forex

Question 1

Where individuals, firms and banks buy and sell
foreign currencies or foreign exchange.

Answer 1

Foreign Exchange Market

Question 2

Functions of the Foreign Exchange Markets

Answer 2

1. Transfer purchasing power from one nation and currency to another.
2. Provide credit for foreign transactions
3. Provide the facilities for hedging and speculation.

Question 3

Demand for currency arises when:

Answer 3

Tourists visit another country
■ Domestic firm wants to import from other countries
■ Individual wants to invest abroad

Question 4

Supply of currency arises from

Answer 4

Foreign tourist expenditures
■ Export earnings
■ Receiving foreign investments

Question 5

Credit is needed when goods are in transit, and to allow
the buyer time to resell the goods to make the payment.

Answer 5

Provide credit for foreign transactions

Question 6

is needed when goods are in transit, and to allow
the buyer time to resell the goods to make the payment.

Answer 6

Credit

Question 7

About 90% of foreign exchange trading reflects purely
financial transactions, and only about 10% trade
financing

Answer 7

Provide the facilities for hedging and speculation

Question 8

Participants

Answer 8

Those needing currency to fund transactions

Commercial banks

Foreign exchange brokers

Central banks

Question 9

Tourists, importers, exporters, investors, etc.

Answer 9

Those needing currency to fund transactions

Question 10

Serve as the clearinghouses for currency exchange

Answer 10

Commercial banks

Question 11

Clearinghouse for surpluses and shortages between the
commercial banks

Answer 11

Foreign exchange brokers

Question 12

Buyer or seller of last resort in the foreign exchange
market

Answer 12

Central banks

Question 13

The exchange rate between the dollar and the euro (R)
is equal to the number of dollars needed to purchase
one euro.
R = $/€

Answer 13

Foreign Exchange Rates

Question 14

Assume only two economies, the United States and
the European Monetary Union.
■ Domestic currency = dollar ($)
■ Foreign currency = euro (€)

Answer 14

Foreign Exchange Rates

Question 15

Under a _______, R is determined by the
intersection of market demand and supply curves for euros.

Answer 15

flexible exchange system

Question 16

is an increase in the domestic price of the
foreign currency

Answer 16

Depreciation

Question 17

If the dollar price of the euro increases from $1 to $1.50, the
dollar has depreciated

Answer 17

Depreciation

Question 18

refers to a decline in the domestic price of the
foreign currency.

Answer 18

Appreciation

Question 19

Once the exchange rate between each of a pair of
currencies with respect to the dollar is established, the
exchange rate between the two currencies themselves,
or _____, can be calculated.

Answer 19

cross exchange rate

Question 19

If the dollar price of the euro decreases from $1 to $0.50, the
dollar has appreciated.

Answer 19

Appreciation

Question 20

A weighted average of the exchange rates between
the domestic currency and the nation’s most
important trading partners

Answer 20

Effective exchange rate

Question 21

The purchase of currency in one market for immediate
re-sell in another market

Answer 21

Arbitrage

Question 22

keeps the exchange rate between any two
currencies the same across different markets

Answer 22

Arbitrage

Question 23

The purchase/re-selling closes differences in exchange
rates by reducing currency available in the low price
market and increasing availability in the high price
market.

Answer 23

Arbitrage

Question 24

The exchange rate that calls for payment and receipt of the foreign exchange within two business days from the date when the transaction was made

Answer 24

Spot rate

Question 25

The exchange rate that calls for delivery of the foreign exchange one, three, six, twelve or twenty-four months after the date the contract is signed

Answer 25

Forward rate

Question 26

The percentage per year by which the forward rate is below the spot rate

Answer 26

Forward discount

Question 27

The percentage per year by which the forward rate is above the spot rate

Answer 27

Forward premium

Question 28

Formula of Forward premium

Answer 28

FD or FP = FR-SR/ SR x 4 x 100 FD or FP = x 4 x 100

Question 29

A spot sale of a currency combined with a forward repurchase of the same currency – as part of a single transaction

Answer 29

Currency Swap

Question 30

Most interbank trading involving the purchase or sale of currencies for future delivery are done as currency swaps

Answer 30

Currency Swap

Question 31

Forward currency contracts for standardized currency amounts and select dates trade on an organized market

