financial market test bank ch 15

Chapter 15: Foreign Exchange: The Structure and Operation of the FX Market Most foreign exchange transactions are conducted:    A. by governments B. by tourists C. in the over-the-counter market D. on the Australian Securities Exchange   The foreign exchange market is where:    A. exports and imports are traded B. exports and imports are interchanged for gold bullion C. different currencies are bought and sold D. companies organise their foreign long-term financing   The institutions that transact between the foreign exchange (FX) dealers in banks and act as principals in the FX market are called the:    A. foreign-currency dealer houses B. currency syndicates C. foreign-exchange brokers D. inter-bank currency clearinghouses   A large international organisation representing the central banks of the major developed countries is called:    A. the OECD B. the ECB C. Bank for International Settlements D. the World Trade Organization   Financial institutions active in the FX markets include:    A. commercial banks B. commodity traders C. insurance companies D. All of the given answers   Currently, the largest FX centre is in:    A. New York B. London C. Hong Kong D. Tokyo   The estimates of FX trading occurring worldwide daily are:    A. USD 100 billion to USD 500 billion B. USD 500 billion to USD 1000 billion C. USD 1500 billion to USD 2000 billion D. USD 2000 billion to USD 4000 billion   Foreign exchange brokers:    A. quote two-way prices at which they are willing to buy and sell at B. in Australia require an authority from the central bank to operate C. arbitrage price differences between the various FX markets D. seek out the best exchange rates and deal mostly with FX dealers   Which of the following market participants tend to keep exchange rates the same in all the world markets?    A. Forward markets B. Foreign exchange counter trades C. Futures markets D. Arbitrageurs   10 The central bank resources made up of foreign currencies, gold and international drawing rights are called:    A. central bank capital B. official reserve assets C. central bank floats D. official bank assets   11 If the value of a currency is influenced by a central bank that intervenes from time to time in the foreign exchange market, this is regarded as a:    A. partial float B. clean float C. dirty float D. soft float   12 If the value of a currency is determined by market forces, this is regarded as a:    A. partial float B. clean float C. dirty float D. hard float   13 If the Australian central bank wished to cause the AUD to appreciate, it would _ AUD and _ foreign currency.    A. buy; sell B. sell; sell C. sell; buy D. buy; buy   14 If the Australian central bank wished to cause the AUD to _, it would _ AUD and _ foreign currency.    A. depreciate; buy; sell B. appreciate; sell; buy C. depreciate; sell; buy D. appreciate; buy; buy   15 All of the following are primary centres of foreign exchange trading EXCEPT:    A. London B. New York C. Munich D. Tokyo   16 Which of the following statements about the foreign exchange markets is INCORRECT?    A. Trading volume exceeds USD 100 billion a day in the US B. Most foreign-exchange trading takes place in London C. It is an over-the-counter market D. Trading volume worldwide exceeds USD 1500 billion per day   17 In the FX market, trading:    A. stops after the London markets have closed B. is restricted to the hours that the Australian banks are open C. takes place at any hour of the night or day D. stops after the London and New York markets have closed   18 Which of the following statements in relation to the operation of the FX market is INCORRECT?    A. A corporation will generally need to sell foreign currency when it borrows funds from overseas capital markets for use in its own domestic operations B. The main trading floor of the FX market is located in Sydney, with subsidiary branches in other main capital cities C. The Reserve Bank may conduct FX transactions in order to change the composition of its 'official reserve assets' D. 'Dealers' in the Australian FX market are required to hold a foreign exchange dealers' authority from the Reserve Bank   19 The _ is the price at which Australian dollars can be converted into another currency, for example the euro.    A. direct exchange rate B. spot exchange rate C. exchange rate between AUD and a foreign currency D. forward exchange rate   20 For currency transactions, the spot exchange rate is the rate _, and the forward exchange rate is the rate _.    