Chapter5Practicequestionsandanswerkeys.docx

Chapter5Practicequestionsandanswerkeys.docx

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Chapter5Practicequestionsandanswerkeys

Lecture#3–PracticeQuestions–InternationalFinancialManagement456

Chapter5–TheMarketforForeignExchange

1.Mostforeignexchangetransactionsarefor 

A. interventionbycentralbanks.

B. interbanktradesbetweeninternationalbanksornonbankdealers.

C. retailtrade.

D. purchaseofhardcurrencies.

2.Thedifferencebetweenabrokerandadealeris 

A. dealersselldrugs;brokerssellhouses.

B. brokersbringtogetherbuyersandsellers,butcarrynoinventory;dealersstandreadytobuyandsellfromtheirinventory.

C. brokerstransactinstocksandbonds;currencyisboughtandsoldthroughdealers.

D. noneoftheabove

3. Interventionintheforeignexchangemarketistheprocessof 

A. acentralbankrequiringthecommercialbanksofthatcountrytotradeatasetpricelevel.

B. commercialbanksindifferentcountriescoordinatingeffortsinordertostabilizeoneormorecurrencies.

C. acentralbankbuyingorsellingitscurrencyinordertoinfluenceitsvalue.

D. thegovernmentofacountryprohibitingtransactionsinoneormorecurrencies.

4.Thespotmarket 

A. involvesthealmost-immediatepurchaseorsaleofforeignexchange.

B. involvesthesaleoffutures,forwards,andoptionsonforeignexchange.

C. takesplaceonlyonthefloorofaphysicalexchange.

D. alloftheabove.

5.

 Usingthetableshown,whatisthemostcurrentspotexchangerateshownforBritishpounds?

UseadirectquotefromaU.S.perspective. 

A. $1.61=£1.00

B. $1.60=£1.00

C. $1.00=£0.625

D. $1.72=£1.00

6.Supposethatthecurrentexchangerateis€0.80=$1.00.Thedirectquote,fromtheU.S.perspectiveis 

A. €1.00=$1.25.

B. €0.80=$1.00.

C. £1.00=$1.80.

D. Noneoftheabove

7.Supposethatthecurrentexchangerateis€1.00=$1.60.Theindirectquote,fromtheU.S.perspectiveis 

A. €1.00=$1.60.

B. €0.6250=$1.00.

C. €1.60=$1.00.

D. Noneoftheabove

8.TheBidprice 

A. isthepricethatthedealerhasjustpaidforsomething,hishistoricalcostofthemostrecenttrade.

B. isthepricethatadealerstandsreadytopay.

C. refersonlytoauctionslikeeBay,notoverthecountertransactionswithdealers.

D. isthepricethatadealerstandsreadytosellat.

9.Supposethespotaskexchangerate,Sa（$|£）,is$1.90=£1.00andthespotbidexchangerate,Sb（$|£）,is$1.89=£1.00.Ifyouweretobuy$10,000,000worthofBritishpoundsandthensellthemfiveminuteslater,howmuchofyour$10,000,000wouldbe"eaten"bythebid-askspread?

A. $1,000,000

B. $52,910.05

C. $100,000

D. $52,631.58

10.Ifthe$/€bidandaskpricesare$1.50/€and$1.51/€,respectively,thecorresponding€/$bidandaskpricesare 

A. €0.6667and€0.6623.

B. $1.51and$1.50.

C. €0.6623and€0.6667.

D. cannotbedeterminedwiththeinformationgiven.

11.IntheInterbankmarket,thestandardsizeofatradeamonglargebanksinthemajorcurrenciesis 

A. fortheU.S.-dollarequivalentof$10,000,000,000.

B. fortheU.S.-dollarequivalentof$10,000,000.

C. fortheU.S.-dollarequivalentof$100,000.

D. fortheU.S.-dollarequivalentof$1,000.

12.Thedollar-euroexchangerateis$1.25=€1.00andthedollar-yenexchangerateis¥100=$1.00.Whatistheeuro-yencrossrate?

