The world’s largest foreign exchange trading center is:
a) New York
b) Tokyo
c) London
d) Hong Kong
Answer: c)
2 On average, worldwide daily trading of foreign exchange is
a) impossible to estimate
b) $15 billion
c) $504 billion
d) $1.88 trillion
Answer: d)
3 The foreign exchange market closes
a) Never
b) 4:00 p.m. EST (New York time)
c) 4:00 p.m. GMT (London time)
d) 4:00 p.m. (Tokyo time)
Answer: a)
4 Most foreign exchange transactions are for:
a) Intervention by central banks
b) Interbank trades between international banks or nonbank dealers
c) retail trade
d) purchase of hard currencies
Answer: b)
5 The difference between a broker and a dealer is
a) Dealers sell drugs, brokers sell houses.
b) Brokers bring together buyers and sellers, but carry no inventory. Dealers stand ready to buy and sell from their inventory.
c) Brokers transact in stocks and bonds; currency is bought and sold through dealers.
d) None of the above
Answer b) Rationale: if someone complains about a) being correct, ask them who would sell a crack house or a meth lab.
6 Most Interbank trades are
a) Speculative or arbitrage transactions
b) Simple order processing for the retail client
c) Overnight loans from one bank to another
d) Brokered by dealers
Answer a)
7 At the wholesale level
a) Most trading takes place OTC between individuals on the floor of the exchange
b) Most trading takes place over the phone
c) Most trading flows over Reuters and EBS platforms
d) Most trading flows through specialized ―broking firms
8 Intervention in the foreign exchange market is the process of:
a) A central bank requiring the commercial banks of that country to trade at a set price level.
b) Commercial banks in different countries coordinating efforts in order to stabilize one or more currencies.
c) A central bank buying or selling its currency in order to influence its value.
d) The government of a country prohibiting transactions in one or more currencies.
10 The spot market
a) Involves the almost-immediate purchase or sale of foreign exchange.
b) Involves the sale of futures, forwards, and options on foreign exchange
c) Takes place only on the floor of a physical trading floor
d) All of the above.
11 Spot foreign exchange trading
a) accounts for about 5 percent of all foreign exchange trading
b) accounts for about 20 percent of all foreign exchange trading
c) accounts for about 35 percent of all foreign exchange trading
d) accounts for about 70 percent of all foreign exchange trading
13 It is common practice among currency traders worldwide to both price and trade currencies against the U.S. dollar. In fact, BIS statistics indicate that about __ percent of currency trading in the world involves the U.S. dollar on one side of the transaction
a) 90 percent
b) 75 percent
c) 45 percent
d) 15 percent
14 Suppose that the current exchange rate is €0.80 = $1.00. The direct quote, from the U.S. perspective is
a) €1.00 = $1.25
b) €0.80 = $1.00
c) £1.00 = $1.80
Answer: a) Rationale: The direct quotation, from the U.S. perspective, the price of one unit of the foreign currency priced in U.S. dollars
15 The Bid price
a) Is the price that the dealer has paid for something, his historical cost
b) Is the price that a dealer stands ready to pay
c) Refers only to auctions like eBay, not over the counter transactions with dealers
d) Is the price that a dealer stands ready to sell at
Answer: b The bid price is the price a dealer will pay; the ask price is the price he charges to sell. Answer a) is a bit tricky, but the dealer’s historical cost is not necessarily the price at which he will be willing to buy more
16 Suppose the spot ask exchange rate, Sa ($|£), is $1.90 = £1.00 and the spot bid exchange rate, Sb ($|£), is $1.89 = £1.00. If you were to buy $10,000,000 worth of British pounds and then sell them five minutes later, how much of your $10,000,000 would be eaten by the bid-ask spread?
a) $1,000,000
b) $52,910.05
c) $100,000
d) $52,631.58
17 If the $/£ bid and ask prices are $1.50 and $1.51, respectively, the corresponding £/$ bid and ask prices are:
a) £0.6667 and £0.6623
b) $1.51 and $1.50
c) £0.6623 and £0.6667
d) cannot be determined with the information given
18 In conversation, Interbank FX trades use a shorthand abbreviation in expressing spot currency quotations. Consider a $/£ bid-ask quote of $1.9072-$1.9077. The ―big figure, assumed to be known to all traders is:
a) $1.9077
b) 1
c) 1.90
d) 77
19 in the Interbank market, the standard size of a trade among large banks in the major currencies is
a) for the U.S.-dollar equivalent of $10,000,000,000
b) for the U.S.-dollar equivalent of $10,000,000
c) for the U.S.-dollar equivalent of $100,000.
