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Chapter 05 - The Market for Foreign Exchange

Chapter 05
The Market for Foreign Exchange

Multiple Choice Questions

1. The world's largest foreign exchange trading center is
A. ew !ork.
". Tok#o.
C. $ondon.
%. &ong 'ong.

(. )n a*erage+ worldwide daily trading of foreign exchange is
A. i,possi-le to esti,ate.
". .15 -illion.
C. .50/ -illion.
%. .0.(1 trillion.

0. The foreign exchange ,arket closes
A. e*er.
". /100 p.,. E2T 3ew !ork ti,e4.
C. /100 p.,. 5MT 3$ondon ti,e4.
%. /100 p.,. 3Tok#o ti,e4.

/. Most foreign exchange transactions are for
A. inter*ention -# central -anks.
". inter-ank trades -etween international -anks or non-ank dealers.
C. retail trade.
%. p6rchase of hard c6rrencies.

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Chapter 05 - The Market for Foreign Exchange
5. The difference -etween a -roker and a dealer is
A. dealers sell dr6gs9 -rokers sell ho6ses.
". -rokers -ring together -6#ers and sellers+ -6t carr# no in*entor#9 dealers stand read# to
-6# and sell fro, their in*entor#.
C. -rokers transact in stocks and -onds9 c6rrenc# is -o6ght and sold thro6gh dealers.
%. none of the a-o*e

:. Most inter-ank trades are
A. spec6lati*e or ar-itrage transactions.
". si,ple order processing for the retail client.
C. o*ernight loans fro, one -ank to another.
%. -rokered -# dealers.

;. At the wholesale le*el
A. ,ost trading takes place )TC -etween indi*id6als on the floor of the exchange.
". ,ost trading takes place o*er the phone.
C. ,ost trading flows o*er <e6ters and E"2 platfor,s.
%. ,ost trading flows thro6gh speciali8ed =-roking= fir,s.

>. ?nter*ention in the foreign exchange ,arket is the process of
A. a central -ank re@6iring the co,,ercial -anks of that co6ntr# to trade at a set price le*el.
". co,,ercial -anks in different co6ntries coordinating efforts in order to sta-ili8e one or
,ore c6rrencies.
C. a central -ank -6#ing or selling its c6rrenc# in order to infl6ence its *al6e.
%. the go*ern,ent of a co6ntr# prohi-iting transactions in one or ,ore c6rrencies.

A. The standard si8e foreign exchange transactions are for
A. .10 ,illion B.2.
". .1 ,illion B.2.
C. C1 ,illion.

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Chapter 05 - The Market for Foreign Exchange
10. Consider a B.2. i,porter desiring to p6rchase ,erchandise fro, a %6tch exporter
in*oiced in e6ros+ at a cost of C51(+100. The B.2. i,porter will contact his B.2. -ank 3where
of co6rse he has an acco6nt deno,inated in B.2. dollars4 and in@6ire a-o6t the exchange rate+
which the -ank @6otes as C1.0(/(D.1.00. The i,porter accepts this price+ so his -ank will
EEEEEEEEEEEEthe i,porter's acco6nt in the a,o6nt of EEEEEEEEEEEE.
A. de-it+ .500+000
". credit+ C51(+100
C. credit+ .500+000
%. de-it+ C51(+100

11. The c6rrent exchange rate is F1.00 G .(.00. Co,p6te the correct -alances in "ank A's
correspondent acco6nt3s4 with -ank " if a c6rrenc# trader e,plo#ed at "ank A -6#s F/5+000
fro, a c6rrenc# trader at -ank " for .A0+000 6sing its correspondent relationship with "ank
".
A. "ank A's dollar-deno,inated acco6nt at " will fall -# .A0+000.
". "ank "'s dollar-deno,inated acco6nt at A will rise -# .A0+000.
C. "ank A's po6nd-deno,inated acco6nt at " will rise -# F/5+000.
%. "ank "'s po6nd-deno,inated acco6nt at A will fall -# F/5+000.
E. All of the a-o*e are correct

1(. The c6rrent exchange rate is F1.00 G .(.00. Co,p6te the correct -alances in "ank A's
correspondent acco6nt3s4 with -ank " if a c6rrenc# trader e,plo#ed at "ank A -6#s F/5+000
fro, a c6rrenc# trader at -ank " for .A0+000 6sing its correspondent relationship with "ank
".
A. "ank A's dollar-deno,inated acco6nt at " will rise -# .A0+000.
". "ank "'s dollar-deno,inated acco6nt at A will fall -# .A0+000.
C. "ank A's po6nd-deno,inated acco6nt at " will rise -# F/5+000.
%. "ank "'s po6nd-deno,inated acco6nt at A will rise -# F/5+000.

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Chapter 05 - The Market for Foreign Exchange
10. The c6rrent exchange rate is C1.00 G .1.50. Co,p6te the correct -alances in "ank A's
correspondent acco6nt3s4 with -ank " if a c6rrenc# trader e,plo#ed at "ank A -6#s C100+000
fro, a c6rrenc# trader at -ank " for .150+000 6sing its correspondent relationship with "ank
".
A. "ank A's dollar-deno,inated acco6nt at " will fall -# .150+000.
". "ank "'s dollar-deno,inated acco6nt at A will fall -# .150+000.
C. "ank A's po6nd-deno,inated acco6nt at " will fall -# C100+000.
%. "ank "'s po6nd-deno,inated acco6nt at A will rise -# C100+000.

1/. The spot ,arket
A. in*ol*es the al,ost-i,,ediate p6rchase or sale of foreign exchange.
". in*ol*es the sale of f6t6res+ forwards+ and options on foreign exchange.
C. takes place onl# on the floor of a ph#sical exchange.
%. all of the a-o*e.

15. 2pot foreign exchange trading
A. acco6nts for a-o6t 5 percent of all foreign exchange trading.
". acco6nts for a-o6t (0 percent of all foreign exchange trading.
C. acco6nts for a-o6t 00 percent of all foreign exchange trading.
%. acco6nts for a-o6t ;0 percent of all foreign exchange trading.

Spot Rate Quotations



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Chapter 05 - The Market for Foreign Exchange
1:. Bsing the ta-le shown+ what is the ,ost c6rrent spot exchange rate shown for "ritish
po6ndsH Bse a direct @6ote fro, a B.2. perspecti*e.
A. .1.:1 G F1.00
". .1.:0 G F1.00
C. .1.00 G F0.:(5
%. .1.;( G F1.00

1;. 26ppose that the c6rrent exchange rate is C0.>0 G .1.00. The direct @6ote+ fro, the B.2.
perspecti*e is
A. C1.00 G .1.(5.
". C0.>0 G .1.00.
C. F1.00 G .1.>0.
%. one of the a-o*e

1>. 26ppose that the c6rrent exchange rate is C1.00 G .1.:0. The indirect @6ote+ fro, the B.2.
perspecti*e is
A. C1.00 G .1.:0.
". C0.:(50 G .1.00.
C. C1.:0 G .1.00.
%. one of the a-o*e

1A. 26ppose that the c6rrent exchange rate is F1.00 G .(.00. The indirect @6ote+ fro, the B.2.
perspecti*e is
A. F1.00 G .(.00.
". F1.00 G .0.50.
C. F0.50 G .1.00.
%. one of the a-o*e

(0. ?ndirect exchange rate @6otations fro, the B.2. perspecti*e are
A. the price of one 6nit of the foreign c6rrenc# in ter,s of the B.2. dollar.
". the price of one B.2. dollar in the foreign c6rrenc#.

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Chapter 05 - The Market for Foreign Exchange
(1. ?t is co,,on practice a,ong c6rrenc# traders worldwide to -oth price and trade
c6rrencies against the B.2. dollar. ?n fact+ (00; "?2 statistics indicate that a-o6t EEEEEEEEE of
c6rrenc# trading in the world in*ol*es the B.2. dollar on one side of the transaction.
A. >: percent
". ;5 percent
C. /5 percent
%. 15 percent

((. ?t is co,,on practice a,ong c6rrenc# traders worldwide to -oth price and trade
c6rrencies against the B.2. dollar. Consider a c6rrenc# dealer who ,akes a ,arket in 5
c6rrencies against the dollar. ?f he were to s6ppl# @6otes for each c6rrenc# in ter,s of all of
the others+ how ,an# @6otes wo6ld he ha*e to pro*ideH
A. 0:
". 00
C. :0
%. 1(0
E. one of the a-o*e

(0. The "id price
A. is the price that the dealer has I6st paid for so,ething+ his historical cost of the ,ost recent
trade.
". is the price that a dealer stands read# to pa#.
C. refers onl# to a6ctions like e"a#+ not o*er the co6nter transactions with dealers.
%. is the price that a dealer stands read# to sell at.

(/. 26ppose the spot ask exchange rate+ 2
a
3.JF4+ is .1.A0 G F1.00 and the spot -id exchange
rate+ 2
-
3.JF4+ is .1.>A G F1.00. ?f #o6 were to -6# .10+000+000 worth of "ritish po6nds and
then sell the, fi*e ,in6tes later+ how ,6ch of #o6r .10+000+000 wo6ld -e =eaten= -# the -id-
ask spreadH
A. .1+000+000
". .5(+A10.05
C. .100+000
%. .5(+:01.5>

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Chapter 05 - The Market for Foreign Exchange
(5. ?f the .DC -id and ask prices are .1.50DC and .1.51DC+ respecti*el#+ the corresponding CD.
-id and ask prices are
A. C0.:::; and C0.::(0.
". .1.51 and .1.50.
C. C0.::(0 and C0.:::;.
%. cannot -e deter,ined with the infor,ation gi*en.

(:. ?n con*ersation+ inter-ank foreign exchange traders 6se a shorthand a--re*iation in
expressing spot c6rrenc# @6otations. Consider a .DF -id-ask @6ote of .1.A0;(-.1.A0;;. The
=-ig fig6re=+ ass6,ed to -e known to all traders is EEEEE.
A. 1.A0;;
". 1
C. 1.A0
%. ;;

(;. ?n con*ersation+ inter-ank foreign exchange traders 6se a shorthand a--re*iation in
expressing spot c6rrenc# @6otations. Consider a .DF -id-ask @6ote of .1.A0;(-.1.A0;;. The
c6rrenc# dealer wo6ld likel# @6ote that as EEEEE.
A. ;(-;;
". ;;-;(
C. 5 points
%. one of the a-o*e

(>. ?n the ?nter-ank ,arket+ the standard si8e of a trade a,ong large -anks in the ,aIor
c6rrencies is
A. for the B.2.-dollar e@6i*alent of .10+000+000+000.
". for the B.2.-dollar e@6i*alent of .10+000+000.
C. for the B.2.-dollar e@6i*alent of .100+000.
%. for the B.2.-dollar e@6i*alent of .1+000.

