49) A document requesting payment 30 days after delivery is known as a ________.
A) time draft
B) sight draft
C) spot draft
D) futures draft
50) An irrevocable letter of credit ________.
A) is issued by a global credit agency
B) is the basis for multilateral credit netting
C) can be amended only if all parties involved agree
D) obligates the exporter’s bank to pay interest to the importer
51) A letter of credit that provides an exporter with the guarantee of another bank in addition to the
importer’s bank is called ________.
A) a confirmed letter of credit
B) a time draft letter of credit
C) an amendable letter of credit
D) a cash in advance letter of credit
52) A speculator is someone who ________.
A) trades foreign exchange illegally
B) deals in the black market in currency
C) takes positions in foreign exchange markets to earn a profit
D) works for OTC financial institutions rather than non-financial corporations
53) Anita, an employee at ABX Partners, a hedge fund firm, has purchased euros because she believes
that the euro will strengthen against other currencies. Which term best describes Anita’s activities?
A) arbitrage
B) speculation
C) spot transaction
D) outright forward
54) Which of the following best describes arbitrage?
A) using foreign exchange to fund new foreign direct investments
B) purchasing foreign currency in anticipation of long term trends
C) using foreign exchange instruments to speculate for profit
D) purchasing foreign currency on one market for immediate resale on another market
55) Ryan, a foreign exchange dealer, sold U.S. dollars for Swiss francs in the U.S., then sold Swiss
francs for Japanese yen in Switzerland, and then sold the Japanese yen for U.S. dollars in the U.S. Ryan
hopes that he will end up with more U.S. dollars than when he began. Which term best describes Ryan’s
actions?
A) arbitrage
B) speculation
C) spot transaction
D) outright forward
56) Which of the following is an example of interest arbitrage?
A) investing in debt instruments in different currencies or different countries
B) selling U.S. dollars for Swiss francs, then selling Swiss francs for British pounds, then selling British
pounds for U.S. dollars
C) investigating different commercial banks to find the best exchange rate
D) an American investing in a London-based company
57) How does arbitrage differ from speculation?
A) Speculation, unlike arbitrage, is never used to protect against risk.
B) A speculator buys or sells foreign currency with the hope that that currency will either weaken or
strengthen in the future, resulting in a profit.
C) Speculation is the purchase of foreign currency on one market for the immediate resale on another
market.
D) Arbitrage is another way to speculate for profit or protect against risk.
58) Which of the following best explains why migrant workers in Dubai send money back home?
A) Non-citizens cannot purchase property.
B) Non-citizens have temporary visas.
C) Western Union offers low rates.
D) Labor demand is flexible.
59) An investor sells Japanese yen which is yielding a low interest rate and uses the proceeds to buy
Swiss francs that yield a higher interest rate. Which term best describes the investor’s actions?
A) forward discount spread
B) interbank transaction
C) strike price option
D) carry trade
60) Which of the following is LEAST relevant to being designated by Euromoney magazine as a top
foreign-exchange dealer?
A) capability of handling specific currencies
B) capability of assessing cultural risk
C) capability of handling derivatives
D) capability of engaging in analytics
61) An exchange rate is the number of units that buys one unit of another currency.
62) A tariff is the price of a currency.
63) In foreign exchange markets, reporting dealers trade more foreign exchange with other reporting
dealers than with any other category of users.
64) Most foreign exchange is handled through voice brokers.
65) In an FX swap, one currency is swapped for another on one date and then swapped back on a future
date.
66) Outright forward transactions involve the exchange of currency the second day after the date on
which the two foreign exchange traders agree to the transaction.
67) The U.S. dollar is important as a vehicle for foreign exchange transactions between two countries
other than the United States.
68) The U.S. dollar is so widely traded partially because the New York Stock Exchange is the biggest
foreign exchange center in the world.
69) The largest market in foreign exchange is in London.
70) Hong Kong is one of the top four largest markets in the world in foreign exchange trades and the
largest in Asia.
71) The bid is the price at which the trader is willing to sell foreign currency.
72) In the spot market, the spread is the difference between the bid and offer rates and is the trader’s
profit margin.
73) If the forward rate for a foreign currency is less than the spot rate, the foreign currency is selling at a
forward premium.
74) A currency sells at a forward premium when the forward rate is greater than the spot rate.
75) Options are more flexible than forward contracts.
76) An offer is the right but not the obligation to buy or sell foreign currency.
77) Commercial banks look at foreign-exchange trading as a service extended primarily to important
customers, not as a major business activity of its own.
78) Although most foreign exchange activity takes place through big money center banks, the use of
electronic trading has allowed even regional banks to deal directly in foreign exchange markets.
79) One reason that companies use the foreign exchange market is to diversify their expenses from other
sources.
80) Companies use the foreign exchange market to convert money for use in financial transactions.
81) An irrevocable letter of credit is the basis for multilateral netting.
82) A confirmed letter of credit may obligate the exporter’s bank to honor a draft presented to it.
83) Arbitrage is the purchase of foreign currency on one market for immediate resale on a foreign
market in order to profit from a price discrepancy.
84) An American investing in a London-based company is an example of interest arbitrage.
85) EBS and Reuters provide customers with electronic foreign exchange services as well as current
market data.
86) The Chicago Mercantile Exchange and NASDAQ are part of the OTC market.
87) Trading activity has increased in recent years due to the growing importance of foreign exchange as
an alternative asset and the expanded emphasis on hedge funds.
88) The U.S. dollar is widely traded because it is a transaction currency in many international
commodity markets.
89) A major challenge faced by Western Union in transferring money between the United States and
Mexico is that Mexican citizens trust the banks but do not trust Western Union due to its reliance on
global banks.
90) According to 2010 surveys, the most frequently traded currency pair is the U.S. dollar and Japanese
yen.
91) What are the two major segments of the foreign exchange market? What types of foreign exchange
instruments are traded within these markets?
92) What are the characteristics of the spot market? What institutions handle spot exchanges?
93) What are the characteristics of the forward market? Why do companies participate in the forward
market? Provide an example to illustrate your answer.
94) What is a futures contract? What institutions handle futures contracts?
95) In a short essay, discuss how companies use foreign exchange.
96) What is currency speculation? Why is it risky?
97) Why would companies become involved in arbitrage? What is the difference between arbitrage and
interest arbitrage?
98) What is remittance income? What institutions in Mexico can handle remittance accounts? Why are
some institutions used more frequently than others?
99) What is the Bank for International Settlements? What three categories does the BIS designate in the
foreign exchange market? Briefly describe each category.
100) How is foreign exchange traded? What methods are available?