IBF 301 Full Test Bank | Questions and Answers (Complete Solutions)

IBF 301 Full Test Bank | Questions and Answers (Complete Solutions) Translation exposure refers to A. accounting exposure. B. the effect that an unanticipated change in exchange rates will have on the consolidated fina ...

IBF 301 Full Test Bank | Questions and Answers (Complete Solutions) Translation exposure refers to A. accounting exposure. B. the effect that an unanticipated change in exchange rates will have on the consolidated financial reports of an MNC. C. the change in the value of a foreign subsidiaries assets and liabilities denominated in a foreign currency, as a result of exchange rate change fluctuations, when viewed from the perspective of the parent firm. D. all of the above The recognized methods for consolidating the financial reports of an MNC are A. short/long term method, current/future method, flexible/ inflexible method, and economic/ noneconomic method. B. current/noncurrent method, monetary/nonmonetary method, short/long term method, and current/ future method. C. current/ noncurrent method, monetary/nonmonetary method, temporal method, and current rate method. D. temporal method, current rate method, flexible/inflexible method, and economic/ noneconomic method. How many methods of foreign currency translation have been used in recent years? (U.S. GAAP.) A. One B. Two C. Three D. Four Translation exposure, also frequently called accounting exposure, refers to the effect that an unanticipated change in exchange rates will have on the A. choice of accounting methodology. B. consolidated financial reports of an MNC. C. firms competitive position. D. cash flows realized from foreign operations. When exchange rates change, the value of a foreign subsidiary's assets and liabilities denominated in a foreign currency change A. when they are viewed from the perspective of the subsidiary firm. B. when they are viewed from the perspective of the parent firm. C. but this is only of material concern if the parent firm is liquidating the subsidiary in a bankruptcy and is forced to realize the value of the assets and liabilities at the current exchange rate. D. none of the above The management of translation exposure is best described as A. selecting a mechanical means for handling the consolidation process for MNCs that logically deals with exchange rate changes. B. selecting a mechanical means for handling the consolidation process for MNCs that makes this quarter's accounting numbers as attractive as possible. C. selecting a mechanical means for handling the consolidation process for MNCs that treats inventory . valuation as LIFO on the income statement and FIFO on the balance sheet. D. selecting a mechanical means for handling the consolidation process for MNCs that treats inventory . valuation as FIFO on the income statement and LIFO on the balance sheet. The sensitivity of "realized" domestic currency values of the firm's contractual cash flows denominated in foreign currency to unexpected changes in the exchange rate is A. transaction exposure. B. translation exposure. C. economic exposure. D. none of the above The sensitivity of the firm's consolidated financial statements to unexpected changes in the exchange rate is A. transaction exposure. B. translation exposure. C. economic exposure. D. none of the above The extent to which the value of the firm would be affected by expected changes in the exchange rate is A. transaction exposure. B. translation exposure. C. economic exposure. D. none of the above The extent to which the value of the firm would be affected by unexpected changes in the exchange rate is A. transaction exposure. B. translation exposure. C. economic exposure. D. none of the above Which of the following is true? A. The competitive effect is defined as the impact that a currency depreciation may have on the operating cash flow in the foreign currency by altering the firm's competitive position in the marketplace. B. The conversion effect is defined as a given accounting cash value in a foreign currency that will be . converted into a lower dollar amount after currency depreciation. C. The competitive effect is defined as a given operating cash flow in a foreign currency will be converted into a lower dollar amount after a currency depreciation. D. None of the above What does it mean to have redenominated an asset in terms of the dollar? A. You have undertaken a hedging strategy that gives the asset a constant dollar value. B. Multiply the foreign currency value of the asset by the spot exchange rate. C. Undertaken accounting changes to eliminate translation exposure. D. None of the above The authoritative body in the United States that specifies accounting policy for U.S. business firms and certified public accounting firms. A. The Federal Accounting Standards Board (FASB). B. The International Accounting Standards Board (IASB). C. The Financial Accounting Standards Board (FASB). D. The Securities and Exchange Commission (SEC) The difference between accounting exposure and translation exposure A. translation is about going from one language to another, accounting is just about the numbers. B. accounting exposure and translation exposure are the same thing. C. hedging one always involves increasing the other. D. hedging one might involve increasing the other. When exchange rates change A. the value of a foreign subsidiary's foreign currency denominated assets and liabilities change to new numbers still denominated in the foreign currency. B. the value of a foreign subsidiary's foreign currency denominated assets and liabilities change when redenominated into the home currency. C. hedging should be done after the change. D. none of the above Translation exposure measures A. the effect that an anticipated change in exchange rates will have on the consolidated financial reports of an MNC. B. economic exposure. C. the change in the value of a foreign subsidiaries assets and liabilities denominated in a foreign currency, as a result of exchange rate change fluctuations, when viewed from the perspective of the parent firm. D. all of the above The current/noncurrent method of foreign currency translation was generally accepted in the United States from the 1930s until 1975, when A. FASB 2 became effective. B. FASB 4 became effective. C. FASB 6 became effective. D. FASB 8 became effective. The underlying principle of the current/noncurrent method is that assets and liabilities should be translated based on their maturity. A. Current assets and liabilities are converted at the current exchange rate in effect when the cash flow associated with the asset or liability actually occurred. Non-current assets and liabilities are translated at the historical exchange rate that prevailed when the asset was recognized. B. Current assets and liabilities, which by definition have a maturity of one year or less, are converted at the current exchange rate. Non-current assets and liabilities are translated at the historical exchange rate. C. All assets and liabilities are converted at the current exchange rate. D. None of the above The generally accepted method for consolidating the financial reports of an MNC from the 1930s to 1975 was A. current/noncurrent method. B. monetary/nonmonetary method. C. temporal method. D. current rate method. Under the current/noncurrent method A. a foreign subsidiary with current assets in excess of current liabilities will cause a translation gain . (loss) if the local currency appreciates (depreciates). B. a foreign subsidiary with current assets in excess of current liabilities will cause a translation loss . (gain) if the local currency appreciates (depreciates). C. a foreign subsidiary with current assets in excess of current liabilities will cause a translation gain . (loss) if the local currency depreciates (appreciates). D. both b) and c) When using the current/noncurrent method, current assets are defined as A. inventory that is currently salable. B. assets with a maturity of one year or less. C. assets with a maturity of 90 days or less. D. none of the above When using the current/noncurrent method, A. most income statement items are translated at the average exchange rate for the accounting period. B. revenue and expense items that are associated with noncurrent assets or liabilities are translated at . the historical rate that applies