A. on that day; today B. at some specified future date; today C. today; on that date D. on that date; at some specified future date   21 Foreign exchange dealers quote _ at which they are prepared to deal in foreign currency.    A. ask prices B. two-way prices C. bid prices D. margin prices   22 The dealer quotes of a buy and a sell price on an FX currency are called:    A. arbitrage quotes B. two-way prices C. dealer spreads D. term quotes   23 Foreign exchange dealers are regarded as forming a/an market.    A. regulated and organised B. over-thecounter C. auction D. exclusively broker   24 Financial institutions that quote buy and sell prices and act as principals in the FX markets are called:    A. FX arbitrageurs B. FX brokers C. FX dealers D. FX speculators   25 The first currency mentioned in an FX quote is called the:    A. basis currency B. base currency C. root currency D. terms currency   26 The second currency named in an FX quote is called the:    A. basis currency B. base currency C. unit currency D. terms currency   27 A difference arises between the bid and ask rates of foreign currency because:    A. the rates are between different dealer banks B. of arbitrage opportunities between currencies C. foreign exchange dealers need to earn income D. it takes time to find buyers or sellers of foreign currency   28 In general, multi-million transactions _ the foreign exchange dealer's bid-offer spread.    A. have no impact on B. increase C. widen D. narrow   29 In general, the foreign exchange dealer's bid-offer spread _ with time to settlement.    A. is not concerned B. increases C. decreases D. narrows   30 In general, the foreign exchange dealer's bid-offer spread _ with increased volatility of FX.    A. is not concerned B. decreases C. widens D. narrows   31 A/An _ position is when an FX dealer enters into a forward contract to sell FX that is not held at that time.    A. arbitrage B. long C. short D. dirty   32 An Australian company has received USD in payment for goods exported At the time of receiving the USD, the exchange rate is quoted as AUD/USD 0.5650 Rather than immediately converting the USD into AUD, the company decides to 'speculate' on a favourable movement in the exchange rate In 'today + n days' the exchange rate is AUD/USD 0.5750 Which of the following statements is correct?    A. The company has taken a 'long' position in the USD B. The exporter company has made a loss on its FX position C. The opportunity cost of interest forgone will affect the profitability of the FX position D. All of the given answers   33 The spot exchange rate can be defined as the:    A. exchange rate that is settled within two business days B. exchange rate that is settled within five working days C. direct exchange rate D. exchange rate between two currencies   34 If a British car sells for £20 000 and the British pound is worth A$2.75, the Australian dollar price of the car is:    A. $13 333 B. $30 000 C. $55 000 D. $133 333   35 Calculate the current exchange rate EUR/JPY, given these two quotes: USD/EUR 0.9780-90 USD/JPY 119.20-30    A. EUR/JPY 116.57-79 B. EUR/JPY 116.67-70 C. EUR/JPY 121.86-88 D. EUR/JPY 121.76-98   36 Calculate the current exchange rate GBP/JPY, given these two quotes: USD/JPY 114.20-30 GBP/USD 1.6750-60    A. GBP/JPY 190.71-88 B. GBP/JPY 191.29-57 C. GBP/JPY 191.40-45 D. GBP/JPY 192.07-24   37 Calculate the current exchange rate AUD/GBP, given these two quotes: AUD/USD 0.5640-50 GBP/USD 1.5850-60    A. AUD/GBP 0.3558-62 B. AUD/GBP 0.3556-65 C. AUD/GBP 0.8945-55 D. AUD/GBP 0.8939-45   38 A forward transaction refers to the:    A. spot rate B. exchange rate that is determined at a specified date beyond the spot rate C. exchange rate that is specified now, but with delivery and payment at some predetermined future date D. upper limit of a currency bid-ask spread   39 The holding of foreign currency in the hope of a future sale is called a/an:    A. arbitrage position B. long position C. short position D. selling position   40 For spot transactions, the FX contract value date is:    A. that day B. one business day from the day of the transaction C. two business days from the day of the transaction D. three business days from the day of the transaction   41 It is Tuesday, 27 March 200X, and an Australian importing company has to pay a US exporter USD 75 000 within the next six weeks The company enters into a forward exchange contract with an FX dealer for 'one month forward delivery' of USD On what date will value settlement occur?    