Answer 31

Foreign Exchange Futures

Question 32

Traded currencies:

Answer 32

Japanese yen ■ Canadian dollar ■ British pound ■ Swiss franc ■ Australian dollar ■ Mexican peso ■ Euro

Question 33

Contracts giving the purchaser the right, but not the obligation, to buy (call option) or to sell (put option) a standard amount of a traded currency on a stated date (European option) or any time before the stated date (American option) at a stated price (strike or exercise price)

Answer 33

Foreign Exchange Options

Question 34

Whenever a future payment must be made or received in foreign currency, _______is involved because spot rates vary over time

Answer 34

a foreign exchange risk

Question 35

Contracted future foreign currency payments may become more expensive if the

Answer 35

domestic currency falls in value

Question 36

Contracted future foreign currency receipts may fall in value if the

Answer 36

domestic currency increases in value.

Question 37

is the avoidance of foreign exchange risk.

Answer 37

Hedging

Question 38

Options in Hedging

Answer 38

1. Buy at the current spot rate and deposit the receipts in an interest earning account until the funds are needed 2. Buy a forward contract 3. Buy a call option

Question 39

the opposite of hedging, is the acceptance of foreign exchange risk in the hope of making a profit.

Answer 39

Speculation,

Question 40

The purchase of a foreign currency when the domestic price falls or is low, in the expectation that it will soon rise, leading to a profit, OR

Answer 40

Stabilizing Speculation

Question 41

The sale of a foreign currency when the domestic price rises, in the expectation that it will fall

Answer 41

Stabilizing Speculation

Question 42

moderates fluctuations in exchange rates over time, serving a useful function

Answer 42

Stabilizing speculation

Question 43

The sale of a foreign currency when the domestic price falls or is low, in the expectation that it will fall even lower, OR

Answer 43

Destabilizing Speculation

Question 44

The purchase of a foreign currency when the domestic price rises, in the expectation that it will rise even higher.

Answer 44

Destabilizing Speculation

Question 45

magnifies fluctuations in exchange rates over time, and can be very disruptive to international flow of trade and investments

Answer 45

Destabilizing speculation

Question 46

is the transfer of short-term liquid funds abroad to earn a higher rate of return.

Answer 46

Interest arbitrage

Question 47

occurs when the transfer abroad entails foreign exchange risk due to the possible depreciation of the foreign currency during the investment period.

Answer 47

Uncovered interest arbitrage

Question 48

is the borrowing of fund in low-yielding currencies and lending in high-yielding currencies

Answer 48

Carry trade

Question 49

is the transfer of short-term liquid funds abroad to earn a higher rate of return.

Answer 49

Interest arbitrage

Question 50

is the spot purchase of the foreign currency to make the investment and the offsetting simultaneous forward sale of the foreign currency to cover, or remove, the foreign exchange risk.

Answer 50

Covered interest arbitrage

Question 51

Markets are_____ if prices reflect all possible information.

Answer 51

efficient

Question 52

The foreign exchange market is efficient if

Answer 52

forward rates accurately predict future spot rate

Question 53

refers to commercial bank deposits outside the country of their issue.

Answer 53

Eurocurrency

Question 54

A deposit denominated in U.S. dollars in a British commercial bank.

Answer 54

Eurodollar -

Question 55

A pound sterling deposit in a French commercial bank.

Answer 55

Eurosterling -

Question 56

A deposit in euros in a Swiss bank.

Answer 56

Eurodeposit -

Question 57

The market in which the borrowing and lending of these balances takes place is the

Answer 57

Eurocurrency market.

Question 58

Reasons for Offshore Deposits

Answer 58

■ Interest rates on short term deposits abroad are often higher than domestic rates. ■ International corporations often find it convenient to hold balances abroad for short periods in currency they need for payments. ■ International corporations can overcome domestic credit restrictions by borrowing in the Eurocurrency market

Question 59

long-term debt securities sold outside the borrower’s country to raise long-term capital in a currency other than the currency of the nation where the bonds are sold.

Answer 59

Eurobonds -

Question 60

medium-term financial instruments used by corporations, banks and countries to borrow medium-term funds in a currency other than the currency in which the notes are sold

Answer 60

Euronotes -