A. ¥125=€1.00

B. ¥1.00=€125

C. ¥1.00=€0.80

D. Noneoftheabove

13.Supposeyouobservethefollowingexchangerates:

€1=$1.25;£1=$2.00.Calculatetheeuro-poundexchangerate. 

A. €1=£1.60

B. €1=£0.625

C. €2.50=£1

D. €1=£2.50

14.Supposeyouobservethefollowingexchangerates:

€1=$1.60;£1=$2.00.Calculatetheeuro-poundexchangerate. 

A. €1.3333=£1.00

B. £1.3333=€1.00

C. €3.00=£1

D. €1.25=£1.00

15.Findtheno-arbitragecrossexchangerate.Thedollar-euroexchangerateisquotedas$1.60=€1.00andthedollar-poundexchangerateisquotedat$2.00=£1.00. 

A. €1.25/£1.00

B. $1.25/£1.00

C. £1.25/€1.00

D. €0.80/£1.00

16.Theeuro-poundcrossexchangeratecanbecomputedas:

A. S（€/£）=S（$/£）S（€/$）

B. 

C. 

D. alloftheabove

17.Supposeabankcustomerwith€1,000,000wishestotradeoutofeuroandintoJapaneseyen.Thedollar-euroexchangerateisquotedas$1.60=€1.00andthedollar-yenexchangerateisquotedat$1.00=¥120.Howmanyyenwillthecustomerget?

A. ¥192,000,000

B. ¥5,208,333

C. ¥75,000,000

D. ¥5,208.33

18.Supposeyouobservethefollowingexchangerates:

€1=$.85;£1=$1.60;and€2.00=£1.00.Startingwith$1,000,000,howcanyoumakemoney?

A. Exchange$1mfor£625,000at£1=$1.60.Buy€1,250,000at€2=£1.00;tradefor$1,062,500at€1=$.85.

B. Startwithdollars,exchangeforeurosat€1=$.85;exchangeforpoundsat€2.00=£1.00;exchangefordollarsat£1=$1.60.

C. Startwitheuros;exchangeforpounds;exchangefordollars;exchangeforeuros.

D. Noarbitrageprofitispossible.

19.YouareaU.S.-basedtreasurerwith$1,000,000toinvest.Thedollar-euroexchangerateisquotedas$1.20=€1.00andthedollar-poundexchangerateisquotedat$1.80=£1.00.Ifabankquotesyouacrossrateof£1.00=€1.50howmuchmoneycananastutetradermake?

A. Noarbitrageispossible

B. $1,160,000

C. $500,000

D. $250,000

20.YouareaU.S.-basedtreasurerwith$1,000,000toinvest.Thedollar-euroexchangerateisquotedas$1.60=€1.00andthedollar-poundexchangerateisquotedat$2.00=£1.00.Ifabankquotesyouacrossrateof£1.00=€1.20howcanyoumakemoney?

A. Noarbitrageispossible

B. Buyeuroat$1.60/€,buy£at€1.20/£,sell£at$2/£

C. Buy£$2/£,buy€at€1.20/£,sell€at$1.60/€

21.TheSingaporedollar—U.S.dollar（S$/$）spotexchangerateisS$1.60/$,theCanadiandollar—U.S.dollar（CD/$）spotrateisCD1.33/$andtheS$/CD1.15.Determinethetriangulararbitrageprofitthatispossibleifyouhave$1,000,000. 