A. 29 March 200X B. 27 April 200X C. 29 April 200X D. 30 April 200X   42 If differences occur for FX rates between three or more currencies, FX dealers may perform:    A. locational arbitrage B. triangular arbitrage C. cross arbitrage D. speculative arbitrage   level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   52 When a smaller amount of a foreign currency is required to buy the Australian dollar, the currency is said to have _ with respect to the dollar.    A. appreciated B. consolidated C. depreciated D. remained fixed   Difficulty: Easy Viney - Chapter 15 #52 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   53 An Australian company is to export electronic equipment into Europe, in particular Germany and Sweden, and needs to consider the exchange rate implications of conducting business in euros and Swedish krona Spot rates quoted are: USD/EUR 0.9275-85 USD/SEK 8.4531-41 Calculate the EUR/SEK cross-rate.    A. EUR/SEK 0.1097–0.1098 B. EUR/SEK 9.1139–9.1051 C. EUR/SEK 9.1051–9.1139 D. EUR/SEK 9.1040–9.1149   Difficulty: Hard Viney - Chapter 15 #53 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   54 The difference between the spot rate and the forward rate quotation is the:    A. exchange rate arbitrage B. forward points C. interest rate parity D. indirect exchange rate   Difficulty: Easy Viney - Chapter 15 #54 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   55 The theory that the annual percentage differential in the forward market for a currency quoted in terms of another currency is equal to the approximate difference in the interest rates between two countries is known as:    A. covered interest arbitrage B. the Fisher equation C. a forward rate agreement D. interest rate parity   Difficulty: Easy Viney - Chapter 15 #55 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   56 The principle of interest rate parity asserts that the:    A. relative spot exchange rates determine the relativity between the forward exchange rates and spot rates B. relativity between spot and forward exchange rates reflects the interest rate differentials between countries C. relative forward exchange rates determine the relativity between the spot exchange rates and the forward interest rate D. relative forward exchange rates determine the relativity between the forward exchange rates and forward interest rates   Difficulty: Medium Viney - Chapter 15 #56 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   57 If interest rate parity holds, the currency of the country with the relatively _ interest rates will trade at a forward _ to the country with the relatively high interest rate.    A. low; discount B. low; premium C. low; loss D. None of the given answers   Difficulty: Easy Viney - Chapter 15 #57 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   58 If interest rate parity holds, the currency of the country with the relatively _ interest rates will trade at a forward _ to the country with the relatively _ interest rate.    A. high; premium; low B. low; discount; high C. high; discount; low D. None of the given answers   Difficulty: Easy Viney - Chapter 15 #58 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   59 An importer will be required to purchase USD in approximately six months to pay for a consignment of goods The company is concerned that the AUD may depreciate before the due date and therefore decides to enter into a forward exchange contract to protect its position The company receives the following quote: 'the Aussie is fifty-eight forty-five to fiftythree, sixty-two to sixty six' Calculate the forward exchange rate.    A. AUD/USD 0.5783-87 B. AUD/USD 0.5907-19 C. AUD/USD 0.5911-15 D. AUD/USD 0.6465-13   Difficulty: Medium Viney - Chapter 15 #59 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   60 If the spot rate is AUD/USD 0.5510-0.5515, and the six-month forward points are 48 to 53, the six-month outright forward rate would be:    A. AUD/USD 0.5462-0.5462 B. AUD/USD 0.5563-0.5558 C. AUD/USD 0.5558-0.5563 D. AUD/USD 0.5558-0.5568   Difficulty: Easy Viney - Chapter 15 #60 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   61 If the spot rate is AUD/USD 0.5526-0.5531 and the 90-day forward rate is AUD/USD 0.55780.5588, the AUD is trading at a/an:    A. expected gain B. premium C. reciprocal D. discount   Difficulty: Easy Viney - Chapter 15 #61 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   62 If the forward exchange rate is priced higher than the spot rate the currency is said to be trading at a:    A. discount B. gain C. premium D. loss   Difficulty: Easy Viney - Chapter 15 #62 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   63 If the forward points are _at a specific date, the base currency is at a _.    