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. New York. B. Tokyo. C. London. D. Hong Kong. 2. On average, worldwide daily trading of foreign exchange is A. impossible to estimate. B. $15 billion. C. $504 billion. D. $3.21 trillion. 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). 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. 5-1 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Chapter 05 - The Market for Foreign Exchange 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 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. 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. 9. The standard size foreign exchange transactions are for A. $10 million U.S. B. $1 million U.S. C. €1 million. 5-2 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Chapter 05 - The Market for Foreign Exchange 10. Consider a U.S. importer desiring to purchase merchandise from a Dutch exporter invoiced in euros, at a cost of €512,100. The U.S. importer will contact his U.S. bank (where of course he has an account denominated in U.S. dollars) and inquire about the exchange rate, which the bank quotes as €1.0242/$1.00. The importer accepts this price, so his bank will ____________the importer's account in the amount of ____________. A. debit, $500,000 B. credit, €512,100 C. credit, $500,000 D. debit, €512,100 11. The current exchange rate is £1.00 = $2.00. Compute the correct balances in Bank A's correspondent account(s) with bank B if a currency trader employed at Bank A buys £45,000 from a currency trader at bank B for $90,000 using its correspondent relationship with Bank B. A. Bank A's dollar-denominated account at B will fall by $90,000. B. Bank B's dollar-denominated account at A will rise by $90,000. C. Bank A's pound-denominated account at B will rise by £45,000. D. Bank B's pound-denominated account at A will fall by £45,000. E. All of the above are correct 12. The current exchange rate is £1.00 = $2.00. Compute the correct balances in Bank A's correspondent account(s) with bank B if a currency trader employed at Bank A buys £45,000 from a currency trader at bank B for $90,000 using its correspondent relationship with Bank B. A. Bank A's dollar-denominated account at B will rise by $90,000. B. Bank B's dollar-denominated account at A will fall by $90,000. C. Bank A's pound-denominated account at B will rise by £45,000. D. Bank B's pound-denominated account at A will rise by £45,000. 5-3 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Chapter 05 - The Market for Foreign Exchange 13. The current exchange rate is €1.00 = $1.50. Compute the correct balances in Bank A's correspondent account(s) with bank B if a currency trader employed at Bank A buys €100,000 from a currency trader at bank B for $150,000 using its correspondent relationship with Bank B. A. Bank A's dollar-denominated account at B will fall by $150,000. B. Bank B's dollar-denominated account at A will fall by $150,000. C. Bank A's pound-denominated account at B will fall by €100,000. D. Bank B's pound-denominated account at A will rise by €100,000. 14. 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 exchange. D. all of the above. 15. 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 33 percent of all foreign exchange trading. D. accounts for about 70 percent of all foreign exchange trading. Spot Rate Quotations 5-4 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Chapter 05 - The Market for Foreign Exchange 16. Using the table shown, what is the most current spot exchange rate shown for British pounds? Use a direct quote from a U.S. perspective. A. $1.61 = £1.00 B. $1.60 = £1.00 C. $1.00 = £0.625 D. $1.72 = £1.00 17. 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. D. None of the above 18. Suppose that the current exchange rate is €1.00 = $1.60. The indirect quote, from the U.S. perspective is A. €1.00 = $1.60. B. €0.6250 = $1.00. C. €1.60 = $1.00. D. None of the above 19. Suppose that the current exchange rate is £1.00 = $2.00. The indirect quote, from the U.S. perspective is A. £1.00 = $2.00. B. £1.00 = $0.50. C. £0.50 = $1.00. D. None of the above 20. Indirect exchange rate quotations from the U.S. perspective are A. the price of one unit of the foreign currency in terms of the U.S. dollar. B. the price of one U.S. dollar in the foreign currency. 