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Chapter 05 - The Market for Foreign Exchange
(A. A dealer in "ritish po6nds who thinks that the po6nd is a-o6t to appreciate
A. ,a# want to widen his -id-ask spread -# raising his ask price.
". ,a# want to lower his -id price.
C. ,a# want to lower his ask price.
%. none of the a-o*e

00. A dealer in "ritish po6nds who thinks that the po6nd is a-o6t to depreciate
A. ,a# want to widen his -id-ask spread -# raising his ask price.
". ,a# want to lower his -id price and his ask price.
C. ,a# want to lower his ask price.
%. none of the a-o*e.

01. A dealer in po6nds who thinks that the exchange rate is a-o6t to increase in *olatilit#
A. ,a# want to widen his -id-ask spread.
". ,a# want to decrease his -id-ask spread.
C. ,a# want to lower his ask price.
%. none of the a-o*e.




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Chapter 05 - The Market for Foreign Exchange
0(. Bsing the ta-le shown+ what is the spot cross-exchange rate -etween po6nds and e6roH
A. C1.00 G F0.;5
". F1.00 G C1.00
C. F1.00 G C0.;5
%. none of the a-o*e

00. The dollar-e6ro exchange rate is .1.(5 G C1.00 and the dollar-#en exchange rate is K100 G
.1.00. Lhat is the e6ro-#en cross rateH
A. K1(5 G C1.00
". K1.00 G C1(5
C. K1.00 G C0.>0
%. one of the a-o*e

0/. 26ppose #o6 o-ser*e the following exchange rates1 C1 G .1.(59 F1 G .(.00. Calc6late the
e6ro-po6nd exchange rate.
A. C1 G F1.:0
". C1 G F0.:(5
C. C(.50 G F1
%. C1 G F(.50

05. The AB%D. spot exchange rate is AB%1.:0D. and the 2FD. is 2F1.(5D.. The AB%D2F
cross exchange rate is EEEEE.
A. 0.;>10
". (.0000
C. 1.(>00
%. 0.0500

0:. 26ppose #o6 o-ser*e the following exchange rates1 C1 G .1.509 F1 G .(.00. Calc6late the
e6ro-po6nd exchange rate.
A. C1.0000 G F1.00
". F1.0000 G C1.00
C. C0.00 G F1
%. C1.(5 G F1.00

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Chapter 05 - The Market for Foreign Exchange
0;. 26ppose #o6 o-ser*e the following exchange rates1 C1 G .1.:09 F1 G .(.00. Calc6late the
e6ro-po6nd exchange rate.
A. C1.0000 G F1.00
". F1.0000 G C1.00
C. C0.00 G F1
%. C1.(5 G F1.00

0>. 26ppose #o6 o-ser*e the following exchange rates1 C1 G .1.509 K1(0 G .1.00. Calc6late
the e6ro-po6nd exchange rate.
A. K100.00 G C1.00
". C1.00 G K1>0
C. K>0 G C1.00
%. C1 G F(.50

0A. 26ppose #o6 o-ser*e the following exchange rates1 C1 G .1./59 F1 G .1.A0. Calc6late the
e6ro-po6nd exchange rate.
A. C1.0100 G F1.00
". F1.0000 G C1.00
C. C(.00 G F1
%. C0 G F1



/0. Lhat is the "?% cross-exchange rate for 2wiss Francs priced in euroH
Hint1 Find the price that a c6rrenc# dealer will pa# in e6ro to -6# 2wiss francs.
A. C0.50>:DC&F
". C0.50>ADC&F
C. C0.5/:0DC&F
%. C0.5/::DC&F

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Chapter 05 - The Market for Foreign Exchange
/1. Lhat is the A2' cross-exchange rate for 2wiss Francs priced in euroH
Hint1 Find the price that a c6rrenc# dealer will take in e6ro to sell 2wiss francs.
A. C0.50>:DC&F
". C0.50>ADC&F
C. C0.5/:0DC&F
%. C0.5/::DC&F

/(. Find the no-ar-itrage cross exchange rate. The dollar-e6ro exchange rate is @6oted as
.1.:0 G C1.00 and the dollar-po6nd exchange rate is @6oted at .(.00 G F1.00.
A. C1.(5DF1.00
". .1.(5DF1.00
C. F1.(5DC1.00
%. C0.>0DF1.00



/0. Lhat is the "?% cross-exchange rate for Canadian dollars priced in euroH
Hint1 Find the price that a c6rrenc# dealer will pa# in e6ro to -6# Canadian dollars.
A. C0.:0A/DCA%
". C0.:10/DCA%
C. C0.:1>1DCA%
%. C0.:1A1DCA%

//. Lhat is the A2' cross-exchange rate for Canadian dollars priced in euroH
Hint1 Find the price that a c6rrenc# dealer will take in e6ro to sell Canadian dollars.
A. C0.:0A/DCA%
". C0.:10/DCA%
C. C0.:1>1DCA%
%. C0.:1A1DCA%

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Chapter 05 - The Market for Foreign Exchange
/5. Find the no-ar-itrage cross exchange rate. The dollar-e6ro exchange rate is @6oted as
.1.:0 G C1.00 and the dollar-#en exchange rate is @6oted at .1.00 G K1(0.
A. K1A(DC1.00
". C1.A(DK100
C. C1.(5DK1.00
%. C1.00DK1.A(

/:. The e6ro-po6nd cross exchange rate can -e co,p6ted as1
A. S3CDF4 G S3.DF4 × S3CD.4
".
C.
%. all of the a-o*e

/;. 26ppose a -ank c6sto,er wishes to trade o6t of "ritish po6nds and into 2wiss francs.
A. ?n dealer Iargon+ this is a c6rrenc# against c6rrenc# trade.
". The -ank will fre@6entl# handle s6ch a trade -# selling "ritish po6nds for B.2. dollars and
then -6#ing 2wiss francs with B.2. dollars.
C. The -ank wo6ld t#picall# sell the "ritish po6nds directl# for 2wiss francs.
%. "oth a4 and -4

/>. ?ncl6ding the transactions costs of the -id-ask spread+ the e6ro-po6nd cross exchange rate
for a c6sto,er who wants to sell e6ro and -6# po6nds can -e co,p6ted as
A. S
b
3FDC4 G S
b
3.DC4 × S
b
3FD.4
". S
a
3CDF4 G S
a
3CD.4 × S
a
3.DF4
C. S
b
3CDF4 G S
b
3.DC4 ×
%. All of the a-o*e

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Chapter 05 - The Market for Foreign Exchange
/A. 26ppose a -ank c6sto,er with C1+000+000 wishes to trade o6t of e6ro and into Mapanese
#en. The dollar-e6ro exchange rate is @6oted as .1.:0 G C1.00 and the dollar-#en exchange
rate is @6oted at .1.00 G K1(0. &ow ,an# #en will the c6sto,er getH
A. K1A(+000+000
". K5+(0>+000
C. K;5+000+000
%. K5+(0>.00




50. Bsing the ta-le a-o*e+ what is the -id price of po6nds in ter,s of e6roH
A. C1.00;1DF
". C1.00;>DF
C. F0.;/;5DC
%. F0.;/;ADC

51. Bsing the ta-le a-o*e+ what is the ask price of po6nds in ter,s of e6roH
A. C1.00;1DF
". C1.00;>DF
C. F0.;/;5DC
%. F0.;/;ADC

5(. Bsing the ta-le a-o*e+ what is the -id price of e6ro in ter,s of po6ndsH
A. C1.00;1DF
". C1.00;>DF
C. F0.;/;5DC
%. F0.;/;ADC

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Chapter 05 - The Market for Foreign Exchange
50. Bsing the ta-le a-o*e+ what is the ask price of e6ro in ter,s of po6ndsH
A. C1.00;1DF
". C1.00;>DF
C. F0.;/;5DC
%. F0.;/;ADC

5/. 26ppose #o6 o-ser*e the following exchange rates1 C1 G ..>59 F1 G .1.:09 and C(.00 G
F1.00. 2tarting with .1+000+000+ how can #o6 ,ake ,one#H
A. Exchange .1, for F:(5+000 at F1 G .1.:0. "6# C1+(50+000 at C( G F1.009 trade for
.1+0:(+500 at C1 G ..>5.
". 2tart with dollars+ exchange for e6ros at C1 G ..>59 exchange for po6nds at C(.00 G F1.009
exchange for dollars at F1 G .1.:0.
C. 2tart with e6ros9 exchange for po6nds9 exchange for dollars9 exchange for e6ros.
%. o ar-itrage profit is possi-le.

55. !o6 are a B.2.--ased treas6rer with .1+000+000 to in*est. The dollar-e6ro exchange rate is
@6oted as .1.(0 G C1.00 and the dollar-po6nd exchange rate is @6oted at .1.>0 G F1.00. ?f a
-ank @6otes #o6 a cross rate of F1.00 G C1.50 how ,6ch ,one# can an ast6te trader ,akeH
A. o ar-itrage is possi-le
". .1+1:0+000
C. .500+000
%. .(50+000

5:. !o6 are a B.2.--ased treas6rer with .1+000+000 to in*est. The dollar-e6ro exchange rate is
@6oted as .1.:0 G C1.00 and the dollar-po6nd exchange rate is @6oted at .(.00 G F1.00. ?f a
-ank @6otes #o6 a cross rate of F1.00 G C1.(0 how ,6ch ,one# can an ast6te trader ,akeH
A. o ar-itrage is possi-le
". .1+1:0+000
C. ./1+::;
%. ./0+000

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Chapter 05 - The Market for Foreign Exchange
5;. !o6 are a B.2.--ased treas6rer with .1+000+000 to in*est. The dollar-e6ro exchange rate is
@6oted as .1.:0 G C1.00 and the dollar-po6nd exchange rate is @6oted at .(.00 G F1.00. ?f a
-ank @6otes #o6 a cross rate of F1.00 G C1.(0 how can #o6 ,ake ,one#H
A. o ar-itrage is possi-le
". "6# e6ro at .1.:0DC+ -6# F at C1.(0DF+ sell F at .(DF
C. "6# F .(DF+ -6# C at C1.(0DF+ sell C at .1.:0DC

5>. The 2ingapore dollarNB.2. dollar 32.D.4 spot exchange rate is 2.1.:0D.+ the Canadian
dollarNB.2. dollar 3C%D.4 spot rate is C%1.00D. and the 2.DC%1.15. %eter,ine the triang6lar
ar-itrage profit that is possi-le if #o6 ha*e .1+000+000.
A. .//+0:0 profit
". ./:+0A0 loss
C. o profit is possi-le
%. ./:+0A0 profit

5A. !o6 are a B.2.--ased treas6rer with .1+000+000 to in*est. The dollar-e6ro exchange rate is
@6oted as .1.50 G C1.00 and the dollar-po6nd exchange rate is @6oted at .(.00 G F1.00. ?f a
-ank @6otes #o6 a cross rate of F1.00 G C1.(5 how can #o6 ,ake ,one#H
A. o ar-itrage is possi-le.
". "6# e6ro at .1.50DC+ -6# F at C1.(5DF+ sell F at .(DF.
C. "6# F .(DF+ -6# C at C1.(5DF+ sell C at .1.50DC.

