Professional Documents
Culture Documents
2) A major challenge faced by Western Union in wiring money between the United States and Mexico is
that ________.
B) it is facing competition from some commercial banks
Answer: B
5) Which term refers to money denominated in the currency of another nation or group of nations?
A) foreign exchange
Answer: A
7) If Toranaga-san, who works for a Japanese trading company that operates in Japanese yen, wanted to
purchase Spanish castanets from a company in Barcelona and needed euros to complete the transaction,
he would use the ________ to gain access to spot euros.
B) foreign-exchange market
Answer: B
8) The relationship between the value of the Brazilian and Chinese currencies is known as the
________.
B) exchange rate
Answer: B
10) Which of the following would have the LEAST influence on price setting in the foreign exchange
market?
C) Western Union
Answer: C
14) ________ involve the exchange of currency the second day after the date on which the two foreign
exchange traders agree to the transaction.
A) Spot transactions
Answer: A
15) Outright forward transactions involve the exchange of currency on a future date beyond two
business days at a fixed exchange rate, known as the ________.
B) forward rate
Answer: B
16) In which of the following transactions is one currency swapped for another on one date and then
swapped back on a future date?
C) FX swap
Answer: C
17) A foreign exchange contract that is an agreement between two parties to buy or sell a particular
currency at a particular price at a particular date in the future as specified in a standardized contract to
all participants in the specified market is known as a(n) ________.
C) futures contract
Answer: C
18) Which of the following best explains the increase in trading activity in recent years?
A) growing emphasis on hedge funds
Answer: A
19) The ________ is the most widely traded currency in the world.
D) U.S. dollar
Answer: D
20) The U.S. dollar is most likely traded widely because it is ________.
A) a reserve currency held by many central banks
Answer: A
21) Albert, an employee at Morgan Stanley, has been given the task of handling the foreign exchange
for a customer who is moving from Brazil to Switzerland in one week. Which of the following should
Albert most likely use when exchanging the client's Brazilian real for Swiss francs?
B) cross rate
Answer: B
23) Why is London most likely the top market for trading foreign exchange?
C) London is uniquely positioned geographically in terms of time zones.
Answer: C
26) Which of the following is NOT one of the top four locations for trading foreign exchange?
A) London
B) New York
C) Tokyo
D) Hong Kong
Answer: D
27) In the spot market, the ________ is the difference between the bid and offer rates and is the trader's
profit margin.
D) spread
Answer: D
28) Which of the following is the price at which the trader is willing to sell foreign currency?
A) offer
Answer: A
29) Melissa, a foreign exchange trader, wants to buy euros from Stephanie. Which of the following is
the price at which Melissa is willing to buy euros?
C) bid
Answer: C
30) In the foreign exchange market, the bid is the rate at which ________.
C) the trader is willing to buy foreign exchange
Answer: C
31) If a foreign currency is quoted in American terms (the direct quote) and the forward rate for a
foreign currency is less than the spot rate, the foreign currency is selling at a ________.
D) forward discount
Answer: D
32) If a foreign currency is quoted in American terms (the direct quote) and the forward rate is greater
than the spot rate, the foreign currency is selling at a ________.
A) forward premium
Answer: A
33) The pound-dollar forward rate for pounds is $1.9068, and the spot rate is $1.9059. Pounds are
selling at a ________.
C) forward premium
Answer: C
34) The pound-dollar forward rate for pounds is $1.9068, and the spot rate is $1.9100. Pounds are
selling at a ________
C) forward discount
Answer: C
35) A(n) ________ is the right but not the obligation to buy or sell a foreign currency within a certain
time period or on a specific date at a specific exchange rate.
D) option
Answer: D
40) Which of the following handles the majority of all foreign exchange activities
C) commercial banks
Answer: C
41) Which of the following is NOT one of the top exchanges that trade in foreign currency futures and
options?
A) CME
B) UBS
C) NYSE Liffe
D) NASDAQ OMX
Answer: B
42) When selecting a commercial and/or investment bank to deal in foreign exchange, corporations are
most likely to use ________.
B) more than one bank to meet different needs
Answer: B
43) Companies most likely use the foreign exchange market to ________.
B) convert money for use in financial transactions
Answer: B
44) Companies most likely use the foreign exchange market to ________.
B) facilitate regular business transactions
Answer: B
45) If a company from Country A decides to sell merchandise to a company from Country B, then the
company from Country A ________.