5-5 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Chapter 05 - The Market for Foreign Exchange 21. It is common practice among currency traders worldwide to both price and trade currencies against the U.S. dollar. In fact, 2007 BIS statistics indicate that about _________ of currency trading in the world involves the U.S. dollar on one side of the transaction. A. 86 percent B. 75 percent C. 45 percent D. 15 percent 22. It is common practice among currency traders worldwide to both price and trade currencies against the U.S. dollar. Consider a currency dealer who makes a market in 5 currencies against the dollar. If he were to supply quotes for each currency in terms of all of the others, how many quotes would he have to provide? A. 36 B. 30 C. 60 D. 120 E. None of the above 23. The Bid price A. is the price that the dealer has just paid for something, his historical cost of the most recent trade. B. is the price that a dealer stands ready to pay. C. refers only to auctions like eBay, not over the counter transactions with dealers. D. is the price that a dealer stands ready to sell at. 24. Suppose the spot ask exchange rate, S a ($|£), is $1.90 = £1.00 and the spot bid exchange rate, S b ($|£), 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 5-6 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Chapter 05 - The Market for Foreign Exchange 25. 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. 26. In conversation, interbank foreign exchange traders 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 27. In conversation, interbank foreign exchange traders use a shorthand abbreviation in expressing spot currency quotations. Consider a $/£ bid-ask quote of $1.9072-$1.9077. The currency dealer would likely quote that as _____. A. 72-77 B. 77-72 C. 5 points D. None of the above 28. 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. 5-7 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Chapter 05 - The Market for Foreign Exchange 29. 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. D. none of the above 30. A dealer in British pounds who thinks that the pound is about to depreciate A. may want to widen his bid-ask spread by raising his ask price. B. may want to lower his bid price and his ask price. C. may want to lower his ask price. D. none of the above. 31. A dealer in pounds who thinks that the exchange rate is about to increase in volatility A. may want to widen his bid-ask spread. B. may want to decrease his bid-ask spread. C. may want to lower his ask price. D. none of the above. 5-8 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Chapter 05 - The Market for Foreign Exchange 32. Using the table shown, what is the spot cross-exchange rate between pounds and euro? A. €1.00 = £0.75 B. £1.33 = €1.00 C. £1.00 = €0.75 D. none of the above 33. 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 D. None of the above 34. Suppose you observe the following exchange rates: €1 = $1.25; £1 = $2.00. Calculate the euro-pound exchange rate. A. €1 = £1.60 B. €1 = £0.625 C. €2.50 = £1 D. €1 = £2.50 35. The AUD/$ 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 36. Suppose you observe the following exchange rates: €1 = $1.50; £1 = $2.00. Calculate the euro-pound exchange rate. A. €1.3333 = £1.00 B. £1.3333 = €1.00 C. €3.00 = £1 D. €1.25 = £1.00 5-9 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Chapter 05 - The Market for Foreign Exchange 37. Suppose you observe the following exchange rates: €1 = $1.60; £1 = $2.00. Calculate the euro-pound exchange rate. A. €1.3333 = £1.00 B. £1.3333 = €1.00 C. €3.00 = £1 D. €1.25 = £1.00 38. Suppose you observe the following exchange rates: €1 = $1.50; ¥120 = $1.00. Calculate the euro-pound exchange rate. A. ¥133.33 = €1.00 B. €1.00 = ¥180 C. ¥80 = €1.00 D. €1 = £2.50 39. Suppose you observe the following exchange rates: €1 = $1.45; £1 = $1.90. Calculate the euro-pound exchange rate. A. €1.3103 = £1.00 B. £1.3333 = €1.00 C. €2.00 = £1 D. €3 = £1 40. What is the BID cross-exchange rate for Swiss Francs priced in euro? Hint: Find the price that a currency dealer will pay in euro to buy Swiss francs. A. €0.5386/CHF B. €0.5389/CHF C. €0.5463/CHF D. €0.5466/CHF 5-10 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. [...]... A the same thing as a mutual fund B a portfolio of financial assets in which shares representing fractional ownership of the fund are sold and redeemed by the fund sponsor C a portfolio of financial assets in which shares representing fractional ownership of the fund trade on an organized exchange D none of the above 93 The largest and most active financial market in the world is A the Fleet Street... distributed, or posted on a website, in whole or part Chapter 05 - The Market for Foreign Exchange 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 Topic: FX Market Participants 5 The difference between a broker and a dealer is A dealers sell drugs; brokers sell houses . 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. 5-1 ©