59) ________ refers to the most commonly quoted interest rate that London banks charge other
large banks that borrow Eurocurrency.
A) London Interbank Offer Rate (LIBOR)
B) London Interbank Bid Rate (LIBID)
C) Spot rate
D) Cross rate
60) The rate at which one currency is expressed in relation to the currency of another country is
called the ________.
A) exchange rate
B) interbank interest rate
C) official cash rate
D) prime rate
61) The bid-ask spread in the foreign exchange market is the ________.
A) price at which a bank will buy a currency
B) price of currency in the foreign exchange market
C) difference between the bid and ask quotes for a currency
D) the time lapsed between a bid quote and an ask quote
62) Investors use the foreign exchange market for ________.
A) stock dilution
B) currency speculation
C) market capitalization
D) mean reversion
63) The practice of insuring against potential losses that result from adverse changes in exchange
rates is called currency ________.
A) hedging
B) arbitrage
C) speculation
D) conversion
64) ________ is the instantaneous purchase and sale of a currency in different markets for profit.
A) Currency hedging
B) Currency arbitrage
C) Currency speculation
D) Currency conversion
65) The profit-motivated purchase and sale of interest-paying securities denominated in different
currencies is called ________.
A) currency conversion
B) currency hedging
C) interest arbitrage
D) interbank interest rates
66) The purchase or sale of a currency with the expectation that its value will change and
generate a profit is called ________.
A) currency hedging
B) currency arbitrage
C) currency speculation
D) currency conversion
67) In a quoted exchange rate of $1.69/British pound, the British pound is called the ________.
A) base currency
B) counter currency
C) cross currency
D) quoted currency
68) An exchange rate of ¥117.87/$ indicates ________.
A) that 117.87 yen buys one dollar
B) that 117.87 dollars buys one yen
C) a direct quote on the dollar
D) an indirect quote on the yen
69) While designating an exchange rate, the numerator indicates the ________.
A) base currency
B) transaction currency
C) quoted currency
D) cross currency
70) While designating an exchange rate, the ________ is always the denominator.
A) counter currency
B) base currency
C) cross currency
D) quoted currency
71) The exchange rate between the euro (€) and the dollar is €0.8461/$. Which of the following
is the correct direct quote on the dollar?
A) $2.20/€
B) $1.1819/€
C) $5.50/€
D) $0.8461/€
72) An exchange rate calculated using two other exchange rates is called a(n) ________.
A) interest arbitrage
B) forward contract
C) forward rate
D) cross rate
73) Which of the following is an exchange rate that requires delivery of the traded currency
within two business days?
A) forward rate
B) spot rate
C) cross rate
D) prime rate
74) The exchange rate at which a bank will purchase a currency is called a ________ rate.
A) prime
B) buy
C) ask
D) forward
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75) Outright forward transactions involve the exchange of currency on a future date beyond two
business days at a fixed exchange rate, known as the ________.
A) spot rate
B) forward rate
C) option rate
D) reverse transaction rate
76) ________ is the simultaneous purchase and sale of foreign exchange for two different dates.
A) Currency hedging
B) Currency speculation
C) Currency swap
D) Currency arbitrage
77) A(n) ________ is a right to exchange a specific amount of a currency on a specific date at a
specific rate.
A) forward contract
B) currency option
C) currency hedging
D) interest arbitrage
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Scenario: Sally Goes to Japan
Sally Johnson has identified a market for her company’s products in Japan. She is excited about
expanding her company, but knows that she needs to learn how the foreign exchange market
works before she can successfully sell her products abroad.
78) If Sally sees a quote of ¥117.87/$, she should know that ________.
A) the yen is the base currency here
B) this is a direct quote on the dollar
C) this is a direct quote on the yen
D) the quote is in U.S. dollars
79) Which of the following is true about a quote of ¥117.87/$?
A) It is equal to $.008484/¥.
B) The quote is in U.S. dollars.
C) This is an indirect quote on the yen.
D) It costs a little more than a dollar to buy one yen.
80) If ABC Software simultaneously purchases and sells foreign exchange for two different
dates, the company is said to be involved in ________.