A. $44,063profit

B. $46,093loss

C. Noprofitispossible

D. $46,093profit

22.Marketmicrostructurerefersto 

A. thebasicmechanicsofhowamarketplaceoperates.

B. thebasicsofhowtomakesmall（micro-sized）currencytrades.

C. howmacroeconomicvariablessuchasGDPandinflationaredetermined.

D. noneoftheabove

23.Theforwardprice 

A. maybehigherthanthespotprice.

B. maybethesameasthespotprice.

C. maybelessthanthespotprice.

D. alloftheabove

24.ForaU.S.traderworkinginAmericanquotes,iftheforwardpriceishigherthanthespotprice 

A. thecurrencyistradingatapremiumintheforwardmarket.

B. thecurrencyistradingatadiscountintheforwardmarket.

C. thenyoushouldbuyatthespot,holdontoitandsellattheforward—it'sabuilt-inarbitrage.

D. alloftheabove—itreallydependsifyou'retalkingAmericanorEuropeanquotes.

25.Theforwardmarket 

A. involvescontractingtodayforthefuturepurchaseofsaleofforeignexchangeatthespotratethatwillprevailatthematurityofthecontract.

B. involvescontractingtodayforthefuturepurchaseofsaleofforeignexchangeatapriceagreedupontoday.

C. involvescontractingtodayfortherightbutnotobligationtothefuturepurchaseofsaleofforeignexchangeatapriceagreedupontoday.

D. noneoftheabove

26.Ifonehasagreedtobuyforeignexchangeforward 

A. youhaveashortpositionintheforwardcontract.

B. youhavealongpositionintheforwardcontract.

C. untiltheexchangeratemoves,youhaven'tmademoney,soyou'reneithershortnorlong.

D. youhavealongpositioninthespotmarket.

27.Thecurrentspotexchangerateis$1.55/€andthethree-monthforwardrateis$1.50/€.Youenterintoashortpositionon€1,000.Atmaturity,thespotexchangerateis$1.60/€.Howmuchhaveyoumadeorlost?

A. Lost$100

B. Made€100

C. Lost$50

D. Made$150

28.Thecurrentspotexchangerateis$1.55/€andthethree-monthforwardrateis$1.50/€.Basedonyouranalysisoftheexchangerate,youareconfidentthatthespotexchangeratewillbe$1.52/€inthreemonths.Assumethatyouwouldliketobuyorsell€1,000,000.Whatactionsdoyouneedtotaketospeculateintheforwardmarket?

A. Takealongpositioninaforwardcontracton€1,000,000at$1.50/€.

B. Takeashortpositioninaforwardcontracton€1,000,000at$1.50/€.

C. Buyeurotodayatthespotrate,sellthemforward.

D. Selleurotodayatthespotrate,buythemforward.

29.Thecurrentspotexchangerateis$1.45/€andthethree-monthforwardrateis$1.55/€.Baseduponyoureconomicforecast,youareprettyconfidentthatthespotexchangeratewillbe$1.50/€inthreemonths.Assumethatyouwouldliketobuyorsell€100,000.Whatactionswouldyoutaketospeculateintheforwardmarket?

Howmuchwillyoumakeifyourpredictioniscorrect?

A. Takeashortpositioninaforward.Ifyou'rerightyouwillmake$15,000.

B. Takealongpositioninaforwardcontractoneuro.Ifyou'rerightyouwillmake$5,000.

C. Takeashortpositioninaforwardcontractoneuro.Ifyou'rerightyouwillmake$5,000.

D. Takealongpositioninaforwardcontractoneuro.Ifyou'rerightyouwillmake$15,000.

30.Consideratraderwhotakesalongpositioninasix-monthforwardcontractontheeuro.Theforwardrateis$1.75=€1.00;thecontractsizeis€62,500.Atthematurityofthecontractthespotexchangerateis$1.65=€1.00. 

A. Thetraderhaslost$625.

B. Thetraderhaslost$6,250.

C. Thetraderhasmade$6,250.

D. Thetraderhaslost$66,287.88

31.Thecurrentspotexchangerateis$1.55/€andthethree-monthforwardrateis$1.50/€.Basedonyouranalysisoftheexchangerate,youareconfidentthatthespotexchangeratewillbe$1.62/€inthreemonths.Assumethatyouwouldliketobuyorsell€1,000,000.Whatactionsdoyouneedtotaketospeculateintheforwardmarket?

Whatistheexpecteddollarprofitfromspec