions in the foreign exchange market include what currency?

Answer 5

USD

Question 6

Define Vehicle currency

Answer 6

one currency is traded into another currency, which is traded for the desired currency

Question 7

How are most transactions in the foreign exchange markets conducted?

Answer 7

Electronic networks

Question 8

Structure of the market

Answer 8

market makers, dealers and brokers, settlement

Question 9

Clearing system

Answer 9

essentially a secured network that processes financial messages or instructions

Question 10

Swift

Answer 10

a clearing system used in some of the foreign exchange markets

Question 11

Direct quotes

Answer 11

express the value of a foreign currency in terms of the domestic currency

Question 12

Indirect quotes

Answer 12

express the value of the domestic currency in terms of the foreign currency

Question 13

Base currency

Answer 13

one that is being bought or sold.

Question 14

Terms currency

Answer 14

the one used to buy or sell the base currency

Question 15

Bid

Answer 15

Amount the bank will pay for a currency

Question 16

Ask

Answer 16

Amount the bank asks for a currency

Question 17

Spread

Answer 17

Difference between the bid and the asked

Question 18

Cross rates

Answer 18

Quotes may also be found, however, by relating on e foreign currency to another foreign currency

Question 19

Eurodollar transactions

Answer 19

Eurocurrency or foreign currency transaction sin the USD

Question 20

LIBOR (London Inter Bank Offered Rate)

Answer 20

The rate Eurobanks offer for loans to other institutions

Question 21

How are LIBOR & LIBID related?

Answer 21

LIBOR is the London banks ask rate, LIBID is the London banks bid rate

Question 22

Bid-Ask spread % =?

Answer 22

(Ask - Bid)/Ask

Question 23

Floating rate note

Answer 23

Floating rate financial instruments with coupon interest linked to the LIBOR or other indicative rates such as the EURIBOR

Question 24

Eurobonds

Answer 24

A U.S. based MNC issues a USD denominated bond in Japan, the bond is categorized as a Eurobond

Question 25

Foreign bond

Answer 25

a bond issued in a particular country by a foreign issuer and denominated in the country’s own currency.