:0. Market ,icrostr6ct6re refers to
A. the -asic ,echanics of how a ,arketplace operates.
". the -asics of how to ,ake s,all 3,icro-si8ed4 c6rrenc# trades.
C. how ,acroecono,ic *aria-les s6ch as 5%O and inflation are deter,ined.
%. none of the a-o*e

5-15
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Chapter 05 - The Market for Foreign Exchange
:1. A recent s6r*e# of B.2. foreign exchange traders ,eas6red traders' perceptions a-o6t how
fast news e*ents that ca6se ,o*e,ents in exchange rates act6all# change the exchange rate.
The s6r*e# respondents clai, that the -6lk of the adI6st,ent to econo,ic anno6nce,ents
regarding 6ne,plo#,ent+ trade deficits+ inflation+ 5%O+ and the Federal f6nds rate takes place
within
A. ten seconds.
". one ,in6te.
C. fi*e ,in6tes.
%. one ho6r.

:(. The forward price
A. ,a# -e higher than the spot price.
". ,a# -e the sa,e as the spot price.
C. ,a# -e less than the spot price.
%. all of the a-o*e

:0. <elati*e to the spot price the forward price will -e
A. 6s6all# less than the spot price.
". 6s6all# ,ore than the spot price.
C. 6s6all# e@6al to the spot price.
%. 6s6all# less than or ,ore than the spot price ,ore often than it is e@6al to the spot price.

:/. For a B.2. trader working in A,erican @6otes+ if the forward price is higher than the spot
price
A. the c6rrenc# is trading at a pre,i6, in the forward ,arket.
". the c6rrenc# is trading at a disco6nt in the forward ,arket.
C. then #o6 sho6ld -6# at the spot+ hold on to it and sell at the forwardNit's a -6ilt-in
ar-itrage.
%. all of the a-o*eNit reall# depends if #o6're talking A,erican or E6ropean @6otes.

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Chapter 05 - The Market for Foreign Exchange
:5. The forward ,arket
A. in*ol*es contracting toda# for the f6t6re p6rchase of sale of foreign exchange at the spot
rate that will pre*ail at the ,at6rit# of the contract.
". in*ol*es contracting toda# for the f6t6re p6rchase of sale of foreign exchange at a price
agreed 6pon toda#.
C. in*ol*es contracting toda# for the right -6t not o-ligation to the f6t6re p6rchase of sale of
foreign exchange at a price agreed 6pon toda#.
%. none of the a-o*e

::. The .DC% spot -id-ask rates are .0.;5:0-.0.;:(5. The 0-,onth forward points are 1(-1:.
%eter,ine the .DC% 0-,onth forward -id-ask rates.
A. .0.;5/>-.0.;:0A
". .0.;5;(-.0.;:/1
C. .0.;51(-.0.;:1:
%. cannot -e deter,ined with the infor,ation gi*en

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Chapter 05 - The Market for Foreign Exchange
:;. <estate the following one-+ three-+ and six-,onth o6tright forward A,erican ter, -id-ask
@6otes in forward points1

A.
".
C.
%. one of the a-o*e

:>. ?f one has agreed to -6# foreign exchange forward
A. #o6 ha*e a short position in the forward contract.
". #o6 ha*e a long position in the forward contract.
C. 6ntil the exchange rate ,o*es+ #o6 ha*en't ,ade ,one#+ so #o6're neither short nor long.
%. #o6 ha*e a long position in the spot ,arket.

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Chapter 05 - The Market for Foreign Exchange
:A. The c6rrent spot exchange rate is .1.55DC and the three-,onth forward rate is .1.50DC. !o6
enter into a short position on C1+000. At ,at6rit#+ the spot exchange rate is .1.:0DC. &ow
,6ch ha*e #o6 ,ade or lostH
A. $ost .100
". Made C100
C. $ost .50
%. Made .150

;0. The c6rrent spot exchange rate is .1.55DC and the three-,onth forward rate is .1.50DC.
"ased on #o6r anal#sis of the exchange rate+ #o6 are confident that the spot exchange rate will
-e .1.5(DC in three ,onths. Ass6,e that #o6 wo6ld like to -6# or sell C1+000+000. Lhat
actions do #o6 need to take to spec6late in the forward ,arketH
A. Take a long position in a forward contract on C1+000+000 at .1.50DC.
". Take a short position in a forward contract on C1+000+000 at .1.50DC.
C. "6# e6ro toda# at the spot rate+ sell the, forward.
%. 2ell e6ro toda# at the spot rate+ -6# the, forward.

;1. The c6rrent spot exchange rate is .1./5DC and the three-,onth forward rate is .1.55DC.
"ased 6pon #o6r econo,ic forecast+ #o6 are prett# confident that the spot exchange rate will
-e .1.50DC in three ,onths. Ass6,e that #o6 wo6ld like to -6# or sell C100+000. Lhat actions
wo6ld #o6 take to spec6late in the forward ,arketH &ow ,6ch will #o6 ,ake if #o6r
prediction is correctH
A. Take a short position in a forward. ?f #o6're right #o6 will ,ake .15+000.
". Take a long position in a forward contract on e6ro. ?f #o6're right #o6 will ,ake .5+000.
C. Take a short position in a forward contract on e6ro. ?f #o6're right #o6 will ,ake .5+000.
%. Take a long position in a forward contract on e6ro. ?f #o6're right #o6 will ,ake .15+000.

;(. Consider a trader who takes a long position in a six-,onth forward contract on the e6ro.
The forward rate is .1.;5 G C1.009 the contract si8e is C:(+500. At the ,at6rit# of the contract
the spot exchange rate is .1.:5 G C1.00.
A. The trader has lost .:(5.
". The trader has lost .:+(50.
C. The trader has ,ade .:+(50.
%. The trader has lost .::+(>;.>>

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Chapter 05 - The Market for Foreign Exchange
;0. The c6rrent spot exchange rate is .1.55DC and the three-,onth forward rate is .1.50DC.
"ased on #o6r anal#sis of the exchange rate+ #o6 are confident that the spot exchange rate will
-e .1.:(DC in three ,onths. Ass6,e that #o6 wo6ld like to -6# or sell C1+000+000. Lhat
actions do #o6 need to take to spec6late in the forward ,arketH Lhat is the expected dollar
profit fro, spec6lationH
A. 2ell C1+000+000 forward for .1.50DC.
". "6# C1+000+000 forward for .1.50DC.
C. Lait three ,onths+ if #o6r forecast is correct -6# C1+000+000 at .1.5(DC.
%. "6# C1+000+000 toda# at .1.55DC9 wait three ,onths+ if #o6r forecast is correct sell
C1+000+000 at .1.:(DC.

;/. The c6rrent spot exchange rate is .1.50DC and the three-,onth forward rate is .1.55DC.
"ased on #o6r anal#sis of the exchange rate+ #o6 are confident that the spot exchange rate will
-e .1.:(DC in three ,onths. Ass6,e that #o6 wo6ld like to -6# or sell C1+000+000. Lhat
actions do #o6 need to take to spec6late in the forward ,arketH Lhat is the expected dollar
profit fro, spec6lationH
A. 2ell C1+000+000 forward for .1.50DC.
". "6# C1+000+000 forward for .1.55DC.
C. Lait three ,onths+ if #o6r forecast is correct -6# C1+000+000 at .1.:(DC.
%. "6# C1+000+000 toda# at .1.50DC9 wait three ,onths+ if #o6r forecast is correct sell
C1+000+000 at .1.:(DC.

;5. Lhich of the following is correctH
A.
".
C.
%. All of the a-o*e are correct

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Chapter 05 - The Market for Foreign Exchange
;:. Lhich of the following are correctH
A.
".
C.
%. All of the a-o*e are correct

;;. Lhich of the following are correctH
A.
".
C.
%. All of the a-o*e are correct

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Chapter 05 - The Market for Foreign Exchange
;>. Lhich of the following are correctH
A.
".
C.
%. All of the a-o*e are correct

;A. Lhen a c6rrenc# trades at a premium in the forward ,arket
A. the exchange rate is ,ore than one dollar 3e.g. C1.00 G .1.(>4.
". the exchange rate is less than one dollar.
C. the forward rate is less than the spot rate.
%. the forward rate is ,ore than the spot rate.

>0. Lhen a c6rrenc# trades at a discount in the forward ,arket
A. the forward rate is less than the spot rate.
". the forward rate is ,ore than the spot rate.
C. the forward exchange rate is less than one dollar 3e.g. C1.00 G .0.A(>4.
%. the exchange rate is less than it was #esterda#.

>1. The 2FD. spot exchange rate is 2F1.(5D. and the 1>0 da# forward exchange rate is
2F1.00D.. The forward pre,i6, 3disco6nt4 is
A. the dollar is trading at an >P pre,i6, to the 2wiss franc for deli*er# in 1>0 da#s.
". the dollar is trading at a /P pre,i6, to the 2wiss franc for deli*er# in 1>0 da#s.
C. the dollar is trading at an >P disco6nt to the 2wiss franc for deli*er# in 1>0 da#s.
%. the dollar is trading at a /P disco6nt to the 2wiss franc for deli*er# in 1>0 da#s.