d) for the U.S.-dollar equivalent of $1,000
20 A dealer in British pounds who thinks that the pound is about to appreciate
a) May want to widen his bid-ask spread by raising his ask price
b) May want to lower his bid price
c) May want to lower his ask price
Answer: c) Rationale: A dealer who thinks that the pound is about to appreciate will want to increase his inventory, none of the strategies listed will accomplish this. While a)
22 The dollar-euro exchange rate is $1.25 = €1.00 and the dollar-yen exchange rate is ¥100 = $1.00. What is the euro-yen cross rate?
a) ¥125 = €1.00
b) ¥1.00 = €125
c) ¥1.00 = €0.80
23 The AUD/$ spot exchange rate is AUD1.60/$ and the SF/$ is SF1.25/$. The AUD/SF cross exchange rate is:
a) 0.7813
b) 2.0000
c) 1.2800
d) 0.3500
28 You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is quoted as $1.20 = €1.00 and the dollar-pound exchange rate is quoted at $1.80 = £1.00. If a bank quotes you a cross rate of £1.00 = €1.50 how much money can an astute trader make?
a) No arbitrage is possible
b) $1,160,000
c) $500,000
d) $250,000
31 The forward price
a) May be higher than the spot price
b) May be the same as the spot price
c) May be less than the spot price
d) All of the above
32 Relative to the spot price the forward price will be
a) Usually less than the spot price
b) Usually more than the spot price
c) Usually equal to the spot price
d) Usually less than or more than the spot price more often than it is equal to the spot price.
33 For a U.S. trader working in American quotes, if the forward price is higher than the spot price
a) The currency is trading at a premium in the forward market
b) The currency is trading at a discount in the forward market
c) Then you should buy at the spot, hold on to it and sell at the forward—it’s a builtin arbitrage.
d) All of the above—it really depends if you’re talking American or European quotes
Answer: a) Rationale: d) is tricky and you will get some students lobbying hard for it—until you remind them to read the question carefully
34 The forward market
a) Involves contracting today for the future purchase of sale of foreign exchange at the spot rate that will prevail at the maturity of the contract.
b) Involves contracting today for the future purchase of sale of foreign exchange at a price agreed upon today.
c) Involves contracting today for the right but not obligation to the future purchase of sale of foreign exchange at a price agreed upon today.
35 The $/CD spot bid-ask rates are $0.7560-$0.7625. The 3-month forward points are 12-16. Determine the $/CD 3-month forward bid-ask rates.
a) $0.7548-$0.7609
b) $0.7572-$0.7641
c) $0.7512-$0.7616
Answer: b) Rationale: forward bid = $0.7560 + 0.0012 = $0.7572; forward ask = $0.7625 + 0.0016 = $0.7641.
36 If one has agreed to buy foreign exchange forward
a) You have a short position in the forward contract
b) You have a long position in the forward contract
c) Until the exchange rate moves, you haven’t made money, so you’re neither short nor long
d) You have a long position in the spot market
37 The current spot exchange rate is $1.55/£ and the three-month forward rate is $1.50/£. You enter into a short position on £1,000. At maturity, the spot exchange rate is $1.60/£. How much have you made or lost?
a) Lost $100
b) Made £100
c) Lost $50
d) Made $150
Answer: a) Rationale: Your loss will be $100 = £1,000 × ($1.50/£ – $1.60/£)
38 The current spot exchange rate is $1.55/£ and the three-month forward rate is $1.50/£. Based on your analysis of the exchange rate, you are confident that the spot exchange rate will be $1.52/£ in three months. Assume that you would like to buy or sell £1,000,000. What actions do you need to take to speculate in the forward market?
a) Take a long position in a forward contract on £1,000,000 at $1.50/£.
b) Take a short position in a forward contract on £1,000,000 at $1.50/£.
c) Buy pounds today at the spot rate, sell them forward
d) Sell pounds today at the spot rate, buy them forward
Answer; a) Rationale: Your expected profit will be $20,000 = £1,000,000 × ($1.52 – $1.50) c) and d) are wrong because the question asks ―What actions do you need to take to speculate in the forward market?‖ not the spot market. In addition, there is no information regarding interest rates.