A. rising; forward discount B. falling; forward discount C. rising; forward loss D. falling; forward gain   Difficulty: Medium Viney - Chapter 15 #63 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   64 Which of the following principles refers to the circumstance that interest rates in different countries provide equal returns, taking into account the spot and forward exchange rates between the two countries?    A. Exchange rate parity B. Interest rate parity C. Law of one price D. Purchasing power parity   Difficulty: Easy Viney - Chapter 15 #64 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   65 A bank has been asked to provide a three-month forward AUD/USD 'buy' quote for a corporate client The following information is available to the FX dealer at the bank: Spot rate: AUD/USD 0.7654–0.7659 US interest rates: 7.73% per annum Australian interest rates: 8.64% per annum Estimate the three-month forward 'buy' rate.    A. 0.7637 B. 0.7639 C. 0.7642 D. 0.7644   Difficulty: Hard Viney - Chapter 15 #65 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   66 A bank has been asked to provide a three-month forward EUR/USD 'buy' quote for a corporate client The following information is available to the FX dealer at the bank: Bid Offer Spot EUR/USD 1.0770 1.0782 3-month US interest rate 3.75% p.a.3.85% p.a 3-month euro interest rate2.65% p.a.2.75% p.a Calculate the bid and ask a three-month forward rate.    A. EUR/USD 1.0796–1.0781 B. EUR/USD 1.0797–1.0782 C. EUR/USD 1.0738–1.0755 D. EUR/USD 1.0743–1.0750   Difficulty: Hard Viney - Chapter 15 #66 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   67 Which of the following statements is correct?    A. A currency with a higher interest rate will sell at a forward premium B. A currency with a higher interest rate will sell at a forward discount C. A currency with a higher interest rate will have a higher spot rate D. A currency with a higher interest rate will have a lower spot rate   Difficulty: Easy Viney - Chapter 15 #67 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   68 All of the following are considered 'hard' or major currencies, EXCEPT the:    A. US dollar B. euro C. Mexican peso D. British pound   Difficulty: Easy Viney - Chapter 15 #68 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   69 The financial institution responsible for monetary policy in the European Union is called the:    A. Bundesbank B. European Parliament C. Bank for International Settlements D. European Central Bank   Difficulty: Easy Viney - Chapter 15 #69 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   70 The FX market is organised as an over-the-counter market in which deposits denominated in foreign currencies are bought and sold.    TRUE The FX markets are vast global markets   Difficulty: Easy Viney - Chapter 15 #70 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   71 The largest FX market is based in New York.    FALSE Owing in part to historical factors, London is the largest FX market   Difficulty: Easy Viney - Chapter 15 #71 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   72 The FX brokers quote two-way prices at which they are prepared both to buy and sell foreign currencies and act as principals in the FX markets.    FALSE It is FX dealers that quote bid and ask prices   Difficulty: Easy Viney - Chapter 15 #72 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   73 If an Australian importer has a contract for Japanese goods denominated in yen payable in three months' time and is concerned that the AUD may appreciate, the importer may enter into a forward contract to sell the yen for delivery in three months' time.    FALSE The importer should buy a forward contact to buy the yen (and sell the AUD) in three months' time   Difficulty: Easy Viney - Chapter 15 #73 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   74 A USD/YEN quote means the price of USD1 in terms of YEN.    TRUE The first currency of a quote is the unit of the quotation   Difficulty: Easy Viney - Chapter 15 #74 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   75 Given USD/EURO0.6450-0.6455 an FX dealer would buy USD1 from you and give you EURO0.6455.    FALSE The dealer would give you EUR0.6450   Difficulty: Easy Viney - Chapter 15 #75 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   76 When a currency is quoted against the USD and the USD is the base currency, this is direct quoting.    TRUE Having the USD as the unit makes the quote direct   Difficulty: Easy Viney - Chapter 15 #76 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   77 A rule for working out a bid-ask cross rate for direct and indirect FX quotations is to multiply the two bid rates and multiply the two ask rates.    