to the applicable balance sheet items. C. depreciation expense is translated at the historical rate that applies to the applicable depreciable asset items. D. all of the above Which of the following statements is false? A. Most income statement items under the current/noncurrent method are translated at the average . exchange rate for the accounting period. B. Under the current/noncurrent method, revenue and expense items that are associated with current assets or liabilities, such as depreciation expense, are translated at the historical rate that applies to the applicable balance sheet item. C. Under the current/noncurrent method, revenue and expense items that are associated with noncurrent assets or liabilities, such as depreciation expense, are translated at the historical rate that applies to the applicable balance sheet item. D. Depreciation expense is translated at the historical rate that applies to the applicable depreciable asset items The underlying principle of the current/noncurrent method is A. assets and liabilities should be translated based on their maturity B. monetary balance sheet accounts should be translated at the spot rate; nonmonetary accounts are translated at the historical rate in effect when the account was first recorded. C. monetary accounts are translated at the current exchange rate; other accounts are translated at the current exchange rate if they are carried on the books at current value; items carried at historical cost are translated at historic exchange rates. D. all balance sheet accounts are translated at the current exchange rate, except stockholders' equity. The underlying principle of the monetary/nonmonetary method is A. assets and liabilities should be translated based on their maturity. B. monetary balance sheet accounts should be translated at the spot rate; nonmonetary accounts are translated at the historical rate in effect when the account was first recorded. C. monetary accounts are translated at the current exchange rate; other accounts are translated at the current exchange rate if they are carried on the books at current value; items carried at historical cost are translated at historic exchange rates. D. all balance sheet accounts are translated at the current exchange rate, except stockholders' equity. According to the monetary/nonmonetary method, monetary balance sheet accounts include A. for example, cash, marketable securities, accounts receivable, notes payable, accounts payable of a foreign subsidiary. B. for example stockholders' equity and long term debt. C. for example inventory paid for in cash, but not working capital. D. COGs, sales, net income. The underlying philosophy of the monetary/nonmonetary method is that A. monetary accounts have a similarity because their value represents a sum of money whose currency equivalent after translation is independent of exchange rate changes. B. monetary accounts have a similarity because their value represents a sum of money whose currency equivalent after translation changes each time the exchange rate changes. C. assets and liabilities should be translated based on their maturity D. most income statement items are translated at the average exchange rate for the period. Depreciation and cost of goods sold, however, are translated at historical rates if the associated balance sheet accounts are carried at historical costs. In comparison to the current/noncurrent method, the monetary/nonmonetary method A. differs substantially with regard to the treatment of inventory. B. classifies accounts on the basis of similarity of attributes rather than the similarity of maturities. C. both a) and b) D. none of the above Under which accounting method are most income statement accounts translated at the average exchange rate for the period? A. Current/ noncurrent method B. Monetary/nonmonetary method C. Temporal method D. Current rate method Using the temporal method, monetary accounts such as cash A. are not translated. B. are translated at the average exchange rate prevailing over the reporting period. C. are translated at the current forward exchange rate. D. are translated at the current spot exchange rate. The underlying principle of the temporal method is A. assets and liabilities should be translated based on their maturity. B. monetary balance sheet accounts should be translated at the spot rate; nonmonetary accounts are translated at the historical rate in effect when the account was first recorded. C. monetary accounts are translated at the current exchange rate; other accounts are translated at the current exchange rate if they are carried on the books at current value; items carried at historical cost are translated at historic exchange rates. D. all balance sheet accounts are translated at the current exchange rate, except stockholders' equity. Since fixed assets and inventory are usually carried at historical costs, A. the temporal method and the monetary/nonmonetary methods will typically provide the same translation. B. the current rate method and the monetary/ nonmonetary methods will typically provide the same translation. C. the temporal method and the current/noncurrent methods will typically provide the same translation. D. none of the above Under the current rate method, A. income statement items are to be translated at the exchange rate at the dates the items are recognized. B. since a) is generally impractical, an appropriately weighted average exchange rate for the period may be used for translation. C. all balance sheet accounts are translated at the current exchange rate, except stockholders' equity. D. all of the above Which of the following is a translation method where the gain or loss due to translation adjustment does not affect reported cash flows? A. Current/noncurrent method B. Current rate method C. Current/future method D. Short/long term method The underlying principle of the current rate method is A. assets and liabilities should be translated based on their maturity. B. monetary balance sheet accounts should be translated at the spot rate; nonmonetary accounts are translated at the historical rate in effect when the account was first recorded. C, monetary accounts are translated at the current exchange rate; other accounts are translated at the current exchange rate if they are carried on the books at current value; items carried at historical cost are translated at historic exchange rates. D. all balance sheet accounts are translated at the current exchange rate, except stockholders' equity The simplest of all translation methods to apply is A. current/noncurrent method. B. monetary/nonmonetary method. C. temporal method. D. current rate method. Which of the following is a translation method where a "plug" equity account called cumulative translation adjustment is used? A. Current/noncurrent method B. Current rate method C. Current/future method D. Short/long term method FASB 8 is essentially the A. current/noncurrent method. B. monetary/nonmonetary method. C. temporal method. D. current rate method FASB 8 A. required taking foreign exchange gains or losses through the income statement. B. caused reported earnings to fluctuate substantially from year to year. C. ran into acceptance problems from the accounting profession and MNCs. D. all of the above Consider a U.S.