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Chapter 05 - The Market for Foreign Exchange
>(. The CD. spot exchange rate is .1.50DC and the 1(0 da# forward exchange rate is 1./5DC.
The forward pre,i6, 3disco6nt4 is
A. the dollar is trading at an >P pre,i6, to the e6ro for deli*er# in 1(0 da#s.
". the dollar is trading at a 5P pre,i6, to the 2wiss franc for deli*er# in 1(0 da#s.
C. the dollar is trading at a 10P disco6nt to the e6ro for deli*er# in 1(0 da#s.
%. the dollar is trading at a 5P disco6nt to the e6ro for deli*er# in 1(0 da#s.

>0. The CD. spot exchange rate is .1.50DC and the A0-da# forward pre,i6, is 10 percent. Find
the A0-da# forward price.
A. .1.:5DC
". .1.50;5DC
C. .1.A1(5DC
%. one of the a-o*e

>/. The 2FD. spot exchange rate is 2F1.(5D. and the 1>0 forward pre,i6, is > percent. Lhat
is the o6tright 1>0 da# forward exchange rateH
A. 2F1.00D.
". 2F1.05D.
C. 2F:.(5D.
%. one of the a-o*e

>5. The 2FD. 1>0-da# forward exchange rate is 2F1.00D. and the 1>0 forward pre,i6, is >
percent. Lhat is the o6tright spot exchange rateH
A. 2F1.00D.
". 2F1.05D.
C. 2F1.(5D.
%. one of the a-o*e

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Chapter 05 - The Market for Foreign Exchange
>:. Consider the following spot and forward rate @6otations for the 2wiss francH

Lhich of the following is tr6e1
A. The 2wiss franc is definitel# going to -e worth ,ore dollars in six ,onths.
". The 2wiss franc is pro-a-l# going to -e worth less in dollars in six ,onths.
C. The 2wiss franc is trading at a forward disco6nt.
%. The 2wiss franc is trading at a forward pre,i6,.

>;. Consider the following spot and forward rate @6otations for the 2wiss franc1

Calc6late the three-,onth forward pre,i6, in A,erican ter,s. Ass6,e 00-da# ,onths and
0:0-da# #ears.
A. 0.050.
". 0./(05.
C. 0.10:/.
%. 0.1/1(.

>>. 2wap transactions
A. in*ol*e the si,6ltaneo6s sale 3or p6rchase4 of spot foreign exchange against a forward
p6rchase 3or sale4 of approxi,atel# an e@6al a,o6nt of the foreign c6rrenc#.
". acco6nt for a-o6t half of ?nter-ank FQ trading.
C. in*ol*e trades of one foreign c6rrenc# for another witho6t going thro6gh the B.2. dollar.
%. all of the a-o*e

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Chapter 05 - The Market for Foreign Exchange
>A. As a r6le+ when the interest rate of the foreign c6rrenc# is greater than the interest rate of
the @6oting c6rrenc#+
A. the o6tright forward rate is less than the spot exchange rate.
". the o6tright forward rate is ,ore than the spot exchange rate.
C. the c6rrenc# will trade at a pre,i6, in the forward contract.
%. none of the a-o*e

A0. "ank dealers in con*ersations a,ong the,sel*es 6se a shorthand notation to @6ote -id
and ask forward prices in ter,s of forward points. This is con*enient -eca6se
A. forward points ,a# change faster than spot and forward @6otes.
". forward points ,a# re,ain constant for long periods of ti,e+ e*en if the spot rates change
fre@6entl#.
C. traders who are looking for *iolations of co*ered interest ar-itrage are less interested in the
act6al spot and forward exchange rates+ -6t are interested in the pre,i6, or disco6nt
differential ,eas6red in forward points.
%. -oth c4 and d4 are correct

A1. "ank dealers in con*ersations a,ong the,sel*es 6se a shorthand notation to @6ote -id
and ask forward prices in ter,s of forward points. Co,plete the following ta-le1

A. 1.A0/0-1.A0/;
". 1.A0/(-1.A0/A
C. 1.A00(-1.A000
%. none of the a-o*e

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Chapter 05 - The Market for Foreign Exchange
A(. An exchange-traded f6nd 3ETF4 is
A. the sa,e thing as a ,6t6al f6nd.
". a portfolio of financial assets in which shares representing fractional ownership of the f6nd
are sold and redee,ed -# the f6nd sponsor.
C. a portfolio of financial assets in which shares representing fractional ownership of the f6nd
trade on an organi8ed exchange.
%. none of the a-o*e.

A0. The largest and ,ost acti*e financial ,arket in the world is
A. the Fleet 2treet Exchange in $ondon.
". the !2E in ew !ork.
C. the FQ ,arket.
%. none of the a-o*e.

A/. ondollar c6rrenc# transactions
A. are priced -# looking at the price that ,6st exist to eli,inate ar-itrage.
". allow for triang6lar ar-itrage opport6nities to keep the c6rrenc# dealers e,plo#ed.
C. are onl# for poor people who don't ha*e dollars.
%. none of the a-o*e


Essay Questions

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Chapter 05 - The Market for Foreign Exchange
A5. Consider the -alance sheets of "ank A and "ank ". "ank A is in Milan+ "ank " is in ew
!ork. The c6rrent exchange rate is C1.00 G .1.(5. 2how the correct -alances in each acco6nt
if a c6rrenc# trader e,plo#ed at "ank A -6#s C100+000 fro, a c6rrenc# trader at -ank " for
.1(5+000 6sing its correspondent relationship with "ank ".









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Chapter 05 - The Market for Foreign Exchange
A:. Consider the -alance sheets of "ank A and "ank ". "ank A is in $ondon+ "ank " is in
ew !ork. The c6rrent exchange rate is F1.00 G .(.00. 2how the correct -alances in each
acco6nt if a c6rrenc# trader e,plo#ed at "ank A -6#s F/5+000 fro, a c6rrenc# trader at -ank
" for .A0+000 6sing its correspondent relationship with "ank ".









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Chapter 05 - The Market for Foreign Exchange
A;. Consider the -alance sheets of "ank A and "ank ". "ank A is in $ondon+ "ank " is in
ew !ork. The c6rrent exchange rate is F1.00 G .(.00. 2how the correct -alances in each
acco6nt if a c6rrenc# trader e,plo#ed at "ank A -6#s F50+000 fro, a c6rrenc# trader at -ank
" for .100+000 6sing its correspondent relationship with "ank ".









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Chapter 05 - The Market for Foreign Exchange



A>. Bsing the ta-le+ what is the Canadian dollar-e6ro spot cross-exchange rateH




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Chapter 05 - The Market for Foreign Exchange
AA. Bsing the ta-le+ what is the :-,onth forward po6nd-#en cross-exchange rateH




100. Bsing the ta-le+ what is 0-,onth forward pre,i6, or disco6nt 3expressed as an ann6al
percentage rate4 for the "ritish po6nd in ter,s of B.2. dollarsH




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Chapter 05 - The Market for Foreign Exchange
Chapter 05 The Market for Foreign Exchange Answer 'e#


Multiple Choice Questions

1. The world's largest foreign exchange trading center is
A. ew !ork.
". Tok#o.
C. $ondon.
%. &ong 'ong.

Topic: Function and Structure of the FX Market

(. )n a*erage+ worldwide daily trading of foreign exchange is
A. i,possi-le to esti,ate.
". .15 -illion.
C. .50/ -illion.
D. .0.(1 trillion.

Topic: Function and Structure of the FX Market

0. The foreign exchange ,arket closes
A. e*er.
". /100 p.,. E2T 3ew !ork ti,e4.
C. /100 p.,. 5MT 3$ondon ti,e4.
%. /100 p.,. 3Tok#o ti,e4.

Topic: Function and Structure of the FX Market

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Chapter 05 - The Market for Foreign Exchange
/. Most foreign exchange transactions are for
A. inter*ention -# central -anks.
. inter-ank trades -etween international -anks or non-ank dealers.
C. retail trade.
%. p6rchase of hard c6rrencies.

Topic: FX Market Participants

5. The difference -etween a -roker and a dealer is
A. dealers sell dr6gs9 -rokers sell ho6ses.
. -rokers -ring together -6#ers and sellers+ -6t carr# no in*entor#9 dealers stand read# to
-6# and sell fro, their in*entor#.
C. -rokers transact in stocks and -onds9 c6rrenc# is -o6ght and sold thro6gh dealers.
%. none of the a-o*e

Topic: FX Market Participants

:. Most inter-ank trades are
A. spec6lati*e or ar-itrage transactions.
". si,ple order processing for the retail client.
C. o*ernight loans fro, one -ank to another.
%. -rokered -# dealers.

Topic: FX Market Participants

;. At the wholesale le*el
A. ,ost trading takes place )TC -etween indi*id6als on the floor of the exchange.
". ,ost trading takes place o*er the phone.
C. ,ost trading flows o*er <e6ters and E"2 platfor,s.
%. ,ost trading flows thro6gh speciali8ed =-roking= fir,s.

Topic: FX Market Participants

5-00
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an# ,anner. This doc6,ent ,a# not -e copied+ scanned+ d6plicated+ forwarded+ distri-6ted+ or posted on a we-site+ in whole or part.
Chapter 05 - The Market for Foreign Exchange
>. ?nter*ention in the foreign exchange ,arket is the process of
A. a central -ank re@6iring the co,,ercial -anks of that co6ntr# to trade at a set price le*el.
". co,,ercial -anks in different co6ntries coordinating efforts in order to sta-ili8e one or
,ore c6rrencies.
C. a central -ank -6#ing or selling its c6rrenc# in order to infl6ence its *al6e.
%. the go*ern,ent of a co6ntr# prohi-iting transactions in one or ,ore c6rrencies.