TRUE Multiplying the two bid rates and multiplying the two ask rates gives a bid-ask cross-rate   Difficulty: Easy Viney - Chapter 15 #77 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   78 Given that AUD/USD (spot) is 0.6830-40 and the six-month forward rate is 0.6798-0.6813, the six-month forward points must have been falling.    TRUE By calculating the difference the points are seen to be 0.0032-0.0027   Difficulty: Easy Viney - Chapter 15 #78 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   79 When an FX dealer calculates a forward exchange rate for NZD/JPY they must adjust both interest rates to allow for the different quotation rates between Japan and New Zealand.    FALSE Only one of the rates needs to be adjusted on the basis of Japan using the 360-day convention   Difficulty: Medium Viney - Chapter 15 #79 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   80 Discuss the current exchange rate regimes of the major currencies.    Major currencies such as the US dollar, the UK pound, the Japanese yen, the European Monetary Union euro and the Australian dollar have all adopted a floating exchange rate regime or a free float A floating exchange rate regime exists when an exchange rate for the currency of a country is allowed to move as the factors of supply and demand decree If the demand for a currency increases the value of that currency will increase relative to other currencies   Viney - Chapter 15 #80 difficulty: EMPTY learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   81 In relation to exchange rates, discuss a managed float regime, a crawling peg regime and a pegged exchange rate.    Countries that operate a managed float regime normally allow the currency to move within a defined band or range, relative to another currency such as the USD A crawling peg regime limits exchange rate movements by being a managed float where an exchange rate is allowed to appreciate in controlled steps over time A pegged exchange rate as used by Hong Kong is where a currency is directly linked to another currency In the case of Hong Kong, the Hong Kong dollar is directly linked to the USD   Viney - Chapter 15 #81 difficulty: EMPTY learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   82 Discuss briefly why a central bank might enter the FX markets.    Central banks may enter the FX markets in order to pay for a government's purchases; to change the composition of the central bank's holdings of foreign currencies as part of its management of official foreign reserve assets; and to influence a foreign exchange rate   Viney - Chapter 15 #82 difficulty: EMPTY learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   83 Distinguish between forward transactions and tom value transactions.    A forward transaction is an FX contract that has a maturity date (value date) more than two working days after the FX contract has been entered into For example, an importer has to pay for some goods denominated in EUR in three months and so, to hedge a possible appreciation of EUR, may enter into a contract to buy EUR today A TOM value transaction is an FX contract with settlement and delivery tomorrow   Viney - Chapter 15 #83 difficulty: EMPTY learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   84 Discuss how the way a currency is quoted affects how cross rates are calculated.    There are two ways in which currencies can be quoted against the USD: a direct quote where the USD is the unit of the quotation, such as USD/JPY, and an indirect quote where the USD is the terms currency and the other currency is the unit of the quotation, such as AUD/USD   Viney - Chapter 15 #84 difficulty: EMPTY learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY   Chapter 15: Foreign Exchange: The Structure and Operation of the FX Market Summary   Category #  of  Question s Difficulty: Easy 57 Difficulty: Hard Difficulty: Medium 18 Viney - Chapter 15 84 ... EMPTY   Which of the following market participants tend to keep exchange rates the same in all the world markets?    A. Forward markets B. Foreign exchange counter trades C. Futures markets D. Arbitrageurs... 15 All of the following are primary centres of foreign exchange trading EXCEPT:    A. London B. New York C. Munich D. Tokyo   16 Which of the following statements about the foreign exchange markets... participants tend to keep exchange rates the same in all the world markets?    A. Forward markets B. Foreign exchange counter trades C. Futures markets D. Arbitrageurs   10 The central bank resources made