C) can denominate the sale in either currency and use the foreign exchange market to convert currency
Answer: C
46) Which of the following is NOT a reason a company would deal in foreign exchange?
A) to pay or receive dividends in a foreign currency
B) to speculate on possible future movements in a currency
C) to buy and sell merchandise denominated in a foreign currency
D) to import merchandise denominated in its currency rather than the currency of the exporter
Answer: D
48) Gomez Enterprises, a firm based in Mexico City, exported 1,000 circuit boards to Taylor Industries,
a firm based in Chicago. Taylor received a document from Gomez that requests immediate payment for
the goods. Gomez has most likely sent a ________.
B) sight draft
Answer: B
51) A letter of credit that provides an exporter with the guarantee of another bank in addition to the
importer's bank is called ________.
A) a confirmed letter of credit
Answer: A
52) A speculator is someone who ________.
C) takes positions in foreign exchange markets to earn a profit
Answer: C
53) Anita, an employee at ABX Partners, a hedge fund firm, has purchased euros because she believes
that the euro will strengthen against other currencies. Which term best describes Anita's activities?
B) speculation
Answer: B
55) Ryan, a foreign exchange dealer, sold U.S. dollars for Swiss francs in the U.S., then sold Swiss
francs for Japanese yen in Switzerland, and then sold the Japanese yen for U.S. dollars in the U.S. Ryan
hopes that he will end up with more U.S. dollars than when he began. Which term best describes Ryan's
actions?
A) arbitrage
Answer: A
58) Which of the following best explains why migrant workers in Dubai send money back home?
A) Non-citizens cannot purchase property.
Answer: A
59) An investor sells Japanese yen which is yielding a low interest rate and uses the proceeds to buy
Swiss francs that yield a higher interest rate. Which term best describes the investor's actions?
D) carry trade
Answer: D
60) Which of the following is LEAST relevant to being designated by Euromoney magazine as a top
foreign-exchange dealer?
A) capability of handling specific currencies
B) capability of assessing cultural risk
C) capability of handling derivatives
D) capability of engaging in analytics
Answer: B
61) An exchange rate is the number of units that buys one unit of another currency.
Answer: TRUE
63) In foreign exchange markets, reporting dealers trade more foreign exchange with other reporting
dealers than with any other category of users.
Answer: TRUE
65) In an FX swap, one currency is swapped for another on one date and then swapped back on a future
date.
Answer: TRUE
66) Outright forward transactions involve the exchange of currency the second day after the date on
which the two foreign exchange traders agree to the transaction.
Answer: FALSE
67) The U.S. dollar is important as a vehicle for foreign exchange transactions between two countries
other than the United States.
Answer: TRUE
68) The U.S. dollar is so widely traded partially because the New York Stock Exchange is the biggest
foreign exchange center in the world.
Answer: FALSE
70) Hong Kong is one of the top four largest markets in the world in foreign exchange trades and the
largest in Asia.
Answer: FALSE
71) The bid is the price at which the trader is willing to sell foreign currency.
Answer: FALSE
72) In the spot market, the spread is the difference between the bid and offer rates and is the trader's
profit margin.
Answer: TRUE
73) If the forward rate for a foreign currency is less than the spot rate, the foreign currency is selling at a
forward premium.
Answer: FALSE
74) A currency sells at a forward premium when the forward rate is greater than the spot rate.
Answer: TRUE
75) Options are more flexible than forward contracts.
Answer: TRUE
76) An offer is the right but not the obligation to buy or sell foreign currency.
Answer: FALSE
77) Commercial banks look at foreign-exchange trading as a service extended primarily to important
customers, not as a major business activity of its own.
Answer: FALSE
78) Although most foreign exchange activity takes place through big money center banks, the use of
electronic trading has allowed even regional banks to deal directly in foreign exchange markets.
Answer: TRUE
79) One reason that companies use the foreign exchange market is to diversify their expenses from other
sources.
Answer: FALSE
80) Companies use the foreign exchange market to convert money for use in financial transactions.
Answer: TRUE
83) Arbitrage is the purchase of foreign currency on one market for immediate resale on a foreign
market in order to profit from a price discrepancy.
Answer: TRUE
85) EBS and Reuters provide customers with electronic foreign exchange services as well as current
market data.
Answer: TRUE
86) The Chicago Mercantile Exchange and NASDAQ are part of the OTC market.
