7) Foreign exchange ________ earn a profit by a bid-ask spread on currencies they purchase and sell.

Foreign exchange ________, on the other hand, earn a profit by bringing together buyers and sellers
of foreign currencies and earning a commission on each sale and purchase.

A) central banks; treasuries

B) dealers; brokers

C) brokers; dealers

D) speculators; arbitrageurs

________ are agents who facilitate trading between dealers without themselves becoming principals
in the transaction.

A) Central banks

B) Foreign exchange brokers

C) Arbitrageurs

D) Foreign exchange dealers

9) Because the market for foreign exchange is worldwide, the volume of foreign exchange currency
transactions is level throughout the 24-hour day. FALSE

10) Foreign exchange markets are a relatively recent phenomenon, beginning with the agreement at
Bretton Woods. FALSE

Dealers in foreign exchange departments at large international banks act as market makers and
maintain inventories of the securities in which they specialize. TRUE

Currency trading lacks profitability for large commercial and investment banks but is maintained as a
service for corporate and institutional customers. FALSE

13) The primary motive of foreign exchange activities by most central banks is profit. FALSE

14) Banks, and a few nonbank foreign exchange dealers, operate ONLY in the interbank markets.
FALSE

Dealers in the foreign exchange departments of large international banks often function as "market
makers." Such dealers stand willing at all times to buy and sell those currencies in which they
specialize and thus maintain an "inventory" position in those currencies. TRUE

Currency trading is a service center rather than a profit center for commercial and investment banks.
FALSE
17) For individuals and firms involved in the import and export of goods and services ,using the
foreign exchange market is necessary, but incidental, to their underlying commercial or investment
purpose. TRUE

18) Most transactions in the interbank foreign exchange trading are primarily conducted via
telecommunication techniques and little is conducted face-to-face. TRUE

1) ________ are NOT one of the three categories reported for foreign exchange.

A) Spot transactions

B) Swap transactions

C) Strip transactions

D) Futures transactions

2) A ________ transaction in the foreign exchange market requires an almost immediate delivery
(typically within two days) of foreign exchange.

A) spot

B) forward

C) futures

D) none of the above

3) A ________ transaction in the foreign exchange market requires delivery of foreign exchange at
some future date.

A) spot

B) forward

C) swap

D) currency

4) A forward contract to deliver British pounds for U.S. dollars could be described either as ________
or ________.

A) buying dollars forward; buying pounds forward

B) selling pounds forward; selling dollars forward

C) selling pounds forward; buying dollars forward

5) A common type of swap transaction in the foreign exchange market is the ________ where the
dealer buys the currency in the spot market and sells the same amount back to the same bank in the
forward market.

A) "forward against spot"

B) "forspot"

C) "repurchase agreement"

D) "spot against forward"

6) The ________ is a derivative forward contract that was created in the 1990s. It has the same
characteristics and documentation requirements as traditional forward contracts except that they are
only settled in U.S. dollars and the foreign currency involved in the transaction is not delivered.

A) nondeliverable forward

B) dollar only forward

C) virtual forward

D) internet forward

7) Which of the following is NOT true regarding nondeliverable forward (NDF) contracts?

A) NDFs are used primarily for emerging market currencies.

B) Pricing of NDFs reflects basic interest rate differentials plus an additional premium charged for
dollar settlement.

C) NDFs can only be traded by central banks.

D) All of the above are true.

8) A ________ transaction in the interbank market is the simultaneous purchase and sale of a given
amount of foreign exchange for two different value dates.

A) spot

B) forward-forward

C) swap

D) futures
A spot transaction in the interbank market for foreign exchange would typically involve a two-day
delay in the actual delivery of the currencies, while such a transaction between a bank and its
commercial customer would not necessarily involve a two-day wait. TRUE

10) Nondeliverable Forwards were originally envisioned as a method of currency speculation, but it is
now estimated that 70% of NDFs are trading for hedging purposes. FALSE

In general, NDF markets normally develop for country currencies having large cross-border capital
movements, but still subject to convertibility restrictions. TRUE

12) NDFs are traded and settled inside the country of the subject currency, and therefore are within
the control of the country's government. FALSE

13) A contract to deliver dollars for euros in six months is both "buying euros forward for dollars" and
"selling dollars forward for euros." TRUE

1) Daily trading volume in the foreign exchange market was about ________ per ________ in 2013.

A) $5,300 billion; month

B) $3,300 billion; month

C) $5,300 billion; day

D) $3,300 billion; day

2) The greatest volume of daily foreign exchange transactions are:

A) spot transactions.

B) forward transactions.

C) swap transactions.

D) This question is inappropriate because the volume of transactions are approximately equal across
the three categories above.

