Market Analysis Flashcards
The U.S. balance of payments deficit would widen for all of the following reasons EXCEPT:
A. dividend payments by U.S. issuers to foreign holders of those securities increase
B. purchases of U.S. securities by foreigners increase
C. exports of domestic goods to foreign countries decrease
D. imports of foreign goods into the United States increase
The best answer is B.
Increased purchases of U.S. securities by foreigners brings funds into the U.S., narrowing the balance of payments deficit.
Increased dividends paid to foreigners means that more funds are taken out of the U.S.; decreased exports of U.S. goods means that less funds are coming into the U.S.; and increased imports means that more funds are leaving the U.S. All would increase the balance of payments deficit.
If the United States balance of payments goes from a deficit to a surplus position, the value of the U.S. dollar should:
A. appreciate
B. depreciate
C. fluctuate
D. stagnate
The best answer is A.
If the United States exports more to foreign countries than is imported, then there is a balance of payments surplus. To pay for their purchases, foreigners must sell their currency and buy the U.S. dollar (since payment for purchases in the U.S. is made in dollars). Thus, the value of the U.S. dollar will rise.
Foreign exchange rates are set in which market?
A. First Market
B. Third Market
C. Interbank Market
D. Equity Market
The best answer is C.
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.
All of the following statements are true about the interbank market EXCEPT the market:
A. is unregulated
B. responds to central bank intervention
C. is located in New York City
D. operates 24 hours a day
The best answer is C.
The interbank market trades foreign currencies across the globe, 24 hours a day. The market is unregulated and responds to central bank buying and selling of currencies.
Trading in the Interbank market will affect all of the following directly EXCEPT:
A. foreign currency prices in terms of U.S. dollars
B. American Depositary Receipt prices in terms of U.S. dollars
C. future economic growth
D. future trade deficit or surplus figures
The best answer is B.
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.
American Depositary Receipts are vehicles for foreign securities to be traded in the United States. ADRs are only traded in the United States, and are denominated in U.S. dollars, so there is no direct effect of foreign currency price movements on ADR prices (though an argument can be made that the foreign stock held in trust pays dividends in the foreign currency; and that these dividends are converted to U.S. dollars to be paid to ADR holders; that currency price movements have some impact on ADR values).
A foreign currency trade that settles on a mutually agreed date after trade date is a:
A. cash settlement
B. seller’s option settlement
C. forward settlement
D. spot settlement
The best answer is C.
Settlement of “forward” trades in the Interbank market takes place on a mutually agreed date in the future. This contrasts with “spot” settlement of foreign currency trades which occurs either one or two business days after trade date (the more actively traded currencies settle next day; less actively traded currencies settle in 2 business days).
Speculators in foreign currencies would NOT be subject to which of the following risks?
A. interest rate risk
B. exchange rate risk
C. market risk
D. political risk
The best answer is A.
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.
A foreign government wishes to stabilize its currency, which has been falling against the U.S. Dollar. The government would:
A. buy U.S. Dollars and buy the foreign currency
B. buy U.S. Dollars and sell the foreign currency
C. sell U.S. Dollars and buy the foreign currency
D. sell U.S. Dollars and sell the foreign currency
The best answer is C.
To stabilize a currency that is falling against the dollar, the foreign government would buy the foreign currency (driving its price up against the U.S. Dollar); and sell the U.S. Dollar (driving its price down against the foreign currency).
If a foreign government wishes to stabilize its currency because it has been falling against the U.S. Dollar, the government would:
A. buy its own currency
B. sell its own currency
C. sell short its own currency
D. buy U.S. Dollars
The best answer is A.
To stabilize a currency that is falling against the dollar, the foreign government would buy its currency (driving its price up against the U.S. Dollar); and sell the U.S. Dollar (driving the U.S. Dollar down against the foreign currency).
The Bank of England is concerned that the British Pound is weakening against the U.S. Dollar. A method for the Bank of England to strengthen its currency would be to:
A. raise British interest rate levels
B. lower British interest rate levels
C. raise U.S. interest rate levels
D. lower U.S. interest rate levels
The best answer is A.
If a country raises its interest rates, it attracts foreign investment in its debt instruments. To buy that country’s debt instruments, payment must be made in that country’s currency - thus demand for the currency is stimulated and currency values will rise. The British central bank has the power to influence British interest rate levels. It can do nothing about U.S. interest rate levels.
The Federal Reserve Bank has made a policy decision to try to strengthen the U.S. Dollar versus the Japanese Yen. Which of the following intervention actions would increase the U.S. Dollar’s exchange value?
A. Buy U.S. Dollars and Buy Japanese Yen
B. Buy U.S. Dollars and Sell Japanese Yen
C. Sell U.S. Dollars and Buy Japanese Yen
D. Sell U.S. Dollars and Sell Japanese Yen
The best answer is B.
If the Federal Reserve wishes to strengthen the U.S. Dollar against the Japanese Yen (which would make our goods more expensive to the Japanese and would decrease exports), it would buy U.S. Dollars and sell Japanese Yen. To decrease the value of the U.S. Dollar, it would do just the opposite - sell the U.S. Dollar and buy the Japanese Yen.
All of the following actions are likely to cause the value of the U.S. Dollar to decline EXCEPT:
A. the Federal Reserve lowers the discount rate
B. U.S. trade is running a widening trade deficit with foreign nations
C. United States investors are making large purchases of foreign securities
D. foreign investors are making large purchases of U.S. securities
The best answer is D.
If the Federal Reserve lowers the discount rate, then interest rates would fall in the U.S. As interest rates fall, so does the U.S. Dollar’s value, since dollar denominated investments are less attractive to foreign purchasers.
If the U.S. runs a large trade deficit, then this is a negative for the value of the dollar.
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.
Conversely, 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.
If the real Gross Domestic Product of the G-20 countries is growing at a slower rate than real Gross Domestic Product growth in the United States, then the value of the U.S. dollar can be expected to:
A. appreciate
B. depreciate
C. fluctuate
D. stagnate
The best answer is A.
The G-20 countries are the major industrialized nations of the world. If the Gross Domestic Product of the other G-20 countries is growing at a slower rate than the GDP growth in the United States, then the United States is doing “better” than those countries and the U.S. dollar will appreciate in value relative to those currencies.
Currency valuation in the interbank market is affected by all of the following EXCEPT:
A. Intervention
B. Revaluation
C. Devaluation
D. Intermediation
The best answer is D.
Currency values in the interbank market are affected by central bank intervention (e.g., the Bank of Japan bolsters the yen by making large purchases); by currency revaluation (e.g., Mexico revalues the Peso against the dollar, changing the official exchange rate); and by devaluation of the currency (which is simply the market mechanism pushing values down).
Intermediation is a U.S. banking term that describes periods when deposits flow into “time accounts” at banks - this typically occurs when interest rates are low. Deposits flow out of banks when interest rates are high (e.g., money funds paying higher rates) - this is known as “disintermediation.”
If the dollar appreciates against foreign currencies, which statement is TRUE?
A. U.S. exports are likely to fall
B. Foreign currencies buy more dollars
C. U.S. goods have become cheaper to foreign buyers
D. Foreign goods are more expensive in the U.S.
The best answer is A.
If the dollar rises, then the U.S. dollar becomes more “expensive” to buy using a foreign currency. U.S. goods become more expensive to foreigners and foreign goods become cheaper in the U.S. Thus, U.S. exports are likely to fall and foreign imports are likely to rise.