Topic: FX Market Participants

A. The standard si8e foreign exchange transactions are for
A. .10 ,illion B.2.
". .1 ,illion B.2.
C. C1 ,illion.

10. Consider a B.2. i,porter desiring to p6rchase ,erchandise fro, a %6tch exporter
in*oiced in e6ros+ at a cost of C51(+100. The B.2. i,porter will contact his B.2. -ank 3where
of co6rse he has an acco6nt deno,inated in B.2. dollars4 and in@6ire a-o6t the exchange rate+
which the -ank @6otes as C1.0(/(D.1.00. The i,porter accepts this price+ so his -ank will
EEEEEEEEEEEEthe i,porter's acco6nt in the a,o6nt of EEEEEEEEEEEE.
A. de-it+ .500+000
". credit+ C51(+100
C. credit+ .500+000
%. de-it+ C51(+100

Topic: Correspondent Bankin !elationships

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Chapter 05 - The Market for Foreign Exchange
11. The c6rrent exchange rate is F1.00 G .(.00. Co,p6te the correct -alances in "ank A's
correspondent acco6nt3s4 with -ank " if a c6rrenc# trader e,plo#ed at "ank A -6#s F/5+000
fro, a c6rrenc# trader at -ank " for .A0+000 6sing its correspondent relationship with "ank
".
A. "ank A's dollar-deno,inated acco6nt at " will fall -# .A0+000.
". "ank "'s dollar-deno,inated acco6nt at A will rise -# .A0+000.
C. "ank A's po6nd-deno,inated acco6nt at " will rise -# F/5+000.
%. "ank "'s po6nd-deno,inated acco6nt at A will fall -# F/5+000.
E. All of the a-o*e are correct

Topic: Correspondent Bankin !elationships

1(. The c6rrent exchange rate is F1.00 G .(.00. Co,p6te the correct -alances in "ank A's
correspondent acco6nt3s4 with -ank " if a c6rrenc# trader e,plo#ed at "ank A -6#s F/5+000
fro, a c6rrenc# trader at -ank " for .A0+000 6sing its correspondent relationship with "ank
".
A. "ank A's dollar-deno,inated acco6nt at " will rise -# .A0+000.
". "ank "'s dollar-deno,inated acco6nt at A will fall -# .A0+000.
C. "ank A's po6nd-deno,inated acco6nt at " will rise -# F/5+000.
%. "ank "'s po6nd-deno,inated acco6nt at A will rise -# F/5+000.

Topic: Correspondent Bankin !elationships

10. The c6rrent exchange rate is C1.00 G .1.50. Co,p6te the correct -alances in "ank A's
correspondent acco6nt3s4 with -ank " if a c6rrenc# trader e,plo#ed at "ank A -6#s C100+000
fro, a c6rrenc# trader at -ank " for .150+000 6sing its correspondent relationship with "ank
".
A. "ank A's dollar-deno,inated acco6nt at " will fall -# .150+000.
". "ank "'s dollar-deno,inated acco6nt at A will fall -# .150+000.
C. "ank A's po6nd-deno,inated acco6nt at " will fall -# C100+000.
%. "ank "'s po6nd-deno,inated acco6nt at A will rise -# C100+000.

Topic: Correspondent Bankin !elationships

5-05
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an# ,anner. This doc6,ent ,a# not -e copied+ scanned+ d6plicated+ forwarded+ distri-6ted+ or posted on a we-site+ in whole or part.
Chapter 05 - The Market for Foreign Exchange
1/. The spot ,arket
A. in*ol*es the al,ost-i,,ediate p6rchase or sale of foreign exchange.
". in*ol*es the sale of f6t6res+ forwards+ and options on foreign exchange.
C. takes place onl# on the floor of a ph#sical exchange.
%. all of the a-o*e.

Topic: The Spot Market

15. 2pot foreign exchange trading
A. acco6nts for a-o6t 5 percent of all foreign exchange trading.
". acco6nts for a-o6t (0 percent of all foreign exchange trading.
C. acco6nts for a-o6t 00 percent of all foreign exchange trading.
%. acco6nts for a-o6t ;0 percent of all foreign exchange trading.

Topic: The Spot Market

Spot Rate Quotations



5-0:
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an# ,anner. This doc6,ent ,a# not -e copied+ scanned+ d6plicated+ forwarded+ distri-6ted+ or posted on a we-site+ in whole or part.
Chapter 05 - The Market for Foreign Exchange
1:. Bsing the ta-le shown+ what is the ,ost c6rrent spot exchange rate shown for "ritish
po6ndsH Bse a direct @6ote fro, a B.2. perspecti*e.
A. .1.:1 G F1.00
. .1.:0 G F1.00
C. .1.00 G F0.:(5
%. .1.;( G F1.00

Topic: The Spot Market

1;. 26ppose that the c6rrent exchange rate is C0.>0 G .1.00. The direct @6ote+ fro, the B.2.
perspecti*e is
A. C1.00 G .1.(5.
". C0.>0 G .1.00.
C. F1.00 G .1.>0.
%. one of the a-o*e

Topic: The Spot Market

1>. 26ppose that the c6rrent exchange rate is C1.00 G .1.:0. The indirect @6ote+ fro, the B.2.
perspecti*e is
A. C1.00 G .1.:0.
. C0.:(50 G .1.00.
C. C1.:0 G .1.00.
%. one of the a-o*e

Topic: The Spot Market

1A. 26ppose that the c6rrent exchange rate is F1.00 G .(.00. The indirect @6ote+ fro, the B.2.
perspecti*e is
A. F1.00 G .(.00.
". F1.00 G .0.50.
C. F0.50 G .1.00.
%. one of the a-o*e

Topic: The Spot Market

5-0;
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Chapter 05 - The Market for Foreign Exchange
(0. ?ndirect exchange rate @6otations fro, the B.2. perspecti*e are
A. the price of one 6nit of the foreign c6rrenc# in ter,s of the B.2. dollar.
. the price of one B.2. dollar in the foreign c6rrenc#.

Topic: The Spot Market

(1. ?t is co,,on practice a,ong c6rrenc# traders worldwide to -oth price and trade
c6rrencies against the B.2. dollar. ?n fact+ (00; "?2 statistics indicate that a-o6t EEEEEEEEE of
c6rrenc# trading in the world in*ol*es the B.2. dollar on one side of the transaction.
A. >: percent
". ;5 percent
C. /5 percent
%. 15 percent

Topic: The Spot Market

((. ?t is co,,on practice a,ong c6rrenc# traders worldwide to -oth price and trade
c6rrencies against the B.2. dollar. Consider a c6rrenc# dealer who ,akes a ,arket in 5
c6rrencies against the dollar. ?f he were to s6ppl# @6otes for each c6rrenc# in ter,s of all of
the others+ how ,an# @6otes wo6ld he ha*e to pro*ideH
A. 0:
. 00
C. :0
%. 1(0
E. one of the a-o*e

Topic: The Spot Market

(0. The "id price
A. is the price that the dealer has I6st paid for so,ething+ his historical cost of the ,ost recent
trade.
. is the price that a dealer stands read# to pa#.
C. refers onl# to a6ctions like e"a#+ not o*er the co6nter transactions with dealers.
%. is the price that a dealer stands read# to sell at.

Topic: The Bid"#sk Spread

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Chapter 05 - The Market for Foreign Exchange
(/. 26ppose the spot ask exchange rate+ 2
a
3.JF4+ is .1.A0 G F1.00 and the spot -id exchange
rate+ 2
-
3.JF4+ is .1.>A G F1.00. ?f #o6 were to -6# .10+000+000 worth of "ritish po6nds and
then sell the, fi*e ,in6tes later+ how ,6ch of #o6r .10+000+000 wo6ld -e =eaten= -# the -id-
ask spreadH
A. .1+000+000
". .5(+A10.05
C. .100+000
D. .5(+:01.5>

Topic: The Bid"#sk Spread

(5. ?f the .DC -id and ask prices are .1.50DC and .1.51DC+ respecti*el#+ the corresponding CD.
-id and ask prices are
A. C0.:::; and C0.::(0.
". .1.51 and .1.50.
C. C0.::(0 and C0.:::;.
%. cannot -e deter,ined with the infor,ation gi*en.

Topic: The Bid"#sk Spread

(:. ?n con*ersation+ inter-ank foreign exchange traders 6se a shorthand a--re*iation in
expressing spot c6rrenc# @6otations. Consider a .DF -id-ask @6ote of .1.A0;(-.1.A0;;. The
=-ig fig6re=+ ass6,ed to -e known to all traders is EEEEE.
A. 1.A0;;
". 1
C. 1.A0
%. ;;

Topic: Spot FX Tradin

5-0A
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Chapter 05 - The Market for Foreign Exchange
(;. ?n con*ersation+ inter-ank foreign exchange traders 6se a shorthand a--re*iation in
expressing spot c6rrenc# @6otations. Consider a .DF -id-ask @6ote of .1.A0;(-.1.A0;;. The
c6rrenc# dealer wo6ld likel# @6ote that as EEEEE.
A. ;(-;;
". ;;-;(
C. 5 points
%. one of the a-o*e

(>. ?n the ?nter-ank ,arket+ the standard si8e of a trade a,ong large -anks in the ,aIor
c6rrencies is
A. for the B.2.-dollar e@6i*alent of .10+000+000+000.
. for the B.2.-dollar e@6i*alent of .10+000+000.
C. for the B.2.-dollar e@6i*alent of .100+000.
%. for the B.2.-dollar e@6i*alent of .1+000.

Topic: Spot FX Tradin

(A. A dealer in "ritish po6nds who thinks that the po6nd is a-o6t to appreciate
A. ,a# want to widen his -id-ask spread -# raising his ask price.
". ,a# want to lower his -id price.
C. ,a# want to lower his ask price.
D. none of the a-o*e

Topic: Spot FX Tradin

00. A dealer in "ritish po6nds who thinks that the po6nd is a-o6t to depreciate
A. ,a# want to widen his -id-ask spread -# raising his ask price.
. ,a# want to lower his -id price and his ask price.
C. ,a# want to lower his ask price.
%. none of the a-o*e.

Topic: Spot FX Tradin

5-/0
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Chapter 05 - The Market for Foreign Exchange
01. A dealer in po6nds who thinks that the exchange rate is a-o6t to increase in *olatilit#
A. ,a# want to widen his -id-ask spread.
". ,a# want to decrease his -id-ask spread.
C. ,a# want to lower his ask price.
%. none of the a-o*e.