3) The United Kingdom and United States together make up nearly ________ of daily currency
trading.

A) 30%

B) 40%

C) 50%

D) 60%
4) The top three currency pairs traded with the U.S. dollar are:

A) U.K. pound, Chinese Yuan, Japanese yen.

B) Swiss franc, euro, Japanese yen.

C) U.K. pound, euro, Japanese yen.

D) euro, Chinese Yuan, Japanese yen.

5) The greatest amount of foreign exchange trading takes place in the following three cities:

A) New York, London, and Tokyo.

B) New York, Singapore, and Zurich.

C) London, Frankfurt, and Paris.

D) London, Tokyo, and Zurich.

6) The four currencies that constitute about 80% of all foreign exchange trading are:

A) U.K pound, Chinese yuan, euro, and Japanese yen.

B) U.S. dollar, euro, Chinese yuan, and U.K. pound.

C) U.S. dollar, Japanese yen, euro, and U.K. pound.

D) U.S. dollar, U.K. pound, yen, and Chinese yuan.

7) As you might expect, the foreign exchange daily trading volume in in New York City is roughly
twice as large as the daily trading volume in London. FALSE

The low level of interest rates around the globe in recent years, combined with slowing economic
growth and new debt issuances, has had a dampening impact on the swap market. FALSE

9) Since the global financial crisis of 2008-2009, the Chinese renminbi (yuan) has become the most
widely traded currency with the U.S. dollar surpassing the euro, yen, and pound as dollar trading
pairs.

FALSE

10) Swap and forward transactions account for an insignificant portion of the foreign exchange
market.

FALSE
1) A foreign exchange ________ is the price of one currency expressed in terms of another currency.
A foreign exchange ________ is a willingness to buy or sell at the announced rate.

A) quote; rate

B) quote; quote

C) rate; quote

2) Most foreign exchange transactions are through the U.S. dollar. If the transaction is expressed as
the foreign currency per dollar this known as ________ whereas ________ are expressed as dollars
per foreign unit.

A) European terms; indirect

B) American terms; direct

C) American terms; European terms

D) European terms; American terms

3) The following is an example of an American term foreign exchange quote:

A) $20/£

B) €0.85/$

C) ¥100/€

D) none of the above

4) From the viewpoint of a British investor, which of the following would be a direct quote in the
foreign exchange market?

A) SF2.40/£

B) $1.50/£

C) £0.55/€

D) $0.90/€

5) A/an ________ quote in the United States would be foreign units per dollar, while a/an ________
quote would be in dollars per foreign currency unit.

A) direct; direct
B) direct; indirect

C) indirect; indirect

D) indirect; direct

6) If the direct quote for a U.S. investor for British pounds is $1.43/£, then the indirect quote for the
U.S. investor would be ________ and the direct quote for the British investor would be ________.

A) £0.699/$; £0.699/$

B) $0.699/£; £0.699/$

C) £1.43/£; £0.699/$

D) £0.699/$; $1.43/£

7) ________ make money on currency exchanges by the difference between the ________ price, or
the price they offer to pay, and the ________ price, or the price at which they offer to sell the
currency.

A) Dealers; ask; bid

B) Dealers; bid; ask

C) Brokers; ask; bid

D) Brokers; bid; ask

8) (CH 5) Refer to Table 5.1. The current spot rate of dollars per pound as quoted in a newspaper is
________ or ________.

A) £1.4484/$; $0.6904/£

B) $1.4481/£; £0.6906/$

C) $1.4484/£; £0.6904/$

D) £1.4487/$; $0.6903/£

9) Refer to Table 5.1. The one-month forward bid price for dollars as denominated in Japanese yen is:

A) -¥20.

B) -¥18.

C) ¥129.74/$.
D) ¥129.62/$.

10) Refer to Table 5.1. The ask price for the two-year swap for a British pound is:

A) $1.4250/£.

B) $1.4257/£.

C) -$230.

D) -$238.

11) Refer to Table 5.1. According to the information provided in the table, the 6-month yen is selling
at a forward ________ of approximately ________ per annum. (Use the mid rates to make your
calculations.)

A) discount; 2.09%

B) discount; 2.06%

C) premium; 2.09%

D) premium; 2.06%

Given the following exchange rates, which of the multiple-choice choices represents a potentially
profitable intermarket arbitrage opportunity?

¥129.87/$

€1.1226/$

€0.00864/¥

A) ¥115.69/€

B) ¥114.96/€

C) $0.8908/€

D) $0.0077/¥

13) The U.S. dollar suddenly changes in value against the euro moving from an exchange rate of
0.8909/€ to $0.8709/€. Thus, the dollar has ________ by ________.

