30) Based on the forward rates in table 19.1, the British pound is expected to
A) stay the same against the dollar.
B) weaken against the dollar.
C) luctuate randomly against the dollar.
D) strengthen against the dollar.
Question Status: Revised
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
31) The following are the prices in the foreign exchange market between the U.S. dollar
and a foreign currency (fc). Spot 0.6335US$/fc; three-month forward 0.6375US$/fc. What
was the discount or premium on three-month forward for the foreign currency?
A) 0.63% premium
B) 0.40% premium
C) 0.63% discount
D) 0.40% discount
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
32) Assume that a irm purchases foreign currency in order to complete the purchase of
raw material from an overseas supplier. The currency is purchased today at an exchange
rate that is good only for today. This transaction is referred to as a(n) ________ transaction.
A) forward
B) arbitrage
C) spot
D) hedge
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
11
33) Forward exchange rates
A) reduce uncertainty about future value of currencies.
B) are always slightly lower than the spot rate.
C) relect expectations about the future value of currencies.
D) both A and C.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
34) A trader who simultaneously bought Swiss francs in New York for .9772 and sold them
in Zurich for .9774 would be practicing
A) simple arbitrage.
B) inside trading.
C) compound arbitrage.
D) parity exploitation.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
35) A dealer in New York ofers to buy U.K. pounds for $1.60 and sell them for $1.605. The
diferent prices are due to
A) arbitrage.
B) a tax on currency transactions.
C) the bid-ask spread.
D) supply and demand.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
12
36) The exchange rate that represents the number of units of a home currency that is
required to purchase one unit of a foreign currency is referred to as a(n) ________ quote.
A) forward
B) direct
C) market
D) indirect
Question Status: Revised
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
37) The exchange rate that represents the number of units of a foreign currency that can
be purchased with one unit of a home currency is referred to as a(n) ________ quote.
A) forward
B) direct
C) market
D) indirect
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
38) A foreign exchange dealer in New York posts an ask price of .01818 for Indian rupees
and a bid price of .01820. What is the dealer’s proit on the simultaneous purchase and sale
of 1 million rupees?
A) $20 proit
B) ($20 )loss
C) $200 proit
D) ($2) loss
Question Status: Revised
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
13
39) The international currency system that presently exists is best described as a ________
rate currency system.
A) parity
B) ixed
C) multinational
D) loating
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
40) A cross rate is the computation of an exchange rate for a currency from the exchange
rates of two other countries.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
41) The asked rate is the price a customer will receive from a foreign currency trader when
selling a foreign currency.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
42) The foreign exchange market is similar in form to the New York Stock Exchange.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
14
43) Arbitrage eliminates forward discounts and premiums across the markets of a single
currency.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
44) Arbitrage is the process of buying and selling in one market in order to make a riskless
proit.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
45) The eiciency of foreign currency markets is ensured, in large measure, by the process
of arbitrageurs.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
46) A direct quote in Bombay tells one how many British pounds can buy one Indian rupee.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
47) The bid rate (also called the ofer rate) is the number of units of home currency paid to
a customer in exchange for their foreign currency.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
48) The foreign exchange market provides a physical entity that transfers the purchasing
power from one currency to another.
Question Status: Previous edition
15
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
49) Foreign exchange transactions carried out in the spot market entails an agreement
today to deliver a speciic number of units of currency on a future date in return for a
speciied number of units of another currency.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
50) Transactions carried out in the foreign exchange markets can include direct or indirect
exchange rate quotes.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
51) Spot transactions are made immediately in the market place at the market price.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
16
52) Spot exchange markets are eicient due to arbitrage forces.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
53) When banks transact in foreign currencies, the direct bid quote is greater than the
direct asked quote.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
54) The forward rate is the same as the spot rate that will prevail in the future.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
55) The major advantage of the forward market is risk reduction.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
56) Spot exchange markets have the potential for arbitrage opportunities for a long period
of time.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
17
57) The diference between the asked price and the bid price is known as the spread.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
58) A narrow spread indicates eiciency in the spot exchange market.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
59) Forward contracts are usually quoted for periods greater than one year.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
60) Forward rates, like spot rates, are quoted in both direct and indirect form.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
61) Forward contracts beneit only the customer due to a reduction in uncertainty.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
18
62) What is the role of arbitrage in the foreign exchange markets?
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
63) A dealer in London posts an ask rate of .6238 and a bid rate of .6237. How much, in
U.K. pounds, would it cost to purchase $100,000. For how much in pounds could you sell
$100,000?
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
64) What is the diference between forward rates and spot rates? What is the purpose of
forward contracts?
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
65) What is the diference between and “ask” quote and a “bid” quote.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
19
66) As December 26, 2012, the spot rate for Swiss francs was 1.0917. The 3 month
forward rate was 1.0939.
Compute the annualized percentage rate premium or discount for Swiss francs.
Question Status: Revised
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
67) One U.S. dollar buys 12.9923 Mexican pesos and .7585 euros. What is the peso/euro
exchange rate.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
19.2 Interest Rate and Purchasing-Power Parity
1) A theory that relates the ratios of spot and forward exchange to diferences in interest
rates in two countries or currency zones is known as
A) interest rate parity.
B) purchasing power parity.
C) market eiciency.
D) forward/spot equivalence hypothesis.
Question Status: Previous edition
Objective: 19.2 Describe interest rate and purchasing power parity.
Keywords: interest rate parity
Principles: Principle 4: Market Prices Relect Information
2) The interplay between interest rate diferentials and exchange rates such that both
adjust until the foreign exchange market and the money market reach equilibrium is called
the
A) purchasing power parity theory.
B) balance of payments quantum theory.
C) interest rate parity theory.
D) arbitrage markets theory.
Question Status: Previous edition
Objective: 19.2 Describe interest rate and purchasing power parity.
Keywords: interest rate parity
Principles: Principle 4: Market Prices Relect Information
3) Which of the following statements is true?
A) The forward rate is the same as the spot rate that will prevail in the future.
B) Only the forward rate is known.
20