Topic: Spot FX Tradin




0(. Bsing the ta-le shown+ what is the spot cross-exchange rate -etween po6nds and e6roH
A. C1.00 G F0.;5
". F1.00 G C1.00
C. F1.00 G C0.;5
%. none of the a-o*e

Topic: Cross"$%chane !ate &uotations

5-/1
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Chapter 05 - The Market for Foreign Exchange
00. The dollar-e6ro exchange rate is .1.(5 G C1.00 and the dollar-#en exchange rate is K100 G
.1.00. Lhat is the e6ro-#en cross rateH
A. K1(5 G C1.00
". K1.00 G C1(5
C. K1.00 G C0.>0
%. one of the a-o*e

Topic: Cross"$%chane !ate &uotations

0/. 26ppose #o6 o-ser*e the following exchange rates1 C1 G .1.(59 F1 G .(.00. Calc6late the
e6ro-po6nd exchange rate.
A. C1 G F1.:0
". C1 G F0.:(5
C. C(.50 G F1
%. C1 G F(.50

Topic: Cross"$%chane !ate &uotations

05. The AB%D. spot exchange rate is AB%1.:0D. and the 2FD. is 2F1.(5D.. The AB%D2F
cross exchange rate is EEEEE.
A. 0.;>10
". (.0000
C. 1.(>00
%. 0.0500

Topic: Cross"$%chane !ate &uotations

0:. 26ppose #o6 o-ser*e the following exchange rates1 C1 G .1.509 F1 G .(.00. Calc6late the
e6ro-po6nd exchange rate.
A. C1.0000 G F1.00
". F1.0000 G C1.00
C. C0.00 G F1
%. C1.(5 G F1.00

Topic: Cross"$%chane !ate &uotations

5-/(
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an# ,anner. This doc6,ent ,a# not -e copied+ scanned+ d6plicated+ forwarded+ distri-6ted+ or posted on a we-site+ in whole or part.
Chapter 05 - The Market for Foreign Exchange
0;. 26ppose #o6 o-ser*e the following exchange rates1 C1 G .1.:09 F1 G .(.00. Calc6late the
e6ro-po6nd exchange rate.
A. C1.0000 G F1.00
". F1.0000 G C1.00
C. C0.00 G F1
D. C1.(5 G F1.00

Topic: Cross"$%chane !ate &uotations

0>. 26ppose #o6 o-ser*e the following exchange rates1 C1 G .1.509 K1(0 G .1.00. Calc6late
the e6ro-po6nd exchange rate.
A. K100.00 G C1.00
". C1.00 G K1>0
C. K>0 G C1.00
%. C1 G F(.50

Topic: Cross"$%chane !ate &uotations

0A. 26ppose #o6 o-ser*e the following exchange rates1 C1 G .1./59 F1 G .1.A0. Calc6late the
e6ro-po6nd exchange rate.
A. C1.0100 G F1.00
". F1.0000 G C1.00
C. C(.00 G F1
%. C0 G F1

Topic: Cross"$%chane !ate &uotations



5-/0
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Chapter 05 - The Market for Foreign Exchange
/0. Lhat is the "?% cross-exchange rate for 2wiss Francs priced in euroH
Hint1 Find the price that a c6rrenc# dealer will pa# in e6ro to -6# 2wiss francs.
A. C0.50>:DC&F
". C0.50>ADC&F
C. C0.5/:0DC&F
%. C0.5/::DC&F

Topic: Cross"$%chane !ate &uotations

/1. Lhat is the A2' cross-exchange rate for 2wiss Francs priced in euroH
Hint1 Find the price that a c6rrenc# dealer will take in e6ro to sell 2wiss francs.
A. C0.50>:DC&F
". C0.50>ADC&F
C. C0.5/:0DC&F
D. C0.5/::DC&F

Topic: Cross"$%chane !ate &uotations

/(. Find the no-ar-itrage cross exchange rate. The dollar-e6ro exchange rate is @6oted as
.1.:0 G C1.00 and the dollar-po6nd exchange rate is @6oted at .(.00 G F1.00.
A. C1.(5DF1.00
". .1.(5DF1.00
C. F1.(5DC1.00
%. C0.>0DF1.00

Topic: Cross"$%chane !ate &uotations



5-//
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Chapter 05 - The Market for Foreign Exchange
/0. Lhat is the "?% cross-exchange rate for Canadian dollars priced in euroH
Hint1 Find the price that a c6rrenc# dealer will pa# in e6ro to -6# Canadian dollars.
A. C0.:0A/DCA%
". C0.:10/DCA%
C. C0.:1>1DCA%
%. C0.:1A1DCA%

Topic: Cross"$%chane !ate &uotations

//. Lhat is the A2' cross-exchange rate for Canadian dollars priced in euroH
Hint1 Find the price that a c6rrenc# dealer will take in e6ro to sell Canadian dollars.
A. C0.:0A/DCA%
". C0.:10/DCA%
C. C0.:1>1DCA%
D. C0.:1A1DCA%

Topic: Cross"$%chane !ate &uotations

/5. Find the no-ar-itrage cross exchange rate. The dollar-e6ro exchange rate is @6oted as
.1.:0 G C1.00 and the dollar-#en exchange rate is @6oted at .1.00 G K1(0.
A. K1A(DC1.00
". C1.A(DK100
C. C1.(5DK1.00
%. C1.00DK1.A(

Topic: Cross"$%chane !ate &uotations

5-/5
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Chapter 05 - The Market for Foreign Exchange
/:. The e6ro-po6nd cross exchange rate can -e co,p6ted as1
A. S3CDF4 G S3.DF4 × S3CD.4
".
C.
D. all of the a-o*e

Topic: #lternati'e $%pressions for the Cross"$%chane !ate

/;. 26ppose a -ank c6sto,er wishes to trade o6t of "ritish po6nds and into 2wiss francs.
A. ?n dealer Iargon+ this is a c6rrenc# against c6rrenc# trade.
". The -ank will fre@6entl# handle s6ch a trade -# selling "ritish po6nds for B.2. dollars and
then -6#ing 2wiss francs with B.2. dollars.
C. The -ank wo6ld t#picall# sell the "ritish po6nds directl# for 2wiss francs.
D. "oth a4 and -4

Topic: The Cross"!ate Tradin (esk

/>. ?ncl6ding the transactions costs of the -id-ask spread+ the e6ro-po6nd cross exchange rate
for a c6sto,er who wants to sell e6ro and -6# po6nds can -e co,p6ted as
A. S
b
3FDC4 G S
b
3.DC4 × S
b
3FD.4
". S
a
3CDF4 G S
a
3CD.4 × S
a
3.DF4
C. S
b
3CDF4 G S
b
3.DC4 ×
D. All of the a-o*e

Topic: The Cross"!ate Tradin (esk

5-/:
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Chapter 05 - The Market for Foreign Exchange
/A. 26ppose a -ank c6sto,er with C1+000+000 wishes to trade o6t of e6ro and into Mapanese
#en. The dollar-e6ro exchange rate is @6oted as .1.:0 G C1.00 and the dollar-#en exchange
rate is @6oted at .1.00 G K1(0. &ow ,an# #en will the c6sto,er getH
A. K1A(+000+000
". K5+(0>+000
C. K;5+000+000
%. K5+(0>.00

Topic: The Cross"!ate Tradin (esk




50. Bsing the ta-le a-o*e+ what is the -id price of po6nds in ter,s of e6roH
A. C1.00;1DF
". C1.00;>DF
C. F0.;/;5DC
%. F0.;/;ADC

Topic: The Cross"!ate Tradin (esk

51. Bsing the ta-le a-o*e+ what is the ask price of po6nds in ter,s of e6roH
A. C1.00;1DF
. C1.00;>DF
C. F0.;/;5DC
%. F0.;/;ADC

Topic: The Cross"!ate Tradin (esk

5-/;
7 (01( -# Mc5raw-&ill Ed6cation. This is proprietar# ,aterial solel# for a6thori8ed instr6ctor 6se. ot a6thori8ed for sale or distri-6tion in
an# ,anner. This doc6,ent ,a# not -e copied+ scanned+ d6plicated+ forwarded+ distri-6ted+ or posted on a we-site+ in whole or part.
Chapter 05 - The Market for Foreign Exchange
5(. Bsing the ta-le a-o*e+ what is the -id price of e6ro in ter,s of po6ndsH
A. C1.00;1DF
". C1.00;>DF
C. F0.;/;5DC
%. F0.;/;ADC

Topic: The Cross"!ate Tradin (esk

50. Bsing the ta-le a-o*e+ what is the ask price of e6ro in ter,s of po6ndsH
A. C1.00;1DF
". C1.00;>DF
C. F0.;/;5DC
D. F0.;/;ADC

Topic: The Cross"!ate Tradin (esk

5/. 26ppose #o6 o-ser*e the following exchange rates1 C1 G ..>59 F1 G .1.:09 and C(.00 G
F1.00. 2tarting with .1+000+000+ how can #o6 ,ake ,one#H
A. Exchange .1, for F:(5+000 at F1 G .1.:0. "6# C1+(50+000 at C( G F1.009 trade for
.1+0:(+500 at C1 G ..>5.
". 2tart with dollars+ exchange for e6ros at C1 G ..>59 exchange for po6nds at C(.00 G F1.009
exchange for dollars at F1 G .1.:0.
C. 2tart with e6ros9 exchange for po6nds9 exchange for dollars9 exchange for e6ros.
%. o ar-itrage profit is possi-le.

Topic: Trianular #rbitrae

55. !o6 are a B.2.--ased treas6rer with .1+000+000 to in*est. The dollar-e6ro exchange rate is
@6oted as .1.(0 G C1.00 and the dollar-po6nd exchange rate is @6oted at .1.>0 G F1.00. ?f a
-ank @6otes #o6 a cross rate of F1.00 G C1.50 how ,6ch ,one# can an ast6te trader ,akeH
A. o ar-itrage is possi-le
". .1+1:0+000
C. .500+000
%. .(50+000

Topic: Trianular #rbitrae

5-/>
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an# ,anner. This doc6,ent ,a# not -e copied+ scanned+ d6plicated+ forwarded+ distri-6ted+ or posted on a we-site+ in whole or part.
Chapter 05 - The Market for Foreign Exchange
5:. !o6 are a B.2.--ased treas6rer with .1+000+000 to in*est. The dollar-e6ro exchange rate is
@6oted as .1.:0 G C1.00 and the dollar-po6nd exchange rate is @6oted at .(.00 G F1.00. ?f a
-ank @6otes #o6 a cross rate of F1.00 G C1.(0 how ,6ch ,one# can an ast6te trader ,akeH
A. o ar-itrage is possi-le
". .1+1:0+000
C. ./1+::;
%. ./0+000

Topic: Trianular #rbitrae

5;. !o6 are a B.2.--ased treas6rer with .1+000+000 to in*est. The dollar-e6ro exchange rate is
@6oted as .1.:0 G C1.00 and the dollar-po6nd exchange rate is @6oted at .(.00 G F1.00. ?f a
-ank @6otes #o6 a cross rate of F1.00 G C1.(0 how can #o6 ,ake ,one#H
A. o ar-itrage is possi-le
. "6# e6ro at .1.:0DC+ -6# F at C1.(0DF+ sell F at .(DF
C. "6# F .(DF+ -6# C at C1.(0DF+ sell C at .1.:0DC

Topic: Trianular #rbitrae

5>. The 2ingapore dollarNB.2. dollar 32.D.4 spot exchange rate is 2.1.:0D.+ the Canadian
dollarNB.2. dollar 3C%D.4 spot rate is C%1.00D. and the 2.DC%1.15. %eter,ine the triang6lar
ar-itrage profit that is possi-le if #o6 ha*e .1+000+000.
A. .//+0:0 profit
". ./:+0A0 loss
C. o profit is possi-le
D. ./:+0A0 profit

Topic: Trianular #rbitrae

5-/A
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Chapter 05 - The Market for Foreign Exchange
5A. !o6 are a B.2.--ased treas6rer with .1+000+000 to in*est. The dollar-e6ro exchange rate is
@6oted as .1.50 G C1.00 and the dollar-po6nd exchange rate is @6oted at .(.00 G F1.00. ?f a
-ank @6otes #o6 a cross rate of F1.00 G C1.(5 how can #o6 ,ake ,one#H
A. o ar-itrage is possi-le.
. "6# e6ro at .1.50DC+ -6# F at C1.(5DF+ sell F at .(DF.
C. "6# F .(DF+ -6# C at C1.(5DF+ sell C at .1.50DC.

