International Finance Exam Practice

1. The largest and most active financial market in the world is

A. the London Metal Exchange in London.
B. the New York Stock Exchange in New York.
C. the foreign exchange market.
D. none of the above.

2. The world's largest foreign exchange trading center is

A. New York.
B. Tokyo.
C. London.
D. Hong Kong.
3. The foreign exchange market closes
A. 4:00 p.m. EST (New York time).
B. 4:00 p.m. GMT (London time).
C. 4:00 p.m. (Tokyo time).
D. Never.

4. Intervention in the foreign exchange market is the process of

A. a central bank requiring the commercial banks of that country to trade at a set price level.
B. commercial banks in different countries coordinating efforts in order to stabilize one or more
currencies.
C. a central bank buying or selling its currency in order to influence its value.
D. the government of a country prohibiting transactions in one or more currencies.

5. The forward market

A. involves contracting today for the future purchase or sale of foreign exchange at the spot rate that will
prevail at the maturity of the contract.
B. involves contracting today for the future purchase or sale of foreign exchange at a price agreed upon
today.
C. involves contracting today for the right but not obligation to the future purchase or sale of foreign
exchange at a price agreed upon today.
D. none of the above

6. If one has agreed to buy foreign exchange forward

A. you have a short position in the forward contract.
B. you have a long position in the forward contract.
C. until the exchange rate moves, you haven't made money, so you're neither short nor long.
D. you have a long position in the spot market.

7. The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€. You enter into a
short position of €1,000 in a euro forward contract. At maturity, the spot exchange rate is $1.60/€. How
much have you made or lost in the forward contract?
A. Lost $100
B. Made €100 profit
C. Lost $50
D. Made $50 profit

8. Graylon, Inc., based in Washington, exports products to Germany and will receive payment of €200,000
in three months. Today, the spot rate of the euro was $1.12, and the 3-month forward rate was $1.10/€.
Graylon sold a forward contract of €200,000 based on the 3-month forward rate. If the euro spot rate three
months later turns out to be $1.15, Graylon will receive $_______ for the euros.
A. 224,000
B. 220,000
C. 200,000
D. 230,000
 International Finance Exam Practice – Partial 1

9. The _______ of a forward contract is obligated to ______ delivery and pay for the contracted goods at
the forward price; the _______ of a forward contract is obligated to ______ delivery and accept payment
for the goods at the forward price.
A. seller; make; buyer; take
B. seller; take; buyer; make
C. buyer; make; seller; take
D. buyer; take; seller; make

10. The 60-day forward rate for the Canadian dollar is $1.07/C$, while the current spot rate of the Canadian
dollar is $1.05/C$. What is the annualized forward premium or discount of the Canadian dollar?
A. 1.9 percent discount.
B. 1.9 percent premium.
C. 11.4 percent premium.
D. 11.4 percent discount.

11. You enter into a forward contract to take delivery of one million Euro three months from now. What
happens to the price you will pay at expiration if Euro depreciates during the contract?
A. Your price will increase.
B. Your price will decrease.
C. Your price was fixed at the onset of the contract.
D. Your price was fixed, and you will receive correspondingly more Euros due to the depreciation.

12. Calculation Question

You are planning a trip to Europe and Japan and want to change U.S. dollars into euros and yen. Your bank
provides the following quotes:
Currency Bid Ask
Euros $1.1940 $1.2450
Yen $0.0082 $0.0096

(a) What are the bank's relative bid/ask spreads for the two currencies?

Euro:

Yen:

(b) How much would you lose if you converted $500 into euros and $500 into yen respectively, and then
convert these foreign currencies back into dollars?

Euro:

Yen:

(c) Based on the quotes in the table, what should be the bid and ask prices for the cross-rate between Euro and
Japanese Yen (specify the exchange rates as yen per euro: ¥/€)?

Yen per euro cross-rate:

Bid price:
Ask price:

Euro per yen cross-rate:

Bid price:
Ask price:
 International Finance Exam Practice – Partial 1

13. A foreign exchange trader with a U.S. bank took a short position of £5,000,000 when the $/£
exchange rate was 1.55. Subsequently, the exchange rate has changed to 1.61. Is this movement in
the exchange rate good from the point of view of the position taken by the trader? By how much has
the bank’s liability changed because of the change in the exchange rate?

14. A bank is quoting the following exchange rates against the dollar for the Swiss franc and the
Australian dollar:

SFr/$ = 1.5960--70
A$/$ = 1.7225--35

An Australian firm asks the bank for an A$/SFr quote. What cross-rate would the bank quote?

15. Doug Bernard specializes in cross-rate arbitrage. He notices the following quotes:

Swiss franc/dollar = SFr1.5971?$

Australian dollar/U.S. dollar = A$1.8215/$
Australian dollar/Swiss franc = A$1.1440/SFr

Ignoring transaction costs, does Doug Bernard have an arbitrage opportunity based on these
quotes? If there is an arbitrage opportunity, what steps would he take to make an arbitrage profit, and
how would he profit if he has $1,000,000 available for this purpose.
 International Finance Exam Practice – Partial 1

16. Assume you are a trader with Deutsche Bank. From the quote screen on your computer terminal,
you notice that Dresdner Bank is quoting €0.7627/$1.00 and Credit Suisse is offering
SF1.1806/$1.00. You learn that UBS is making a direct market between the Swiss franc and the euro,
with a current €/SF quote of .6395. Show how you can make a triangular arbitrage profit by trading
at these prices. (Ignore bid-ask spreads for this problem.) Assume you have $5,000,000 with which
to conduct the arbitrage. What happens if you initially sell dollars for Swiss francs? What €/SF price
will eliminate triangular arbitrage?

Solution:

17. The current spot exchange rate is $1.95/£ and the three-month forward rate is $1.90/£. Based on
your analysis of the exchange rate, you are pretty confident that the spot exchange rate will be $1.92/£
in three months. Assume that you would like to buy or sell £1,000,000.

a. What actions do you need to take to speculate in the forward market? What is the expected
dollar profit from speculation?

b. What would be your speculative profit in dollar terms if the spot exchange rate actually turns
out to be $1.86/£.