-based MNC with manufacturing activities in Japan. The result of a change in the ¥-$ exchange rate on the assets and liabilities of the consolidated balance sheet is: Ignoring transaction exposure in the yen, the translation exposure will indicate a possible need for a "balance sheet hedge" of A. ¥200,000,000 more liabilities denominated in yen. B. ¥200,000,000 less assets denominated in yen. C. both a) or b) D. none of the above A U.S. parent firm, as result of its business activities in Germany, has a net exposure of €1,000,000. The consolidated reports were prepared at the year end for the last two successive years. If the exchange rates on these reporting dates changed from $1.00 = €1.10 to $1.00 = €1.00, then the translation exposure report will indicate a "reporting currency imbalance" of A. $90,910. B. $0. C. -$90,910. D. none of the above (i) Measure in dollars an enterprise's assets, liabilities, revenues, or expenses that are denominated in a foreign currency according to generally accepted accounting principles (ii) Isessentially the temporal method of translation (with some subtle differences) (iii) Provide information that is generally compatible with the expected economic effects of a rate change on an enterprise's cash flows and equity (iv) Reflect in consolidated statements the financial results and relationships of the individual consolidated entities as measured in their functional currencies in conformity with U.S. generally accepted accounting principles Which of the above statements pertain to FASB 8? A. (i) B. (i) and (ii) C. (iii) and (iv) D. (i), (ii), and (iii) (i) Measure in dollars an enterprise's assets, liabilities, revenues, or expenses that are denominated in a foreign currency according to generally accepted accounting principles (ii) Isessentially the temporal method of translation (with some subtle differences) (iii) Provide information that is generally compatible with the expected economic effects of a rate change on an enterprise's cash flows and equity (iv) Reflect in consolidated statements the financial results and relationships of the individual consolidated entities as measured in their functional currencies in conformity with U.S. generally accepted accounting principles Which of the above statements pertain to FASB 52? A. (i) B. (i) and (ii) C. (iii) and (iv) D. (i), (ii), and (iii) FASB 52 requires A. The current rate method of translation in some circumstances and the temporal method in others. B. The current rate method of translation in some circumstances and the noncurrent method in others. C. The monetary rate method of translation in some circumstances and the temporal method in others. D. The current rate method of translation in some circumstances and the monetary method in others. The International Accounting Standards Committee A. is now known as The International Accounting Standards Board. B. is charged with accounting standards at the International House of Pancakes. C. includes many convicted felons among its members. D. all of the above In what year were U.S. MNCs mandated to implement FASB 52? A. 1952 B. 1962 C. 1972 D. 1982 The "functional currency" is defined in FASB 52 as A. the currency of the primary economic environment in which the entity operates. B. the currency in which the MNC prepares its consolidated financial statements. C. a currency that is not the parent firm's home country currency. D. both b) and c) The "reporting currency" is defined in FASB 52 as A. the currency of the primary economic environment in which the entity operates. B. the currency in which the MNC prepares its consolidated financial statements. C. a currency that is not the parent firm's home country currency. D. both a) and c) The stated objectives of FASB 52 are A to provide information that is generally compatible with the expected economic effects of a rate change on an enterprise's cash flows and equity. B. to reflect in consolidated statements the financial results and relationships of the individual . consolidated entities as measured in their functional currencies in conformity with U.S. generally accepted accounting principles. C. both a) and b) D. none of the above The currency of the primary economic environment in which the entity operates is defined in FASB 52 as A. the "reporting currency". B. the "functional currency". C. the "current" currency. D. none of the above The actual translation process prescribed by FASB 52 is A. a two-stage process. B. a twelve step program. C. a five-step process. D. none of the above. When determining the functional currency, A. if the sales prices for the foreign entity's products are generally not responsive on a short-term basis to exchange rate changes, but are determined more by local competition and government regulation, the local currency should be the functional currency. B. if there is an active local market for the foreign entity's products the local currency should be the functional currency. C. if factor of production costs for the foreign entity are primarily, and on a continuing basis, costs for components obtained from the parent's country the functional currency should be the home currency. D. all of the above In implementing FASB 52, A. the functional currency of the foreign entity must be translated into the reporting currency in which the consolidated statements are reported. B. the local currency of a foreign entity may not always be its functional currency. If it is not, the temporal method of translation is used to remeasure the foreign entity's books into the functional currency. C. the current rate method is used to translate from the functional currency to the reporting currency. D. in some cases, a foreign entity's functional currency may be the same as the reporting currency, in which case translation is not necessary. E. All of the above are true A translation exposure report shows, for each account that is included in the consolidated balance sheet, A. the amount of foreign exchange exposure that exists for each foreign subsidiary in which the MNC has a material interest. B. the amount of foreign exchange exposure that exists on a net basis for the firm. C. the amount of foreign exchange exposure that exists for each foreign currency in which the MNC has exposure. D. none of the above Salient economic factors for determining the functional currency include A. cash flow indicators. B. sales price indicators. C. sales market indicators. D. all of the above XYZ Corporation, a U.S. parent firm, has a wholly owned sales affiliate, ABC Ltd., in the United Kingdom. The affiliate was established to service to the local market. Assume that: 1. the functional currency of ABC is the pound 2. the reporting currency is the dollar 3. the initial exchange rate $1.00 = £ 0.67 ABC's nonconsolidated balance sheets and the footnotes to the financial statements indicate that ABC owes the parent firm £200,000. Assume that, XYZ had made an investment of $500,000 in the affiliate. Under FASB 52, the intercompany debt and investment will appear on the consolidated balance sheet as A. £200,000. B. $201,493. C. $298,507. D. none of the above The impact of financing in determining the functional currency A. financing does not impact the choice of functional currency due to the integrated nature of capital markets. B. if the financing of the foreign entity is primarily denominated in the foreign currency and the debt service obligations are normally handled by the foreign entity, the functional currency is the foreign currency. C. if the financing of the foreign entity is primarily from the parent, with debt service obligations normally handled by the parent, the functional currency is the home currency. D. both b) and c) If a foreign entity is only a shell company for carrying accounts that could be carried on the parent's books, A. the functional currency would generally be the parent's currency. B. the functional currency would generally be the local currency. C. there is no reason to hedge transaction exposure. D. none of the above A highly inflationary economy is defined in FASB 52 as A. one that has cumulative inflation of approximately 100 percent or more over a 3-year period. B. one that has current inflation of approximately 40 percent per year. C. one that has going-forward expected inflation of approximately 40 percent per year. D. none of the above In highly inflationary economies, FASB 52 requires that the foreign entities' financial statement be remeasured from the local currency "as if the functional currency were the reporting currency". The purpose of this requirement is A. to prevent large important balance sheet accounts, carried at historical values, from having insignificant values once translated into the reporting currency at the current rate. B. to prevent games playing in the accounting books. C. to prevent having to restate the books at a later date. D. none of the above Which of the following are true? A. Some items that are a source of transaction exposure are also a source of translation exposure. B. Some items that are a source of transaction exposure are NOT also a source of translation exposure. C. Both a) and b) D. None of the above Generally speaking, A. it is not possible to hedge both translation exposure and transaction exposure simultaneously. B. if a firm can hedge translation exposure then transaction exposure will be simultaneously hedged. C. if a firm can hedge transaction exposure then translation exposure will be simultaneously hedged. D. none of the above Translation exposure, A. is not entity specific, rather it is currency specific. B. is not currency specific, rather it is entity specific. C. involves restatement from Italian to French. D. none of the above The source of translation exposure A. is a mismatch of net assets and net liabilities denominated in the same currency. B. is a mismatch of net assets and net liabilities denominated in different currencies. C. is a mismatch of current assets and current liabilities denominated in different currencies. D. none of the above A balance sheet hedge seeks to A. eliminate any mismatch of net assets and net liabilities denominated in the same currency. B. transfer accounting exposure to transaction exposure. C. create cumulative translation adjustment. D. none of the above A derivatives hedge that seeks to eliminate translation exposure A. eliminate any mismatch of the rate of change in net assets and the rate of change in net liabilities denominated in the same currency. B. really involves speculation about foreign exchange rate changes. C. by simultaneously going long and short in currency futures contracts. D. none of the above Consider a U.S.