Answer: FALSE
87) Trading activity has increased in recent years due to the growing importance of foreign exchange as
an alternative asset and the expanded emphasis on hedge funds.
Answer: TRUE
89) A major challenge faced by Western Union in transferring money between the United States and
Mexico is that Mexican citizens trust the banks but do not trust Western Union due to its reliance on
global banks.
Answer: FALSE
90) According to 2010 surveys, the most frequently traded currency pair is the U.S. dollar and Japanese
yen.
Answer: FALSE
91) What are the two major segments of the foreign exchange market? What types of foreign exchange
instruments are traded within these markets?
Answer: The foreign exchange market has two major segments: the over-the-counter market (OTC) and
the exchange-traded market. The OTC market is comprised of banks, both commercial banks and
investment banks, as well as other financial institutions, and is where most of the foreign exchange
activity takes place. The exchange-traded market is composed of securities exchanges, such as the
Philadelphia Stock Exchange and the Chicago Mercantile Exchange, where certain types of foreign
exchange instruments, such as exchange-traded options and futures, are traded. Several different types of
foreign exchange instruments are traded in these markets, but the traditional foreign exchange
instruments that comprise the bulk of foreign exchange trading are spot transactions, outright forwards,
and FX swaps. Spot transactions involve the exchange of currency the second day after the date on
which the two foreign exchange traders agree to the transaction. The rate at which the transaction is
settled is the spot rate. Outright forward transactions involve the exchange of currency three or more
days after the date on which the traders agree to the transaction. It is the single purchase or sale of a
currency for future delivery. The rate at which the transaction is settled is the forward rate and is a
contract rate between the two parties. In an FX swap, one currency is swapped for another on one date
and then swapped back on a future date. Although an FX swap is both a spot and a forward transaction,
it is accounted for as a single transaction.
93) What are the characteristics of the forward market? Why do companies participate in the forward
market? Provide an example to illustrate your answer.
Answer: The spot market is for foreign exchange transactions that occur within two business days, but
in some transactions a seller extends credit to the buyer for a period that is longer than two days. The
forward rate is the rate quoted today for future delivery. The most widely traded currencies in the
forward market are the British pound, Canadian dollar, Japanese yen, and Swiss franc. Many currencies
do not have a forward market due to the small size and volume of transactions in that currency. The
difference between the spot and forward rates is either the forward discount or the forward premium. If
the forward rate for a foreign currency is less than the spot rate, the foreign currency is selling at a
forward discount. If the forward rate is greater than the spot rate, the foreign currency is selling at a
forward premium. For example, a Japanese exporter of consumer electronics might sell television sets to
a U.S. importer with immediate delivery but payment due in 30 days. The U.S. importer is obligated to
pay in yen in 30 days and may enter into a contract with a currency dealer to deliver the yen at a forward
rate-the rate quoted today for future delivery.
97) Why would companies become involved in arbitrage? What is the difference between arbitrage and
interest arbitrage?
Answer: As with most types of foreign exchange activities, companies attempt to earn money through
arbitrage and interest arbitrage. One type of profit-seeking activity is arbitrage, which is the purchase of
foreign currency on one market for immediate resale on another market (in a different country) to profit
from a price discrepancy. Interest arbitrage is the investing in debt instruments, such as bonds, in
different countries.
99) What is the Bank for International Settlements? What three categories does the BIS designate in the
foreign exchange market? Briefly describe each category.
Answer: The foreign-exchange market is made up of many different players. The Bank for International
Settlements (BIS), a central banking institution in Basel, Switzerland, owned and controlled by 56
member central banks, divides the market into three major categories: reporting dealers, other financial
institutions, and nonfinancial institutions. Reporting dealers, also known as money center banks, are
financial institutions that actively participate in local and global foreign exchange and derivative
markets. They are mainly the large commercial and investment banks and are widely assumed to include
the 10 largest banks and financial institutions in terms of overall market share in foreign-exchange
trading: Deutsche Bank, Barclays Capital, UBS, Citi, JP Morgan, HSBC, RBS, Credit Suisse, Goldman
Sachs, and Morgan Stanley. The other financial institutions are financial institutions not classified as
reporting dealers. They include smaller commercial banks, investment banks and securities houses,
hedge funds, pension funds, money market funds, currency funds, mutual funds, specialized foreign-
exchange trading companies, and so forth. Nonfinancial customers are any counterparty other than those
described above and include any non-financial end user, such governments and companies (MNEs as
well as small- and medium-size corporations and firms).