Topic: Trianular #rbitrae

:0. Market ,icrostr6ct6re refers to
A. the -asic ,echanics of how a ,arketplace operates.
". the -asics of how to ,ake s,all 3,icro-si8ed4 c6rrenc# trades.
C. how ,acroecono,ic *aria-les s6ch as 5%O and inflation are deter,ined.
%. none of the a-o*e

Topic: Spot Forein $%chane Market Microstructure

:1. A recent s6r*e# of B.2. foreign exchange traders ,eas6red traders' perceptions a-o6t how
fast news e*ents that ca6se ,o*e,ents in exchange rates act6all# change the exchange rate.
The s6r*e# respondents clai, that the -6lk of the adI6st,ent to econo,ic anno6nce,ents
regarding 6ne,plo#,ent+ trade deficits+ inflation+ 5%O+ and the Federal f6nds rate takes place
within
A. ten seconds.
. one ,in6te.
C. fi*e ,in6tes.
%. one ho6r.

Topic: Spot Forein $%chane Market Microstructure

:(. The forward price
A. ,a# -e higher than the spot price.
". ,a# -e the sa,e as the spot price.
C. ,a# -e less than the spot price.
D. all of the a-o*e

Topic: The Forward Market

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Chapter 05 - The Market for Foreign Exchange
:0. <elati*e to the spot price the forward price will -e
A. 6s6all# less than the spot price.
". 6s6all# ,ore than the spot price.
C. 6s6all# e@6al to the spot price.
D. 6s6all# less than or ,ore than the spot price ,ore often than it is e@6al to the spot price.

Topic: The Forward Market

:/. For a B.2. trader working in A,erican @6otes+ if the forward price is higher than the spot
price
A. the c6rrenc# is trading at a pre,i6, in the forward ,arket.
". the c6rrenc# is trading at a disco6nt in the forward ,arket.
C. then #o6 sho6ld -6# at the spot+ hold on to it and sell at the forwardNit's a -6ilt-in
ar-itrage.
%. all of the a-o*eNit reall# depends if #o6're talking A,erican or E6ropean @6otes.

Topic: The Forward Market

:5. The forward ,arket
A. in*ol*es contracting toda# for the f6t6re p6rchase of sale of foreign exchange at the spot
rate that will pre*ail at the ,at6rit# of the contract.
. in*ol*es contracting toda# for the f6t6re p6rchase of sale of foreign exchange at a price
agreed 6pon toda#.
C. in*ol*es contracting toda# for the right -6t not o-ligation to the f6t6re p6rchase of sale of
foreign exchange at a price agreed 6pon toda#.
%. none of the a-o*e

Topic: The Forward Market

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Chapter 05 - The Market for Foreign Exchange
::. The .DC% spot -id-ask rates are .0.;5:0-.0.;:(5. The 0-,onth forward points are 1(-1:.
%eter,ine the .DC% 0-,onth forward -id-ask rates.
A. .0.;5/>-.0.;:0A
. .0.;5;(-.0.;:/1
C. .0.;51(-.0.;:1:
%. cannot -e deter,ined with the infor,ation gi*en

Topic: Forward !ate &uotations

:;. <estate the following one-+ three-+ and six-,onth o6tright forward A,erican ter, -id-ask
@6otes in forward points1

A.
".
C.
%. one of the a-o*e

Topic: Forward !ate &uotations

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Chapter 05 - The Market for Foreign Exchange
:>. ?f one has agreed to -6# foreign exchange forward
A. #o6 ha*e a short position in the forward contract.
. #o6 ha*e a long position in the forward contract.
C. 6ntil the exchange rate ,o*es+ #o6 ha*en't ,ade ,one#+ so #o6're neither short nor long.
%. #o6 ha*e a long position in the spot ,arket.

Topic: )on and Short Forward Positions

:A. The c6rrent spot exchange rate is .1.55DC and the three-,onth forward rate is .1.50DC. !o6
enter into a short position on C1+000. At ,at6rit#+ the spot exchange rate is .1.:0DC. &ow
,6ch ha*e #o6 ,ade or lostH
A. $ost .100
". Made C100
C. $ost .50
%. Made .150

Topic: )on and Short Forward Positions

;0. The c6rrent spot exchange rate is .1.55DC and the three-,onth forward rate is .1.50DC.
"ased on #o6r anal#sis of the exchange rate+ #o6 are confident that the spot exchange rate will
-e .1.5(DC in three ,onths. Ass6,e that #o6 wo6ld like to -6# or sell C1+000+000. Lhat
actions do #o6 need to take to spec6late in the forward ,arketH
A. Take a long position in a forward contract on C1+000+000 at .1.50DC.
". Take a short position in a forward contract on C1+000+000 at .1.50DC.
C. "6# e6ro toda# at the spot rate+ sell the, forward.
%. 2ell e6ro toda# at the spot rate+ -6# the, forward.

Topic: )on and Short Forward Positions

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Chapter 05 - The Market for Foreign Exchange
;1. The c6rrent spot exchange rate is .1./5DC and the three-,onth forward rate is .1.55DC.
"ased 6pon #o6r econo,ic forecast+ #o6 are prett# confident that the spot exchange rate will
-e .1.50DC in three ,onths. Ass6,e that #o6 wo6ld like to -6# or sell C100+000. Lhat actions
wo6ld #o6 take to spec6late in the forward ,arketH &ow ,6ch will #o6 ,ake if #o6r
prediction is correctH
A. Take a short position in a forward. ?f #o6're right #o6 will ,ake .15+000.
". Take a long position in a forward contract on e6ro. ?f #o6're right #o6 will ,ake .5+000.
C. Take a short position in a forward contract on e6ro. ?f #o6're right #o6 will ,ake .5+000.
%. Take a long position in a forward contract on e6ro. ?f #o6're right #o6 will ,ake .15+000.

Topic: )on and Short Forward Positions

;(. Consider a trader who takes a long position in a six-,onth forward contract on the e6ro.
The forward rate is .1.;5 G C1.009 the contract si8e is C:(+500. At the ,at6rit# of the contract
the spot exchange rate is .1.:5 G C1.00.
A. The trader has lost .:(5.
. The trader has lost .:+(50.
C. The trader has ,ade .:+(50.
%. The trader has lost .::+(>;.>>

Topic: )on and Short Forward Positions

;0. The c6rrent spot exchange rate is .1.55DC and the three-,onth forward rate is .1.50DC.
"ased on #o6r anal#sis of the exchange rate+ #o6 are confident that the spot exchange rate will
-e .1.:(DC in three ,onths. Ass6,e that #o6 wo6ld like to -6# or sell C1+000+000. Lhat
actions do #o6 need to take to spec6late in the forward ,arketH Lhat is the expected dollar
profit fro, spec6lationH
A. 2ell C1+000+000 forward for .1.50DC.
. "6# C1+000+000 forward for .1.50DC.
C. Lait three ,onths+ if #o6r forecast is correct -6# C1+000+000 at .1.5(DC.
%. "6# C1+000+000 toda# at .1.55DC9 wait three ,onths+ if #o6r forecast is correct sell
C1+000+000 at .1.:(DC.

Topic: )on and Short Forward Positions

5-5/
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Chapter 05 - The Market for Foreign Exchange
;/. The c6rrent spot exchange rate is .1.50DC and the three-,onth forward rate is .1.55DC.
"ased on #o6r anal#sis of the exchange rate+ #o6 are confident that the spot exchange rate will
-e .1.:(DC in three ,onths. Ass6,e that #o6 wo6ld like to -6# or sell C1+000+000. Lhat
actions do #o6 need to take to spec6late in the forward ,arketH Lhat is the expected dollar
profit fro, spec6lationH
A. 2ell C1+000+000 forward for .1.50DC.
. "6# C1+000+000 forward for .1.55DC.
C. Lait three ,onths+ if #o6r forecast is correct -6# C1+000+000 at .1.:(DC.
%. "6# C1+000+000 toda# at .1.50DC9 wait three ,onths+ if #o6r forecast is correct sell
C1+000+000 at .1.:(DC.

Topic: )on and Short Forward Positions

;5. Lhich of the following is correctH
A.
".
C.
D. All of the a-o*e are correct

Topic: )on and Short Forward Positions

5-55
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Chapter 05 - The Market for Foreign Exchange
;:. Lhich of the following are correctH
A.
.
C.
%. All of the a-o*e are correct

Topic: )on and Short Forward Positions

;;. Lhich of the following are correctH
A.
".
C.
%. All of the a-o*e are correct

Topic: )on and Short Forward Positions

5-5:
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Chapter 05 - The Market for Foreign Exchange
;>. Lhich of the following are correctH
A.
".
C.
%. All of the a-o*e are correct

Topic: )on and Short Forward Positions

;A. Lhen a c6rrenc# trades at a premium in the forward ,arket
A. the exchange rate is ,ore than one dollar 3e.g. C1.00 G .1.(>4.
". the exchange rate is less than one dollar.
C. the forward rate is less than the spot rate.
D. the forward rate is ,ore than the spot rate.

Topic: Forward Premium

>0. Lhen a c6rrenc# trades at a discount in the forward ,arket
A. the forward rate is less than the spot rate.
". the forward rate is ,ore than the spot rate.
C. the forward exchange rate is less than one dollar 3e.g. C1.00 G .0.A(>4.
%. the exchange rate is less than it was #esterda#.