-based MNC with manufacturing activities in Japan. The result of a change in the ¥-$ exchange rate on the assets and liabilities of the consolidated balance sheet is: Ignoring transaction exposure in the yen, the translation exposure will indicate a possible need for a "derivatives hedge" of A. short position in ¥200,000,000 currency futures. B. long position in ¥200,000,000 currency futures. C. either a) or b) D. none of the above With regard to translation exposure versus operating exposure A. upper management should be more concerned with translation exposure. B. any discussion really involves speculation about foreign exchange rate changes. C. upper management should be more concerned with operating exposure. D. none of the above With regard to research on the stock price reaction to mandated accounting changes such as FASB 52 A. the results suggest that market participants seem to think that changes in reported earnings do not change the actual cash flows in multinational firms. B. the results suggest that market agents react to "cosmetic" earning changes. C. the results suggest that market agents do not react to cosmetic earning changes that do not affect value. D. none of the above Which of the following are true statements? A. Since translation exposure does not have an immediate direct effect on operating cash flows, its control is relatively unimportant in comparison to transaction exposure, which involves potential real cash flow losses. B Since it is generally not possible to eliminate both translation exposure and transaction exposure, it is more logical to effectively manage transaction exposure. C. Two ways to control translation risk are: a balance sheet hedge and a derivatives "hedge." D. All of the above are true statements Under which method does the gain or loss due to translation adjustment not affect reported cash flows, as it does with the other three translation methods? A. Current/noncurrent method B. Monetary/nonmonetary method C. Temporal method D. Current rate method Under FASB 52, when a net translation exposure exists, A. a derivatives hedge is necessary to bring balance to the consolidated balance sheet after an exchange rate change. B. a money market hedge is necessary to bring balance to the consolidated balance sheet after an exchange rate change. C. a cumulative translation adjustment account is necessary to bring balance to the consolidated balance sheet after an exchange rate change. D. none of the above With regard to foreign currency translation methods used by foreign MNCs, A. foreign currency translation methods are generally only used by U.S.-based MNCs since foreign firms have a built in hedge by being foreign. B. are generally the same methods used by U.S.-based firms. C. are exactly the same methods used by U.S.-based firms since GAAP is GAAP. D. none of the above are true statements. Transaction exposure is defined as A. the sensitivity of realized domestic currency values of the firm's contractual cash flows denominated in foreign currencies to unexpected exchange rate changes. B. the extent to which the value of the firm would be affected by unanticipated changes in exchange rate. C. the potential that the firm's consolidated financial statement can be affected by changes in exchange rates. D. ex post and ex ante currency exposures. The most direct and popular way of hedging transaction exposure is by A) exchange-traded futures options. B) currency forward contracts. C) foreign currency warrants. D) borrowing and lending in the domestic and foreign money markets. If you have a long position in a foreign currency, you can hedge with: A) A short position in an exchange-traded futures option B) A short position in a currency forward contract C) A short position in foreign currency warrants D) Borrowing (not lending) in the domestic and foreign money markets If you owe a foreign currency denominated debt, you can hedge with A) a long position in a currency forward contract. B) a long position in an exchange-traded futures option. C) buying the foreign currency today and investing it in the foreign county. D) both a) and c) If you own a foreign currency denominated bond, you can hedge with A) a long position in a currency forward contract. B) a long position in an exchange-traded futures option. C) buying the foreign currency today and investing it in the foreign county. D) a swap contract where pay the cash flows of the bond in exchange for dollars. With any hedge A) your losses on one side should about equal your gains on the other side. B) you should try to make money on both sides of the transaction: that way you make money coming and going. C) you should spend at least as much time working the hedge as working the underlying deal itself. D) you should agree to anything your banker puts in front of your face With any successful hedge A) you are guaranteed to lose money on one side. B) you can avoid the accounting ramifications of a loss on one side by keeping it off the books. C) both a) and b) D) none of the above The choice between a forward market hedge and a money market hedge often comes down to A) interest rate parity. B) option pricing. C) flexibility and availability. D) none of the above Since a corporation can hedge exchange rate exposure at low cost A) there is no benefit to the shareholders in an efficient market. B) shareholders would benefit from the risk reduction that hedging offers. C) the corporation's banker would benefit from the risk reduction that hedging offers. D) none of the above A CFO should be least worried about A) transaction exposure. B) translation exposure. C) economic exposure. D) none of the above Exchange rate risk of a foreign currency payable is an example of A) transaction exposure. B) translation exposure. C) economic exposure. D) none of the above A stock market investor would pay attention to A) anticipated changes in exchange rates that have been already discounted and reflected in the firm's value. B) unanticipated changes in exchange rates that have not been discounted and reflected in the firm's value. Your firm has a British customer that is willing to place a $1 million order, but wants to pay in pounds instead of dollars. The spot exchange rate is $1.85 = £1.00 and the one-year forward rate is $1.90 = £1.00. The lead time on the order is such that payment is due in one year. What is the fairest exchange rate to use? A. $1.85 = £1.00 B. $1.8750 = £1.00 C. $1.90 = £1.00 D. none of the above Your firm has a British customer that is willing to place a $1 million order (with payment due in 6 months), but insists upon paying in pounds instead of dollars. A) The customer essentially wants you to discount your price by the value of a put option on pounds. B) The customer essentially wants you to discount your price by the value of a call option on pounds. C) None of the above A CME contract on €125,000 with September delivery A) is an example of a forward contract. B) is an example of a futures contract. C) is an example of a put option. D) is an example of a call option Yesterday, you entered into a futures contract to buy €62,500 at $1.50 per €. Suppose the futures price closes today at $1.46. How much have you made/lost? A) Depends on your margin balance. B) You have made $2,500.00. C) You have lost $2,500.00. D) You have neither made nor lost money, yet In reference to the futures market, a "speculator" A) attempts to profit from a change in the futures price B) wants to avoid price variation by locking in a purchase price of the underlying asset through a long . position in the futures contract or a sales price through a short position in the futures contract C. stands ready to buy or sell contracts in unlimited quantity D. both b) and c) Comparing "forward" and "futures" exchange contracts, we can say that A. they are both "marked-to-market" daily. B. their major difference is in the way the underlying asset is priced for future purchase or sale: futures settle daily and forwards settle at maturity. C. a futures contract is negotiated by open outcry between floor brokers or traders and is traded on organized exchanges, while forward contract is tailor-made by an international bank for its clients and is traded OTC. D. both b) and c) Comparing "forward" and "futures" exchange contracts, we can say that A) delivery of the underlying asset is seldom made in futures contracts. B) delivery of the underlying asset is usually made in forward contracts. C) delivery of the underlying asset is seldom made in either contract—they are typically cash settled at maturity. D) both a) and b) E) both a) and c) In which market does a clearinghouse serve as a third party to all transactions? A) Futures B) Forwards C) Swaps D) None of the above In the event of a default on one side of a futures trade, A) the clearing member stands in for the defaulting party. B) the clearing member will seek restitution for the defaulting party. C. if the default is on the short side, a randomly selected long contract will not get paid. That party will . then have standing to initiate a civil suit against the defaulting short. D. both a) and b) Yesterday, you entered into a futures contract to buy €62,500 at $1.50 per €. Your initial performance bond is $1,500 and your maintenance level is $500. At what settle price will you get a demand for additional funds to be posted? A. $1.5160 per €. B. $1.208 per €. C. $1.1920 per€. D. $1.4840 per €. ($93,750 - $1,000 = $92,750 / €62,500 = $1.484) Yesterday, you entered into a futures contract to sell €62,500 at $1.50 per €. Your initial performance bond is $1,500 and your maintenance level is $500. At what settle price will you get a demand for additional funds to be posted? A. $1.5160 per €. B. $1.208 per €. C. $1.1920 per€. D. $1.1840 per €. Yesterday, you entered into a futures contract to buy €62,500 at $1.50/€. Your initial margin was $3,750 (= 0.04 × €62,500 × $1.50/€ = 4 percent of the contract value in dollars). Your maintenance margin is $2,000 (meaning that your broker leaves you alone until your account balance falls to $2,000). At what settle price (use 4 decimal places) do you get a margin call? A. $1.4720/€ B. $1.5280/€ C. $1.500/€ D. None of the above 3,750 - 2000 = 1750 ($93,750 - $1,750 = $92,000 / €62,500 = $1.472) Three days ago, you entered into a futures contract to sell €62,500 at $1.50 per €. Over the past three days the contract has settled at $1.50, $1.52, and $1.54. How much have you made or lost? A. Lost $0.04 per € or $2,500 B. Made $0.04 per € or $2,500 C. Lost $0.06 per € or $3,750 D. None of the above You will sell your euros for $93,750. The highest contract price over the three days was $1.54. Thus, you could have sold your euros for $96,250 (found by 62,500 × 1.54). Finally, $96,250 - $93,750 = -$2,500 Today's settlement price on a Chicago Mercantile Exchange (CME) Yen futures contract is $0.8011/ ¥100. Your margin account currently has a balance of $2,000. The next three days' settlement prices are $0.8057/¥100, $0.7996/¥100, and $0.7985/¥100. (The contractual size of one CME Yen contract is ¥12,500,000). If you have a short position in one futures contract, the changes in the margin account from daily marking-to-market will result in the balance of the margin account after the third day to be A. $1,425. B. $2,000. C. $2,325. D. $3,425. 0.008011 = $0.8011/¥100 0.008057 = $0.8057//¥100 0.007996 = $0.7996//¥100 0.007985 = $0.7985/¥100 Explanation: $2,000 + ¥12,500,000 [(0.008011 - 0.008057) + (0.008057 - 0.007996) + (0.007996 - 0.007985)] = $2,325 Today's settlement price on a Chicago Mercantile Exchange (CME) Yen futures contract is $0.8011/ ¥100. Your margin account currently has a balance of $2,000. The next three days' settlement prices are $0.8057/¥100, $0.7996/¥100, and $0.7985/¥100. (The contractual size of one CME Yen contract is ¥12,500,000). If you have a long position in one futures contract, the changes in the margin account from daily marking-to-market, will result in the balance of the margin account after the third day to be A. $1,425. B. $1,675. C. $2,000. D. $3,425 0.008011 = $0.8011/¥100 0.008057 = $0.8057//¥100 0.007996 = $0.7996//¥100 0.007985 = $0.7985/¥100 Explanation: $2,000 + ¥12,500,000 [(0.008057 - 0.008011) + (0.007996 - 0.008057) + (0.007985 - 0.007996)] = $1,675 Suppose the futures price is below the price predicted by IRP. What steps would assure an arbitrage profit? A) Go short in the spot market, go long in the futures contract. B) Go long in the spot market, go short in the futures contract. C) Go short in the spot market, go short in the futures contract. D) Go long in the spot market, go long in the futures contract Suppose you observe the following 1-year interest rates, spot exchange rates and futures prices. Futures contracts are available on €10,000. How much risk-free arbitrage profit could you make on 1 contract at maturity from this mispricing? A. $159.22 B. $153.10 C. $439.42 D. None of the above What paradigm is used to define the futures price? A) IRP B) Hedge Ratio C) Black Scholes D) Risk Neutral Valuation If a currency futures contract (direct quote) is priced below the price implied by Interest Rate Parity (IRP), arbitrageurs could take advantage of the mispricing by simultaneously A) going short in the futures contract, borrowing in the domestic currency, and going long in the foreign currency in the spot market. B) going short in the futures contract, lending in the domestic currency, and going long in the foreign currency in the spot market. C) going long in the futures contract, borrowing in the domestic currency, and going short in the foreign currency in the spot market. D) going long in the futures contract, borrowing in the foreign currency, and going long in the domestic currency, investing the proceeds at the local rate of interest. Open interest in currency futures contracts A) tends to be greatest for the near-term contracts. B) tends to be greatest for the longer-term contracts. C) typically decreases with the term to maturity of most futures contracts. D) both a) and c) The "open interest" shown in currency futures quotations is A) the total number of people indicating interest in buying the contracts in the near future. B) the total number of people indicating interest in selling the contracts in the near future. C) the total number of people indicating interest in buying or selling the contracts in the near future. D) the total number of long or short contracts outstanding for the particular delivery month. If you think that the dollar is going to appreciate against the euro, you should A) buy put options on the euro. B) sell call options on the euro. C) buy call options on the euro. D) none of the above From the perspective of the writer of a put option written on €62,500. If the strike price is $1.55/€, and the option premium is $1,875, at what exchange rate do you start to lose money? A. $1.52/€ B. $1.55/€ C. $1.58/€ D. None of the above the writer will collect $96,875 if the option is exercised (€62,500 × $1.55), and is due an option premium of $1,875. Thus, $96,875 - $1,875 = $95,000. Solve the following for X: ($96,875 / $1.55) = ($95,000 / X A European option is different from an American option in that A) one is traded in Europe and one in traded in the United States. B) European options can only be exercised at maturity; American options can be exercised prior to maturity. C) European options tend to be worth more than American options, ceteris paribus. D) American options have a