Word quiz

Question 1

Dealers

Answer 1

make money on currency exchanges by the differences between the bid (price they offer for the currency) and the ask (the price they offer to sell the currency).

Question 2

Brokers

Answer 2

agents who facilitate trading between dealers without themselves becoming principals in the transaction

Question 3

Speculators

Answer 3

seek profit from exchange rates changes

Question 4

Arbitragers

Answer 4

seek profits from simultaneous exchange rate differences in different markets

Question 5

Speculators+ and arbitragers

Answer 5

seek to profit from trading in the market itself rather than having the foreign exchange transaction being incidental to the execution of a commercial or investment transaction.

Question 6

A spot transaction

Answer 6

in the foreign exchange market requires an almost immediate delivery of foreign exchange. (normally on the second following business day)

Question 7

A forward transaction

Answer 7

in the foreign exchange market requires delivery of foreign exchange at some future date

Question 8

Buying or selling forward

Answer 8

describe the same transaction, just which currency is referenced

Question 9

Swap transaction

Answer 9

Simultaneous purchase and sale of a given amount of fx for two different value dates.
Well known: spot against forward, forward-forward, nondeliverable forward.

Question 10

Foreign exchange rate

Answer 10

price of one currency expressed in terms of another

Question 11

(Foreign exchange rate) quotation

Answer 11

is a statement of willingness to buy or sell at an announced rate

Question 12

Forward premium or discount

Answer 12

is the percentage difference between the spot and forward exchange rate stated in annual percentage terms.

Question 13

Bid

Answer 13

is the price in one currency which a dealer will buy another currency

Question 14

Ask

Answer 14

is the price at which a dealer will sell the other currency

Question 15

Devaluation of a currency

Answer 15

drop in foreign exchange value of a currency that is pegged to another currency

Question 16

Depreciation of a currency

Answer 16

drop in the foreign exchange value of a floating currency

Question 17

Bank and nonbank traders

Answer 17

profit from buying foreign exchange at a bid price and reselling it at a slightly higher ask or offer price

Question 18

Operating exposure

Answer 18

a type of international risk exposure that measure the change in present value of a firm resulting from changes in future operating cash flows caused by unexpected changes in exchange rates.

Question 19

The fisher effect

Answer 19

states that nominal interest rates in each country are equal to the required rate of return plus compensation for expected inflation.
i=r+π
Where i= nominal interest rate, r= real interest rate and π= expected inflation.

Question 20

International fisher effect

Answer 20

the relationship between the percentage change in the spot rate over time and the differential between the comparable interest rates.

Question 21

Fisher open

Answer 21

states that the spot exchange rate should change in an equal amount but in the opposite direction to the difference in interest rates between two countries.

(S_2 - S_1) / S_1 * 100 = i_¥ - i_$

Question 22

The theory of interest rate parity

Answer 22

states that the difference in the national interest rates for securities of similar risk and maturity should be equal to but opposite in sign to the forward rate discount or premium for the foreign currency, except for transaction costs.

Question 23

Arbitrage Rule of Thumb

Answer 23

If the difference in interest rates is greater than the forward premium/discount, or expected change in the spot rate for UIA, invest in the higher interest yielding currency. If the difference in interest rates is less than the forward premium (or expected change in the spot rate), invest in the lower yielding currency.

Question 24

Uncovered interest arbitrage

Answer 24

investors borrow in countries and currencies exhibiting low interest rates and convert the proceed into currencies that offer much higher interest rates. Uncovered because the investor does not sell the higher yielding currency proceeds forward, choosing to remain uncoered and accept the currency risk of exchanging the higher yield currency into the lower yielding currency at the end of the period.

Question 25

Speculation

Answer 25

the financial manager takes a position in the expectation of profit

Question 26

Hedging

Answer 26

the financial manager uses the intstruments to reduce the risks of the corporations cash flow

Question 27

Foreign currency future contract

Answer 27

is an alternative to a forward contract, it calls for future delivery of a standard amount of currency at a fixed time and price. Can either be a short position or a long s´position.

Question 28

Foreign currency option

Answer 28

contract giving the purchaser of the option the right to buy or sell a given amount of currency at a fixed price per unit for a specified time period. “right, but not the obligation” to take an action. The buyer of the option is the holder and the seller of the option is the writer.