A) increasing its foreign exchange rate risk
B) conducting a currency swap
C) entering an arbitrage situation
D) buying and selling at the spot rate
81) If ABC Software holds a currency option to purchase Swiss francs at SF 1.67/$ in 30 days, at
the end of which the exchange rate is SF1.70/$, then ABC Software ________.
A) is required to follow through on a currency exchange
B) has succeeded in hedging against exchange rate risk
C) would exercise its currency option
D) would not exercise its currency option
82) Currency speculation is the purchase or sale of a currency with the expectation that its value
will remain fluctuate.
83) In any exchange rate, the quoted currency is always the numerator.
84) Exchange rate risk is the risk of fluctuation in exchange rates.
85) Two firms participating in a swap must use the same currency.
86) An exchange rate requiring delivery of the traded currency within two business days is called
a cross rate.
87) If an individual is traveling to another country and wants to exchange currencies at his bank
before departing, he will be quoted the spot rate since he is exchanging that will be delivered to
him with two business days.
88) Forward rates represent the expectations of currency traders and bankers regarding a
currency’s future spot rate.
89) International banks participate in the swap market by acting as broker or by undertaking half
of a swap for its own account.
90) Identify and explain the types of currency instruments used in the forward market.
91) Explain the concept of cross rates. Include the description of a vehicle currency and the role
it plays in the foreign exchange market.
92) Explain the function of spot rates and the spot market.
93) ________ in the foreign exchange market specialize in currency futures and options
transactions.
A) Securities exchanges
B) Eurocurrency markets
C) Interbank markets
D) Over-the-counter markets
94) ________ is a decentralized exchange encompassing a global computer network of foreign
exchange traders and other market participants.
A) Securities exchanges
B) Eurocurrency market
C) Interbank market
D) Over-the-counter market
95) Fully convertible currencies are also called ________.
A) external currencies
B) hard currencies
C) unlimited currencies
D) soft currencies
96) Governments impose currency restrictions in their countries to ________.
A) encourage future investment outflows
B) indirectly reduce imports and exports
C) protect currencies from speculators
D) exhaust their reserve of hard currencies
97) Which of the following is used by governments for the convertibility of currencies in their
countries?
A) multiple exchange rates
B) countertrade
C) import deposit requirements
D) OTC market
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Scenario: Trader’s Paradise
Trader’s Paradise is a global merchant that sells a variety of products. The company operates in
forty-eight different countries (some developed, some developing) and some former communist
countries. The company faces substantial risks given the differing conditions in foreign exchange
markets.
98) To insure against potential losses that result from adverse changes in exchange rates, Trader’s
Paradise should use currency ________.
A) swap
B) speculation
C) hedging
D) arbitrage
99) If Trader’s Paradise purchases and sells the euros simultaneously in different markets for
profit, it would be engaging in currency ________.
A) swap
B) speculation
C) hedging
D) arbitrage
100) If Trader’s Paradise purchases euros expecting the value to rise and generate a profit for the
company, it is engaging in currency ________.
A) swap
B) speculation
C) hedging
D) arbitrage
101) When doing business with former communist countries, Trader’s Paradise insists on getting
paid in a currency that can be traded freely in the foreign exchange market. The price of this
currency is determined by the forces of supply and demand. Which of the following is the mode
of payment illustrated in this scenario?
A) soft currency
B) nonconvertible currency
C) local currency
D) hard or convertible currency
102) ABC Software has had difficulty obtaining funds to expand. A friend of the CEO
recommends that the company should explore an offshore financial center, which ________.
A) is a country or territory whose financial sector features very few regulations and few, if any,
taxes
B) tends to be characterized by political and economic instability making, it is an inexpensive but
risky source of funds
C) typically lends money to companies that have had difficulty getting financing elsewhere
because of poor credit records
D) is a financial center located in a resort community and is characterized by poor
telecommunications infrastructure
103) All foreign exchange transactions can be performed in the over-the-counter (OTC) market.
104) A convertible currency is a currency accepted by both residents and non residents of a
country for the payment of goods or services.
105) One goal of currency restriction is to preserve hard currencies to pay for imports and to
finance trade deficits.
106) Differentiate between currency speculation and currency arbitrage.
107) Briefly describe the three main institutions of the foreign exchange market.
108) What is currency speculation? Why do some governments protect their markets from
currency speculation?
109) Why do governments impose currency restrictions and how can companies get around such
restrictions?