fixed exercise price; European options' exercise price is set at the average price of the underlying asset during the life of the option An "option" is A. a contract giving the seller (writer) of the option the right, but not the obligation, to buy (call) or sell (put) a given quantity of an asset at a specified price at some time in the future. B. a contract giving the owner (buyer) of the option the right, but not the obligation, to buy (call) or sell (put) a given quantity of an asset at a specified price at some time in the future. C. a contract giving the owner (buyer) of the option the right, but not the obligation, to buy (put) or sell (call) a given quantity of an asset at a specified price at some time in the future. D. a contract giving the owner (buyer) of the option the right, but not the obligation, to buy (put) or sell (sell) a given quantity of an asset at a specified price at some time in the future. An investor believes that the price of a stock, say IBM's shares, will increase in the next 60 days. If the investor is correct, which combination of the following investment strategies will show a profit in all the choices? (i) - buy the stock and hold it for 60 days (ii) - buy a put option (iii) - sell (write) a call option (iv) - buy a call option (v) - sell (write) a put option A. (i), (ii), and (iii) B. (i), (ii), and (iv) C. (i), (iv), and (v) D. (ii) and (iii) Most exchange traded currency options A) mature every month, with daily resettlement. B) have original maturities of 1, 2, and 3 years. C) have original maturities of 3, 6, 9, and 12 months. D) mature every month, without daily resettlement. The volume of OTC currency options trading is A) much smaller than that of organized-exchange currency option trading. B) much larger than that of organized-exchange currency option trading. C) larger, because the exchanges are only repackaging OTC options for their customers. D) none of the above With currency futures options the underlying asset is A) foreign currency. B) a call or put option written on foreign currency. C) a futures contract on the foreign currency. D) none of the above Exercise of a currency futures option results in A) a long futures position for the call buyer or put writer. B) a short futures position for the call buyer or put writer. C) a long futures position for the put buyer or call writer. D) a short futures position for the call buyer or put buyer. A currency futures option amounts to a derivative on a derivative. Why would something like that exist? A) For some assets, the futures contract can have lower transactions costs and greater liquidity than the underlying asset. B) Tax consequences matter as well, and for some users an option contract on a future is more tax efficient. C) Transactions costs and liquidity. D) All of the above The current spot exchange rate is $1.55 = €1.00 and the three-month forward rate is $1.60 = €1.00. Consider a three-month American call option on €62,500. For this option to be considered at-themoney, the strike price must be A. $1.60 = €1.00 B. $1.55 =€1.00 C. $1.55 × (1+i$ ) 3/12 = €1.00 × (1+i€) 3/12 D. none of the above The current spot exchange rate is $1.55 = €1.00 and the three-month forward rate is $1.60 = €1.00. Consider a three-month American call option on €62,500 with a strike price of $1.50 = €1.00. Immediate exercise of this option will generate a profit of A. $6,125 B. $6,125/(1+i$ ) 3/12 C. negative profit, so exercise would not occur D. $3,125 €62,500 ($1.55 - $1.50) = $3,125 The current spot exchange rate is $1.55 = €1.00 and the three-month forward rate is $1.60 = €1.00. Consider a three-month American call option on €62,500 with a strike price of $1.50 = €1.00. If you pay an option premium of $5,000 to buy this call, at what exchange rate will you break-even? A. $1.58 = €1.00 B. $1.62 =€1.00 C. $1.50 =€1.00 D. $1.68 = €1.00 $1.55 × €62,500 = $96,875 and $1.50 × €62,500 = $93,750. To buy the call, you also must pay a $5,000 option premium, so if exercised, the total amount paid will be $93,750 + $5,000 = $98,750. Solve the following for X: ($96,875 / $1.55) = ($98,750 / X). The current spot exchange rate is $1.55 = €1.00; the three-month U.S. dollar interest rate is 2%. Consider a three-month American call option on €62,500 with a strike price of $1.50 = €1.00. What is the least that this option should sell for? A. $0.05×62,500 = $3,125 B. $3,125/1.02 = $3,063.73 C. $0.00 D. none of the above Which of the follow options strategies are consistent in their belief about the future behavior of the underlying asset price? A) Selling calls and selling puts B) Buying calls and buying puts C) Buying calls and selling puts D) None of the above American call and put premiums A) should be at least as large as their intrinsic value. B) should be at no larger than their moneyness. C) should be exactly equal to their time value. D) should be no larger than their speculative value Which of the following is correct? A) Time value = intrinsic value + option premium B) Intrinsic value = option premium + time value C) Option premium = intrinsic value - time value D) Option premium = intrinsic value + time value Which of the following is correct? A) European options can be exercised early. B) American options can be exercised early. C) Asian options can be exercised early. D) All of the above For European options, what of the effect of an increase in St? A) Decrease the value of calls and puts ceteris paribus B) Increase the value of calls and puts ceteris paribus C) Decrease the value of calls, increase the value of puts ceteris paribus D) Increase the value of calls, decrease the value of puts ceteris paribus For European options, what of the effect of an increase in the strike price E? A) Decrease the value of calls and puts ceteris paribus B) Increase the value of calls and puts ceteris paribus C) Decrease the value of calls, increase the value of puts ceteris paribus D) Increase the value of calls, decrease the value of puts ceteris paribus For European currency options written on euro with a strike price in dollars, what of the effect of an increase in r$ relative to r€? A) Decrease the value of calls and puts ceteris paribus B) Increase the value of calls and puts ceteris paribus C) Decrease the value of calls, increase the value of puts ceteris paribus D) Increase the value of calls, decrease the value of puts ceteris paribus For European currency options written on euro with a strike price in dollars, what of the effect of an increase in r$? A) Decrease the value of calls and puts ceteris paribus B) Increase the value of calls and puts ceteris paribus C) Decrease the value of calls, increase the value of puts ceteris paribus D) Increase the value of calls, decrease the value of puts ceteris paribus For European currency options written on euro with a strike price in dollars, what of the effect of an increase r€? A) Decrease the value of calls and puts ceteris paribus B) Increase the value of calls and puts ceteris paribus C) Decrease the value of calls, increase the value of puts ceteris paribus D) Increase the value of calls, decrease the value of puts ceteris paribus For European currency options written on euro with a strike price in dollars, what of the effect of an increase in the exchange rate S($/€)? A) Decrease the value of calls and puts ceteris paribus B) Increase the value of calls and puts ceteris paribus C) Decrease the value of calls, increase the value of puts ceteris paribus D) Increase the value of calls, decrease the value of puts ceteris paribus For European currency options written on euro with a strike price in dollars, what of the effect of an increase in the exchange rate S(€/$)? A) Decrease the value of calls and puts ceteris paribus B) Increase the value of calls and puts ceteris paribus C) Decrease the value of calls, increase the value of puts ceteris paribus D) Increase the value of calls, decrease the value of puts ceteris paribus The hedge ratio A. Is the size of the long (short) position the investor must have in the underlying asset per option the investor must write (buy) to have a risk-free offsetting investment that will result in the investor perfectly hedging the option. B. (CuT - CdT) / So(u - d) C. Is related to the number of options that an investor can write without unlimited loss while holding a certain amount of the underlying asset. D. All