39 The current spot exchange rate is $1.55/£ and the three-month forward rate is $1.50/£. Based on your analysis of the exchange rate, you are confident that the spot exchange rate will be $1.52/£ in three months. Assume that you would like to buy or sell £1,000,000. What actions do you need to take to speculate in the forward market? What is the expected dollar profit from speculation?
a) Sell £1,000,000 forward for $1.50/£.
b) Buy £1,000,000 forward for $1.50/£.
c) Wait three months, if your forecast is correct buy £1,000,000 at $1.52/£
d) Sell £1,000,000 today at $1.55/£; wait three months, if your forecast is correct buy £1,000,000 back at $1.52/£
Answer: b) Rationale: if you agree to buy £1,000,000 forward for $1.50/£ and the price is actually turns out to be $1.52/£ in three months, your expected profit will be $20,000 = £1,000,000 × ($1.52 – $1.50) Answer d), while tempting from an accounting standpoint, is wrong since the question asks you to make money with futures, not by holding a spot position.
Answer: d) Rationale: these are equations 5.14, 5.15, and 5.16.
45 When a currency trades at a premium in the forward market
a) The exchange rate is more than one dollar (e.g. €1.00 = $1.28)
b) The exchange rate is less than one dollar
c) The forward rate is less than the spot rate
d) The forward rate is more than the spot rate.
46 When a currency trades at a discount in the forward market
a) The forward rate is less than the spot rate
b) The forward rate is more than the spot rate.
c) The forward exchange rate is less than one dollar (e.g. €1.00 = $0.928)
d) The exchange rate is less than it was yesterday
47 The SF/$ spot exchange rate is SF1.25/$ and the 180 day forward exchange rate is SF1.30/$. The forward premium (discount) is:
a) The dollar is trading at an 8% premium to the Swiss franc for delivery in 180 days.
b) The dollar is trading at a 4% premium to the Swiss franc for delivery in 180 days.
c) The dollar is trading at an 8% discount to the Swiss franc for delivery in 180 days.
d) The dollar is trading at a 4% discount to the Swiss franc for delivery in 180 days.
Answer A:
48 The SF/$ spot exchange rate is SF1.25/$ and the 180 forward premium is 8 percent. What is the outright 180 day forward exchange rate?
a) SF1.30/$
b) SF1.35/$
c) SF6.25/$
49 The largest and most active financial market in the world is
a) The Fleet Street Exchange in London
b) The NYSE in New York
c) The FX market
Answer: c).
50 Nondollar currency transactions
a) Are priced by looking at the price that must exist to eliminate arbitrage.
b) Allow for triangular arbitrage opportunities to keep the currency dealers employed.
c) Are only for poor people who don’t have dollars.
d) None of the above.
d
25 Suppose a bank customer wishes to trade out of British pounds and into Swiss francs.
a) In dealer jargon, this is a currency against currency trade
b) The bank will frequently handle such a trade by selling British pounds for U.S. dollars and then buying francs with U.S. dollars. c) The bank would sell the British pounds directly for Swiss francs.
d) a) and b) but not c)
27 The Singapore dollar—U.S. dollar (S$/$) spot exchange rate is S$1.60/$, the Canadian dollar—U.S. dollar (CD/$) spot rate is CD1.33/$ and the S$/CD1.15. Determine the triangular arbitrage profit that is possible if you have $1,000,000.
a) $44,063 profit
b) $46,093 loss
c) No profit is possible
d) $46,093 profit
41 Swap transactions
a) Involve the simultaneous sale (or purchase) of spot foreign exchange against a forward purchase (or sale) of approximately an equal amount of the foreign currency.
b) Account for about half of Interbank FX trading.
c) All of the above
d) Involve trades of one foreign currency for another without going through the U.S. dollar Answer: a)
a
42 As a rule, when the interest rate of the foreign currency is greater than the interest rate of the quoting currency,
a) the outright forward rate is less than the spot exchange rate
b) the outright forward rate is more than the spot exchange rate c) the currency will trade at a premium in the forward contract
d) none of the above
43 Bank dealers in conversations among themselves use a shorthand notation to quote bid and ask forward prices in terms of forward points. This is convenient because:
a) Forward points may change faster than spot and forward quotes.
b) In swap transactions where the trader is attempting to minimize currency exposure the actual spot and outright forward rates are often of no consequence.
c) It’s cool to look smart around your peers
d) Time is money.
b
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