1. An FI can eliminate its currency risk exposure by matching its foreign currency assets to its foreign currency
liabilities.
2. To a U.S. trader of foreign currencies, a direct quote indicates U.S. dollars received for each one unit of the
foreign currency.
3. As the U.S. dollar appreciates against the Japanese yen, U.S. goods become less expensive to Japanese
consumers.
4. As the U.S. dollar appreciates against the Japanese yen, Japanese goods sold in the U.S. become less
expensive to the U.S. consumer.
5. The exposure to foreign exchange risk by U.S. FIs has decreased with the growth of the various derivative
markets.
6. The spot foreign exchange market is where forward and futures contracts and swap agreements are
transacted.
7. The market in which foreign currency is traded for future delivery is the forward foreign exchange market.
8. Forward contracts in FX are typically written for periods exceeding 6 months.
9. The greater the volatility of foreign exchange rates given any net exposure position, the greater the
fluctuations in value of the foreign exchange portfolio.
10. U.S. pension funds invest approximately one percent (1%) of their portfolios in foreign securities.
11. U.S. life insurance companies generally hold less than ten percent (10%) of their portfolios in foreign
securities.
12. State regulation of the U.S. insurance industry has an effect on the ability of insurance companies to invest
in foreign securities.
13. Most nonbank FIs have foreign exchange risk exposure that is smaller than the exposure of the large U.S.
money-center banks.
14. The underlying cause of foreign exchange volatility reflects fluctuations in the demand and supply of a
country’s currency.
15. A positive net exposure position in FX implies an FI has purchased more foreign currency than it has sold.
16. A positive net exposure position in FX implies the FI is net short in a currency.
17. As of March 2009, U.S. banks were net short British pounds.
18. Most profits or losses on foreign trading come from taking an open position in currencies.
19. The FX markets of the world have become one of the largest of all financial markets.
20. Average daily turnover in the FX market has recently been as high as $4 trillion.
21. FX trading risk exposure continues into the night until all FI operations are closed.
22. FX trading income is derived only from profit (or loss) on the FI’s speculative currency positions.
23. The reason an FI receives a fee when purchasing foreign currencies to allow customers to complete
international transactions is because the FI assumes some FX risk.
24. Profits in foreign exchange trading have grown despite the decreased volatility in FX rates in European
countries.
25. The total FX risk for a domestic bank that is making a one-year loan in a foreign currency is that the interest
income expected on the loan is exposed to a depreciation of the foreign currency.
26. An FI can control its FX risk exposure by on-balance-sheet and off-balance-sheet hedging.
27. Off-balance-sheet hedging involves taking a position in FX forward or other derivative securities even
though no FX assets or liabilities are on the balance sheet.
28. On-balance-sheet hedging involves making changes in the on-balance-sheet assets and liabilities to protect
FI profits from FX risk without the use of derivative securities.
29. Directly matching foreign asset and liability books in the same FX currency will allow an FI to hedge or
lock in a profit spread regardless of future changes in exchange rates.
30. The use of an exchange rate forward contract assures the FI of the opportunity to buy (or sell) the foreign
currency at a future time at a known price.
31. Interest rate parity implies that the discounted spread between interest rates in two currencies should equal
the percentage spread between forward and spot exchange rates.
32. Violation of the interest rate parity theorem would allow arbitrage profits.
33. Long-term violations of the interest rate parity relationship may occur if imperfections in the international
financial markets are allowed to exist.
34. The real interest rate reflects the underlying real sector demand and supply for funds in denominated in the
domestic currency.
35. Which of the following is NOT a source of foreign exchange risk?
36. The market in which foreign currency is traded for immediate delivery is the
37. The FI is acting as a FX market agent for its customers when it
38. A positive net exposure position in FX implies that the FI is
39. A negative net exposure position in FX implies that the FI is
40. The reasons nonbank FIs have less FX risk than major money center banks include
41. U.S. pension funds hold approximately _______ of their assets in foreign securities, while British pension
funds have traditionally invested approximately _______ of their funds in foreign assets.
42. The FI is acting as a hedger when it
43. FX risk exposure of an FI essentially relates to this type of activity.
44. When purchasing and selling foreign currencies to allow customers to take positions in foreign real and
financial investments, the FI
45. Which of the following factors help explain the decline in FX trading in the early years of this century?
46. The FI is acting as a speculator when it
47. The decrease in European FX volatility during the last decade has occurred because of
48. The decline in European FX volatility during the last decade has been offset in part by
49. If foreign currency exchange rates are highly positively correlated, how can a FI reduce its exchange rate
risk exposure?
50. Which of the following FX trading activities is used to hedge FX risk?
51. Which of the following FX trading activities is used for purposes of speculation?
52. In which of the following FX trading activities does the FI not assume FX risk?
53. As of 2009, which of the following FX “markets” is the largest?
54. Most profits or losses on foreign trading for FIs come from
55. Deviations from the international currency parity relationships may occur because of
56. The nominal interest rate is equal to the
57. Which of the following is an example of interest rate parity?
58. According to PPP, foreign currency exchange rates between two countries adjust to reflect changes in each
country’s
59. What is the FI’s net exposure in British pounds?