of the above An arbitrage is best defined as A. A legal condition imposed by the CFTC. B. The act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making reasonable profits. C. The act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making guaranteed profits. D. None of the above Interest Rate Parity (IRP) is best defined as A. When a government brings its domestic interest rate in line with other major financial markets. B. When the central bank of a country brings its domestic interest rate in line with its major trading partners. C. An arbitrage condition that must hold when international financial markets are in equilibrium. D. None of the above When Interest Rate Parity (IRP) does not hold A. there is usually a high degree of inflation in at least one country. B. the financial markets are in equilibrium. C. there are opportunities for covered interest arbitrage. D. both b) and c) Suppose you observe a spot exchange rate of $1.50/€. If interest rates are 5% APR in the U.S. and 3% APR in the euro zone, what is the no-arbitrage 1-year forward rate? A. €1.5291/$ B. $1.5291/€ C. €1.4714/$ D. $1.4714/€ Suppose you observe a spot exchange rate of $1.50/€. If interest rates are 3% APR in the U.S. and 5% APR in the euro zone, what is the no-arbitrage 1-year forward rate? A. €1.5291/$ B. $1.5291/€ C. €1.4714/$ D. $1.4714/€ Suppose you observe a spot exchange rate of $2.00/£. If interest rates are 5% APR in the U.S. and 2% APR in the U.K., what is the no-arbitrage 1-year forward rate? A. £2.0588/$ B. $2.0588/£ C. £1.9429/$ D. $1.9429/£ A formal statement of IRP is A. F($/€) /S($/€) = (1+i$) /(1+i€) B. F($/€) /S($/€) = (1+i€) /(1+i$) C. [F($/€) - S($/€)] /S($/€) = (1+i$) /(1+i€) D. F($/€) - S($/€) = i$ - i€ Suppose that the one-year interest rate is 5.0 percent in the United States; the spot exchange rate is $1.20/€; and the one-year forward exchange rate is $1.16/€. What must one-year interest rate be in the euro zone to avoid arbitrage? A. 5.0% B. 6.09% C. 8.62% D. None of the above Suppose that the one-year interest rate is 3.0 percent in the Italy, the spot exchange rate is $1.20/€, and the one-year forward exchange rate is $1.18/€. What must one-year interest rate be in the United States? A. 1.2833% B. 1.0128% C. 4.75% D. None of the above Suppose that the one-year interest rate is 4.0 percent in the Italy, the spot exchange rate is $1.60/€, and the one-year forward exchange rate is $1.58/€. What must one-year interest rate be in the United States? A. 2% B. 2.7% C. 5.32% D. None of the above Covered Interest Arbitrage (CIA) activities will result in A. an unstable international financial markets. B. restoring equilibrium quite quickly. C. a disintermediation. D. no effect on the market. Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and that the spot exchange rate is $1.12/€ and the one-year forward exchange rate, is $1.16/€. Assume that an arbitrageur can borrow up to $1,000,000. A. This is an example where interest rate parity holds. B. This is an example of an arbitrage opportunity; interest rate parity does NOT hold. C. This is an example of a Purchasing Power Parity violation and an arbitrage opportunity. D. None of the above Suppose that you are the treasurer of IBM with an extra US$1,000,000 to invest for six months. You are considering the purchase of U.S. T-bills that yield 1.810% (that's a six month rate, not an annual rate by the way) and have a maturity of 26 weeks. The spot exchange rate is $1.00 = ¥100, and the six month forward rate is $1.00 = ¥110. The interest rate in Japan (on an investment of comparable risk) is 13 percent. What is your strategy? A. Take $1m, invest in U.S. T-bills. B. Take $1m, translate into yen at the spot, invest in Japan, and repatriate your yen earnings back into dollars at the spot rate prevailing in six months. C. Take $1m, translate into yen at the spot, invest in Japan, hedge with a short position in the forward contract. D. Take $1m, translate into yen at the forward rate, invest in Japan, hedge with a short position in the spot contract. Suppose that the annual interest rate is 2.0 percent in the United States and 4 percent in Germany, and that the spot exchange rate is $1.60/€ and the forward exchange rate, with one-year maturity, is $1.58/ €. Assume that an arbitrager can borrow up to $1,000,000 or €625,000. If an astute trader finds an arbitrage, what is the net cash flow in one year? A. $238.65 B. $14,000 C. $46,207 D. $7,000 A currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one year. The one-year interest rate in the U.S. is i$ = 2% and in the euro zone the one-year interest rate is i€ = 6%. The spot exchange rate is $1.25 = €1.00 and the one-year forward exchange rate is $1.20 = €1.00. Show how to realize a certain profit via covered interest arbitrage. A. Borrow $1,000,000 at 2%. Trade $1,000,000 for €800,000; invest at i = 6%; translate proceeds back at forward rate of $1.20 = €1.00, gross proceeds = $1,017,600. B. Borrow €800,000 at i€ = 6%; translate to dollars at the spot, invest in the U.S. at i$ = 2% for one year; translate €848,000 back into euro at the forward rate of $1.20 = €1.00. Net profit $2,400. C. Borrow €800,000 at i€ = 6%; translate to dollars at the spot, invest in the U.S. at i$ = 2% for one year; translate €850,000 back into euro at the forward rate of $1.20 = €1.00. Net Suppose that the annual interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and that the spot exchange rate is $1.12/€ and the forward exchange rate, with one-year maturity, is $1.16/€. Assume that an arbitrager can borrow up to $1,000,000. If an astute trader finds an arbitrage, what is the net cash flow in one year? A. $10,690 B. $15,000 C. $46,207 D. $21,964.29 A U.S.-based currency dealer has good credit and can borrow $1,000,000 for one year. The one-year interest rate in the U.S. is i$ = 2% and in the euro zone the one-year interest rate is i€ = 6%. The spot exchange rate is $1.25 = €1.00 and the one-year forward exchange rate is $1.20 = €1.00. Show how to realize a certain dollar profit via covered interest arbitrage. A. Borrow $1,000,000 at 2%. Trade $1,000,000 for €800,000; invest at i = 6%; translate proceeds back at forward rate of $1.20 = €1.00, gross proceeds = $1,017,600. B. Borrow €800,000 at i€ = 6%; translate to dollars at the spot, invest in the U.S. at i$ = 2% for one year; translate €848,000 back into euro at the forward rate of $1.20 = €1.00. Net profit $2,400. C. Borrow €800,000 at i€ = 6%; translate to dollars at the spot, invest in the U.S. at i$ = 2% for one year; translate €850,000 back into euro at the forward rate of $1.20 = €1.00. Net p An Italian currency dealer has good credit and can borrow €800,000 for one year. The one-year interest rate in the U.S. is i$ = 2% and in the euro zone the one-year interest rate is i€ = 6%. The spot exchange rate is $1.25 = €1.00 and the one-year forward exchange rate is $1.20 = €1.00. Show how to realize a certain euro-denominated profit via covered interest arbitrage. A. Borrow $1,000,000 at 2%. Trade $1,000,000 for €800,000; invest at i = 6%; translate proceeds back at forward rate of $1.20 = €1.00, gross proceeds = $1,017,600. B. Borrow €800,000 at i€ = 6%; translate to dollars at the spot, invest in the U.S. at i$ = 2% for one year; translate €848,000 back into euro at the forward rate of $1.20 = €1.00. Net profit $2,400. C. Borrow €800,000 at i€ = 6%; translate to dollars at the spot, invest in the U.S. at i$ = 2% for one year; translate €850,000 back into euro at the forward rate of $1.20 = €1.00. Suppose that you are the treasurer of IBM with an extra US$1,000,000 to invest for six months. You are considering the purchase of U.S. T-bills that yield 1.810% (that's a six month rate, not an annual rate by the way) and have a maturity of 26 weeks. The spot exchange rate is $1.00 = ¥100, and the six month forward rate is $1.00 = ¥110. What must the interest rate in Japan (on an investment of comparable risk) be before you are willing to consider investing there for six months? A. 11.991% B. 1.12% C. 7.45% D. -7.45% How high does the lending rate in the euro zone have to be before an arbitrageur would NOT consider borrowing dollars, trading for euro at the spot, investing in the euro zone and hedging with a short position in the forward contract? Bid Ask S($/€) $1.40 $1.43 F($/€) $1.44 $1.49 Borrowing Lending i$ 4.20% 4.10% i€ ? ? A. The bid-ask spreads are too wide for any profitable arbitrage when i€ > 0 B. 3.48% C. -2.09% D. None of the above The world's largest foreign exchange trading center is A) New York. B) Tokyo. C) London. D) Hong Kong. On average, worldwide daily trading of foreign exchange is A) impossible to estimate. B) $15 billion. C) $504 billion. D) $3.21 trillion. 