A) appreciated; 2.30%

B) depreciated; 2.30%
C) appreciated; 2.24%

D) depreciated; 2.24%

14) A German firm is attempting to determine the euro/pound exchange rate and has the following
exchange rate information: USD/pound = $1.5509/£ and the USD/euro rate = $1.2194/€. Therefore,
the euro/pound rate must be:

A) £1.2719/€.

B) €1.2719/£.

C) €0.7316/£.

D) €0.7863/£.

15) The European and American terms for foreign currency exchange are square roots of one another.

FALSE

16) When the cross rate for currencies offered by two banks differs from the exchange rate offered by
a third bank, a triangular arbitrage opportunity exists. TRUE

17) A confusing "quirk" of international exchange rates occurs when calculating the percentage
change in spot rates from one period to another. The percent change in the spot rate from one period
to another when quoted using foreign currency terms is always greater than the percent changes
quoted when using home currency terms. FALSE

18) The most commonly quoted currency exchange is that between the U.S. dollar and the European
euro. For example, a quotation of EUR/USD 1.2174. The euro is the base currency and the dollar the
price currency. TRUE

19) Since in the U.S. the home currency is the dollar and the foreign currency is the euro, in New
York USD 1.2174 = EUR 1.00 would be a direct quote on the euro and an indirect quote on the dollar.
TRUE

1. The concept of absolute advantage's origins lie in work of __Adam Smith__________

1. Because countries have different financial regulations and customs, it is common for MNEs to
apply their domestic rules and regulations when doing financial business in a foreign country.
FALSE

1. In determining why a firm becomes multinational there are many reasons. One reason is that
the firm is a resource seeker. TRUE
1. Since 2009 the IMF's exchange rate regime classification system uses a "de facto
classification" methodology. Under this system, a country in which exchange rate is
determined by forces of supply and demand is considered to have:
A) a residual agreement.
B) hard pegs.
C) soft pegs.
D) floating arrangements.

1. A small economy country whose GDP is heavily dependent on trade with the Italy
could use a(n) ________ exchange rate regime to minimize the risk to their economy
that could arise due to unfavorable changes in the exchange rate.
A) pegged exchange rate with the United States
B) pegged exchange rate with the Euro
C) independent floating
D) managed float

1. The euro is an example of a rigidly fixed system, acting as a single currency for its member
countries. However, the euro itself is an independently floating currency against all other
currencies.TRUE

2. A currency board exists when a country's central bank commits to back its money supply
entirely with foreign reserves at all times. TRUE (BiH EXAMPLE)

1. Which of the following is a part of the Financial Account of the BOP?

2. Based on the premise that, other things equal, countries would prefer a fixed exchange
rate, which of the following statements is NOT true?
A) Fixed rates provide stability in international prices for the conduct of trade.
B) Fixed exchange rate regimes necessitate that central banks maintain large quantities
of international reserves for use in the occasional defense of the fixed rate.
C) Fixed rates are inherently inflationary in that they require the country to follow
loose monetary and fiscal policies.
D) Stable prices aid in the growth of international trade and lessen exchange rate risks
for businesses.
1. The authors discuss the concept of the "Impossible Trinity" or the inability to achieve
simultaneously the goals of exchange rate stability, full financial integration, and monetary
independence. If a country chooses to have a restriction on its capital and financial account in
its balance of payments, which two of the three goals is a country most able to achieve?
A) monetary independence and exchange rate stability
B) exchange rate stability and full financial integration
C) full financial integration and monetary independence
D) None of the above.

1. Explain the difference between direct and portfolio investments when categorizing
investments for the financial account component of the balance of payments.
Direct investment is the net balance of capital dispersed from and into the country for the purpose
of exerting control over assets, while portfolio investment is the net balance of capital that flows in
and out of the country but does not reach the 10% threshold of direct investment.
1. J-Curve suggests that when a currency is devalued the immediate impact may be an increase
in a country's trade deficit. However, this situation tends to correct itself in 2 to 5
weeks.FALSE

2. The effect of an imbalance in the BOP is the same for countries on a fixed exchange rate
regime as for those on a floating exchange rate regime. FALSE

3. A country's overall level of interest rates should have an impact on the financial account of the
BOP. Relatively low real interest rates should normally stimulate an outflow of capital seeking
higher interest rates in other country currencies.TRUE

1. Under a fixed exchange rate system, the central bank bears the responsibility to ensure that
the BOP is near zero. If the sum of the current and financial accounts is LESS THAN ZERO
(deficit), an excess demand for the foreign currency exists in the world. To preserve the fixed
exchange rate, the central bank should ________ .
A) Buy foreign currency
B) sell foreign currency
C) sell domestic currency
D) not intervene in the foreign exchange market