Topic: Forward Premium

5-5;
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Chapter 05 - The Market for Foreign Exchange
>1. The 2FD. spot exchange rate is 2F1.(5D. and the 1>0 da# forward exchange rate is
2F1.00D.. The forward pre,i6, 3disco6nt4 is
A. the dollar is trading at an >P pre,i6, to the 2wiss franc for deli*er# in 1>0 da#s.
". the dollar is trading at a /P pre,i6, to the 2wiss franc for deli*er# in 1>0 da#s.
C. the dollar is trading at an >P disco6nt to the 2wiss franc for deli*er# in 1>0 da#s.
%. the dollar is trading at a /P disco6nt to the 2wiss franc for deli*er# in 1>0 da#s.

Topic: Forward Premium

>(. The CD. spot exchange rate is .1.50DC and the 1(0 da# forward exchange rate is 1./5DC.
The forward pre,i6, 3disco6nt4 is
A. the dollar is trading at an >P pre,i6, to the e6ro for deli*er# in 1(0 da#s.
". the dollar is trading at a 5P pre,i6, to the 2wiss franc for deli*er# in 1(0 da#s.
C. the dollar is trading at a 10P disco6nt to the e6ro for deli*er# in 1(0 da#s.
%. the dollar is trading at a 5P disco6nt to the e6ro for deli*er# in 1(0 da#s.

Topic: Forward Premium

>0. The CD. spot exchange rate is .1.50DC and the A0-da# forward pre,i6, is 10 percent. Find
the A0-da# forward price.
A. .1.:5DC
. .1.50;5DC
C. .1.A1(5DC
%. one of the a-o*e

Topic: Forward Premium

>/. The 2FD. spot exchange rate is 2F1.(5D. and the 1>0 forward pre,i6, is > percent. Lhat
is the o6tright 1>0 da# forward exchange rateH
A. 2F1.00D.
". 2F1.05D.
C. 2F:.(5D.
%. one of the a-o*e

Topic: Forward Premium

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Chapter 05 - The Market for Foreign Exchange
>5. The 2FD. 1>0-da# forward exchange rate is 2F1.00D. and the 1>0 forward pre,i6, is >
percent. Lhat is the o6tright spot exchange rateH
A. 2F1.00D.
". 2F1.05D.
C. 2F1.(5D.
%. one of the a-o*e

Topic: Forward Premium

>:. Consider the following spot and forward rate @6otations for the 2wiss francH

Lhich of the following is tr6e1
A. The 2wiss franc is definitel# going to -e worth ,ore dollars in six ,onths.
". The 2wiss franc is pro-a-l# going to -e worth less in dollars in six ,onths.
C. The 2wiss franc is trading at a forward disco6nt.
D. The 2wiss franc is trading at a forward pre,i6,.

Topic: Forward Premium

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Chapter 05 - The Market for Foreign Exchange
>;. Consider the following spot and forward rate @6otations for the 2wiss franc1

Calc6late the three-,onth forward pre,i6, in A,erican ter,s. Ass6,e 00-da# ,onths and
0:0-da# #ears.
A. 0.050.
". 0./(05.
C. 0.10:/.
D. 0.1/1(.

Topic: Forward Premium

>>. 2wap transactions
A. in*ol*e the si,6ltaneo6s sale 3or p6rchase4 of spot foreign exchange against a forward
p6rchase 3or sale4 of approxi,atel# an e@6al a,o6nt of the foreign c6rrenc#.
". acco6nt for a-o6t half of ?nter-ank FQ trading.
C. in*ol*e trades of one foreign c6rrenc# for another witho6t going thro6gh the B.2. dollar.
%. all of the a-o*e

Topic: Swap Transactions

>A. As a r6le+ when the interest rate of the foreign c6rrenc# is greater than the interest rate of
the @6oting c6rrenc#+
A. the o6tright forward rate is less than the spot exchange rate.
". the o6tright forward rate is ,ore than the spot exchange rate.
C. the c6rrenc# will trade at a pre,i6, in the forward contract.
%. none of the a-o*e

Topic: Swap Transactions

5-:0
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Chapter 05 - The Market for Foreign Exchange
A0. "ank dealers in con*ersations a,ong the,sel*es 6se a shorthand notation to @6ote -id
and ask forward prices in ter,s of forward points. This is con*enient -eca6se
A. forward points ,a# change faster than spot and forward @6otes.
". forward points ,a# re,ain constant for long periods of ti,e+ e*en if the spot rates change
fre@6entl#.
C. traders who are looking for *iolations of co*ered interest ar-itrage are less interested in the
act6al spot and forward exchange rates+ -6t are interested in the pre,i6, or disco6nt
differential ,eas6red in forward points.
D. -oth c4 and d4 are correct

Topic: Swap Transactions

A1. "ank dealers in con*ersations a,ong the,sel*es 6se a shorthand notation to @6ote -id
and ask forward prices in ter,s of forward points. Co,plete the following ta-le1

A. 1.A0/0-1.A0/;
". 1.A0/(-1.A0/A
C. 1.A00(-1.A000
%. none of the a-o*e

Topic: Swap Transactions

A(. An exchange-traded f6nd 3ETF4 is
A. the sa,e thing as a ,6t6al f6nd.
". a portfolio of financial assets in which shares representing fractional ownership of the f6nd
are sold and redee,ed -# the f6nd sponsor.
C. a portfolio of financial assets in which shares representing fractional ownership of the f6nd
trade on an organi8ed exchange.
%. none of the a-o*e.

Topic: $%chane Traded Currency Funds

5-:1
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Chapter 05 - The Market for Foreign Exchange
A0. The largest and ,ost acti*e financial ,arket in the world is
A. the Fleet 2treet Exchange in $ondon.
". the !2E in ew !ork.
C. the FQ ,arket.
%. none of the a-o*e.

Topic: Summary

A/. ondollar c6rrenc# transactions
A. are priced -# looking at the price that ,6st exist to eli,inate ar-itrage.
". allow for triang6lar ar-itrage opport6nities to keep the c6rrenc# dealers e,plo#ed.
C. are onl# for poor people who don't ha*e dollars.
%. none of the a-o*e

Topic: Summary


Essay Questions

5-:(
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Chapter 05 - The Market for Foreign Exchange
A5. Consider the -alance sheets of "ank A and "ank ". "ank A is in Milan+ "ank " is in ew
!ork. The c6rrent exchange rate is C1.00 G .1.(5. 2how the correct -alances in each acco6nt
if a c6rrenc# trader e,plo#ed at "ank A -6#s C100+000 fro, a c6rrenc# trader at -ank " for
.1(5+000 6sing its correspondent relationship with "ank ".





5-:0
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Chapter 05 - The Market for Foreign Exchange
32ee also the OowerOoint presentation for this chapter4





Topic: Function and Structure of the FX Market

5-:/
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Chapter 05 - The Market for Foreign Exchange
A:. Consider the -alance sheets of "ank A and "ank ". "ank A is in $ondon+ "ank " is in
ew !ork. The c6rrent exchange rate is F1.00 G .(.00. 2how the correct -alances in each
acco6nt if a c6rrenc# trader e,plo#ed at "ank A -6#s F/5+000 fro, a c6rrenc# trader at -ank
" for .A0+000 6sing its correspondent relationship with "ank ".





5-:5
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Chapter 05 - The Market for Foreign Exchange
32ee also the OowerOoint presentation for this chapter4





Topic: Function and Structure of the FX Market

5-::
7 (01( -# Mc5raw-&ill Ed6cation. This is proprietar# ,aterial solel# for a6thori8ed instr6ctor 6se. ot a6thori8ed for sale or distri-6tion in
an# ,anner. This doc6,ent ,a# not -e copied+ scanned+ d6plicated+ forwarded+ distri-6ted+ or posted on a we-site+ in whole or part.
Chapter 05 - The Market for Foreign Exchange
A;. Consider the -alance sheets of "ank A and "ank ". "ank A is in $ondon+ "ank " is in
ew !ork. The c6rrent exchange rate is F1.00 G .(.00. 2how the correct -alances in each
acco6nt if a c6rrenc# trader e,plo#ed at "ank A -6#s F50+000 fro, a c6rrenc# trader at -ank
" for .100+000 6sing its correspondent relationship with "ank ".





5-:;
7 (01( -# Mc5raw-&ill Ed6cation. This is proprietar# ,aterial solel# for a6thori8ed instr6ctor 6se. ot a6thori8ed for sale or distri-6tion in
an# ,anner. This doc6,ent ,a# not -e copied+ scanned+ d6plicated+ forwarded+ distri-6ted+ or posted on a we-site+ in whole or part.
Chapter 05 - The Market for Foreign Exchange
32ee also the OowerOoint presentation for this chapter4





Topic: Function and Structure of the FX Market

5-:>
7 (01( -# Mc5raw-&ill Ed6cation. This is proprietar# ,aterial solel# for a6thori8ed instr6ctor 6se. ot a6thori8ed for sale or distri-6tion in
an# ,anner. This doc6,ent ,a# not -e copied+ scanned+ d6plicated+ forwarded+ distri-6ted+ or posted on a we-site+ in whole or part.
Chapter 05 - The Market for Foreign Exchange



A>. Bsing the ta-le+ what is the Canadian dollar-e6ro spot cross-exchange rateH



Topic: Forward Cross"$%chane !ates

5-:A
7 (01( -# Mc5raw-&ill Ed6cation. This is proprietar# ,aterial solel# for a6thori8ed instr6ctor 6se. ot a6thori8ed for sale or distri-6tion in
an# ,anner. This doc6,ent ,a# not -e copied+ scanned+ d6plicated+ forwarded+ distri-6ted+ or posted on a we-site+ in whole or part.
Chapter 05 - The Market for Foreign Exchange
AA. Bsing the ta-le+ what is the :-,onth forward po6nd-#en cross-exchange rateH


Topic: Forward Cross"$%chane !ates

100. Bsing the ta-le+ what is 0-,onth forward pre,i6, or disco6nt 3expressed as an ann6al
percentage rate4 for the "ritish po6nd in ter,s of B.2. dollarsH



Topic: Forward Cross"$%chane !ates

5-;0
7 (01( -# Mc5raw-&ill Ed6cation. This is proprietar# ,aterial solel# for a6thori8ed instr6ctor 6se. ot a6thori8ed for sale or distri-6tion in
an# ,anner. This doc6,ent ,a# not -e copied+ scanned+ d6plicated+ forwarded+ distri-6ted+ or posted on a we-site+ in whole or part.