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) 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. 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 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. 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. 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 The standard size foreign exchange transactions are for A) $10 million U.S. B) $1 million U.S. C) €1 million. 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 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 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 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. 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. 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 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 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 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 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 = $1.00. D. None of the above Indirect exchange rate quotations from the U.S. perspective are A) the price of one unit of the foreign currency in terms of the U.S. dollar. B) the price of one U.S. dollar in the foreign currency. It is common practice among currency traders worldwide to both price and trade currencies against the U.S. dollar. In fact, 2007 BIS statistics indicate that about of currency trading in the world involves the U.S. dollar on one side of the transaction. A. 86 percent B. 75 percent C. 45 percent D. 15 percent It is common practice among currency traders worldwide to both price and trade currencies against the U.S. dollar. Consider a currency dealer who makes a market in 5 currencies against the dollar. If he were to supply quotes for each currency in terms of all of the others, how many quotes would he have to provide? A. 36 B. 30 C. 60 D. 120 E. None of the above The Bid price A) is the price that the dealer has just paid for something, his historical cost of the most recent trade. B) is the price that a dealer stands ready to pay. C) refers only to auctions like eBay, not over the counter transactions with dealers. D) is the price that a dealer stands ready to sell at. Suppose the spot ask exchange rate, Sa ($|£), 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 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. 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 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 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. 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 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. 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. 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 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 Suppose you observe the following exchange rates: €1 = $1.25; £1 = $2.00. Calculate the euro-pound exchange rate. A. €1 = £1.60 B. €1 = £0.625 C. €2.50 =£1 D. €1 = £2.50 The AUD/$ 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 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 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 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 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 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 What is the ASK cross-exchange rate for Swiss Francs priced in euro? A. €0.5386/CHF B. €0.5389/CHF C. €0.5463/CHF D. €0.5466/CHF Find the no-arbitrage cross exchange rate. The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. A. €1.25/£1.00 B. $1.25/£1.00 C. £1.25/€1.00 D. €0.80/£1.00 What is the BID cross-exchange rate for Canadian dollars priced in euro? Hint: Find the price that a currency dealer will pay in euro to buy Canadian dollars. A. €0.6094/CAD B. €0.6104/CAD C. €0.6181/CAD D. €0.6191/CAD What is the ASK cross-exchange rate for Canadian dollars priced in euro? Hint: Find the price that a currency dealer will take in euro to sell Canadian dollars. A. €0.6094/CAD B. €0.6104/CAD C. €0.6181/CAD D. €0.6191/CAD Find the no-arbitrage cross exchange rate. The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-yen exchange rate is quoted at $1.00 = ¥120. A. ¥192/€1.00 B. €1.92/¥100 C. €1.25/¥1.00 D. €1.00/¥1.92 The euro-pound cross exchange rate can be computed as: A. S(€/£) = S($/£) × S(€/$) B. S(€/£) = S($/£) / S($/€) C. S(€/£) = S(€/$) / S(£/$) D. all of the above Suppose a bank customer wishes to trade out of British pounds and into Swiss francs. A) In dealer jargon, this is a currency against currency trade. B) The bank will frequently handle such a trade by selling British pounds for U.S. dollars and then buying Swiss francs with U.S. dollars C) The bank would typically sell the British pounds directly for Swiss francs. D) Both a) and b) Including the transactions costs of the bid-ask spread, the euro-pound cross exchange rate for a customer who wants to sell euro and buy pounds can be computed as A. Sb (£/€) = Sb ($/€) × Sb (£/$) B. Sa (€/£) = Sa (€/$) × Sa ($/£) C. Sb (€/£) = Sb ($/€) × 1/ Sa (£/$) D. All of the above Suppose a bank customer with €1,000,000 wishes to trade out of euro and into Japanese yen. The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-yen exchange rate is quoted at $1.00 = ¥120. How many yen will the customer get? A. ¥192,000,000 B. ¥5,208,333 C. ¥75,000,000 D. ¥5,208.33 Using the table above, what is the bid price of pounds in terms of euro? A. €1.3371/£ B. €1.3378/£ C. £0.7475/€ D. £0.7479/€ Using the table above, what is the ask price of pounds in terms of euro? A. €1.3371/£ B. €1.3378/£ C. £0.7475/€ D. £0.7479/€ Using the table above, what is the bid price of euro in terms of pounds? A. €1.3371/£ B. €1.3378/£ C. £0.7475/€ D. £0.7479/€ Using the table above, what is the ask price of euro in terms of pounds? A. €1.3371/£ B. €1.3378/£ C. £0.7475/€ D. £0.7479/€ Suppose you observe the following exchange rates: €1 = $.85; £1 = $1.60; and €2.00 = £1.00. Starting with $1,000,000, how can you make money? A. Exchange $1m for £625,000 at £1 = $1.60. Buy €1,250,000 at €2 = £1.00; trade for $1,062,500 at €1 = $.85. B. Start with dollars, exchange for euros at €1 = $.85; exchange for pounds at €2.00 = £1.00; exchange for dollars at £1 = $1.60. C. Start with euros; exchange for pounds; exchange for dollars; exchange for euros. D. No arbitrage profit is possible. 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 You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. If a bank quotes you a cross rate of £1.00 = €1.20 how much money can an astute trader make? A) No arbitrage is possible B. $1,160,000 C. $41,667 D. $40,000 You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. If a bank quotes you a cross rate of £1.00 = €1.20 how can you make money? A) No arbitrage is possible B) Buy euro at $1.60/€, buy £ at €1.20/£, sell £ at $2/£ C. Buy £ $2/£, buy € at €1.20/£, sell € at $1.60/€ You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is quoted as $1.50 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. If a bank quotes you a cross rate of £1.00 = €1.25 how can you make money? A. No arbitrage is possible. B. Buy euro at $1.50/€, buy £ at €1.25/£, sell £ at $2/£. C. Buy £ $2/£, buy € at €1.25/£, sell € at $1.50/€. The Singapore dollar—U.S. dollar (S$/$) 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 Market microstructure refers to A) the basic mechanics of how a marketplace operates. B) the basics of how to make small (micro-sized) currency trades. C) how macroeconomic variables such as GDP and inflation are determined. D) none of the above A recent survey of U.S. foreign exchange traders measured traders' perceptions about how fast news events that cause movements in exchange rates actually change the exchange rate. The survey respondents claim that the bulk of the adjustment to economic announcements regarding unemployment, trade deficits, inflation, GDP, and the Federal funds rate takes place within A) ten seconds. B) one minute. C) five minutes. D) one hour. 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