Question 29

Call

Answer 29

buyer has right to purchase the currency

Question 30

Put

Answer 30

buyer has the right to sell currency

Question 31

Option's three different price elements

Answer 31

- The strike price is the exchange rate at which the foreign currency can be bought or sold - The premium is the cost of the option itself paid when the option is purchased - The underlying spot rate in the market

Question 32

Call profit

Answer 32

Call profit =spot rate-(strikep price+premium) The writer of a call option has limited profit and unlimited losses if uncovered. The holder of a call has limited losses (premium) and unlimited profit.

Question 33

Break-even price

Answer 33

Call: Strikeprice + premium Put: Strikeprice - premium

Question 34

Put profit

Answer 34

Put profit =strike price-(spot rate+premium) Limited loss for a holder, unlimited loss for a writer of a put.

Question 35

The pricing of any option consists of 5 elements

Answer 35

- present spot rate - time to maturity - forward rate - interest rate - volatility (standard deviation of daily spot movement).

Question 36

Credit Risk or roll-over risk

Answer 36

is the possibility that a borrower’s creditworthiness at the time of renewing a credit, is reclassified by the lender

Question 37

Repricing risk

Answer 37

is the risk of changes in interest rates charged (earned) at the time a financial contract’s rate is being reset

Question 38

Long positition future

Answer 38

buy – believe price of the currency is going to rise in the future

Question 39

Short position future

Answer 39

sell - believe price of the currency is going to fall in the future

Question 40

has standardized contracts per currency

Answer 40

future

Question 41

has any contract size desired

Answer 41

forward

Question 42

has a fixed maturity, typically longest a year.

Answer 42

future

Question 43

, trading occurs on an organized exchange

Answer 43

future

Question 44

bill of lading

Answer 44

is issued to the exporter by a common carrier transporting the merchandise

Question 45

provides that the carrier deliver the merchandise to the designated consignee only

Answer 45

Straight B/L (bill of lading)

Question 46

directs the carrier to deliver the goods to the order of a designated party, usually the shipper

Answer 46

Order B/L (bill of lading)

Question 47

A draft

Answer 47

sometimes called a bill of exchange (B/E), is the instrument normally used in international commerce to effect payment

Question 48

is payable on presentation to the drawee

Answer 48

sight draft

Question 49

also called usance draft, allows a delay in payment. It is presented to the drawee who acce

Answer 49

time draft

Question 50

Forfaiting

Answer 50

is an international trade technique that can provide medium and long-term financing

Question 51

Letter of Credit (L/C)

Answer 51

) is a bank’s conditional promise to pay issued by a bank at the request of an importer in which the bank promises to pay an exporter upon presentation of documents specified in the L/C

Question 52

A back-to-back loan

Answer 52

also referred to as a parallel loan or credit swap, occurs when two firms in different countries arrange to borrow each other’s currency for a specific period of time

Question 53

Risk-sharing

Answer 53

is a contractual arrangement in which the buyer and seller agree to “share” or split currency movement impacts on payments

Question 54

Financing cash flows

Answer 54

are payments for the use of inter and intracompany loans and stockholder equity

Question 55

------ is far more important for the long-run health of a business than changes caused by transaction or translation exposure

Answer 55

Operating exposure

Question 56

Operating cash flows

Answer 56

arise from intercompany and intracompany receivables and payables, rent and lease payments, royalty and licensing fees, and other associated fees

Question 57

Foreign exchange exposure

Answer 57

measure of the potential for a firm’s profitability, net cash flow and market value to change because of a change in exchange rates

Question 58

Transaction exposure

Answer 58

measures the changes in the value of outstanding financial obligation incurred prior to a change in exchange rate but not due to be settled until after the exchange rate changes

Question 59

Translation exposure

Answer 59

accounting exposure, is the potential for accounting derived changes in owners equity to occur because of the need to translate financial statements of foreign subsidiaries into a single reporting currency for consolidated financial statements.

Question 60

Intrinsic value

Answer 60

is the financial gain if the option is exercised immediately

Question 61

Call profit:

Answer 61

spot rate-(strike price+premium)

Question 62

Put profit:

Answer 62

strike price-(spot rate+premium)

Question 63

Foreign currency future contract

Answer 63

is an alternative to a forward contract, it calls for future delivery of a standard amount of currency at a fixed time and price. Can either be a short position or a long s´position.