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Chapter 7, The Foreign Exchange Market
CHAPTER 7
The Foreign Exchange Market
EASY (definitional)
Ans: a
Section: Organization of the Foreign Exchange Market
Level: Easy
7.2 Exports of goods and services by the United States by 2008 total more than
_________ of gross domestic product.
a) 10%
b) 20%
c) 50%
d) 75%
Ans: a
Section: Introduction
Level: Easy
7.3 Most currency transactions are channeled through the worldwide ________ market
which accounts for _______ of foreign exchange transactions.
a) stock, 50%
b) interbank, 50%
c) interbank, 95%
d) internet, 30%
Ans: c
Section: Organization of the foreign exchange market
Level: Easy
Ans: c
Section: The participants
Level: Easy
Chapter 7, The Foreign Exchange Market
Ans: d
Section: Size
Level: Easy
Ans: a
Section: Spot quotations
Level: Easy
7.7 When exchange rates are quoted as the number of U.S. dollars per unit of foreign
currency, it is referred to as
a) American terms
b) European terms
c) fixed-exchange terms
d) spot-market terms
Ans: a
Section: The Spot Market
Level: Easy
7.8 When the home currency price of a certain fixed quantity of the foreign currency is
quoted, it is referred to as the
a) indirect quotation
b) direct quotation
c) European quotation
d) American quotation
Ans: b
Section: The Spot Market
Level: Easy
Ans: d
Section: Organization
Level: Easy
7.10 Traders on the foreign exchange market use ___________ to eliminate or cover the
risk of loss on export or import orders denominated in foreign currencies.
a) currency options
b) forward contracts
c) money-market hedges
d) currency futures contracts
Ans: b
Section: The participants
Level: Easy
Ans: c
Section: The participants
Level: Easy
7.12 What is the name of the foreign bank account that a trader maintains in a foreign
bank and from which they would request transfer of currency to the account of another
trader with whom they have concluded a transaction?
a) nostro account
b) short sale account
c) settlement account
d) interbank account
Ans: a
Section: The Mechanics of Spot Transactions
Level: Easy
7.13 A ___________ between a bank and a customer calls for a fixed delivery date, at a
fixed exchange rate for a specified amount of one currency against another currency
payment.
a) spot quotation
Chapter 7, The Foreign Exchange Market
b) currency option
c) currency swap
d) forward contract
Ans: d
Section: The forward market
Level: Easy
7.14 The risk that a central bank will not make the necessary transfer of foreign currency
to complete a currency settlement is known as ________ risk.
a) exchange rate
b) Herstatt
c) Interest-rate
d) settlement
Ans: b
Section: The mechanics of spot transactions
Level: Easy
7.15 When an importer goes long in the forward market, they would be
a) buying currency for future delivery
b) selling currency for future delivery
c) arbitraging the interest rate differential
d) buying a forward contract at a premium
Ans: a
Section: The Forward Market
Level: Easy
MEDIUM (applied)
7.16 The spot and 30-day forward rates for the Dutch euro are $1.4757 and $1.48,
respectively. The guilder is said to be selling at a forward
a) premium of 1.2%
b) premium of 3.5%
c) discount of 3.5%
d) discount of 1.2%
Ans: b
Section: Forward quotations
Level: Medium
7.17 Suppose the spot direct quotes for the pound sterling and euro are $1.3981-89 and
$.1230-33, respectively. What is the direct quote for the pound in Paris?
a) €1.1339-73/£
b) €.8793-.8819/£
Chapter 7, The Foreign Exchange Market
c) £.0808-12/€
d) £.0976-87/€
Ans: a
Section: Spot quotations
Level: Medium
7.18 Suppose it is 1995 and the following direct quotes are received for spot and one-
month French francs in New York: .1160-684-6. Then the outright 30- day forward
quote for the French franc was:
a) .1156-62
b) .1164-74
c) .1166-72
d) .1154-64
Ans: b
Section: Forward quotations
Level: Medium
7.19 Suppose it is 1990 and the spot direct quotes for the Swedish krona and French
franc are $.1395-99 and $.1130-33, respectively. What is the direct quote for the krona
in Paris?
a) 1.2312-81
b) 1.2435-37
c) .0806-11
d) .0973-81
Ans: a
Section: Spot quotations
Level: Medium
7.20 Suppose pound sterling is quoted at $1.4419-36, and the Swiss franc is quoted at
$0.6250-67. What is the direct quote for the pound in Zurich?
a) 2.3035-70
b) 2.3018- 88
c) 2.3008-98
d) 2.3020-50
Ans: c
Section: Spot quotations
Level: Medium
7.21 Suppose the Brazilian Real is quoted at $0.9455-9510, and the Thai baht is quoted
at $25.2513-3986. What is the direct quote for the Real in Bangkok?
a) 27.1267-5673
b) 26.7801-9801
Chapter 7, The Foreign Exchange Market
c) 25.2597-2700
d) 26.5524-8626
Ans: d
Section: Spot quotations
Level: Medium
7.22 If the direct price of the dollar is DM2.5 in 1990 Frankfurt and transaction costs
were .4% of the amount transacted, then the minimum- maximum direct quotes for the
DM in New York were:
a) $.3968-4032
b) $2.4800-2.5200
c) $.3984-.4016
d) $2.4900-2.5100
Ans: a
Section: Spot quotations
Level: Medium
7.23 It is 1985 and suppose the 90-day forward quotes on the DM and the French franc
are $.4002-10 and $.1180-90, respectively. What is the direct 90-day forward quote for
the franc in Frankfurt?
a) 3.3625-54
b) 3.3631-92
c) .2943-74
d) .2949-68
Ans: c
Section: Forward quotations
Level: Medium
7.24 The spot and 180-day forward rates for the euro are $1.3310 and $1.3402,
respectively. The euro is said to be selling at a forward
a) discount of 6.9%
b) premium of 6.9%
c) discount of 1.4%
d) premium of 1.4%
Ans: d
Section: Forward quotations
Level: Medium
7.25 Suppose the spot direct quotes for the Italian euro and Swedish krone are
$1.2509-51 and $.1201-10, respectively. What is the direct quote for the Swedish krone
in Milan?
a) €.00413-25/Kr
Chapter 7, The Foreign Exchange Market
b) €.00422-31/Kr
c) €.0957-67/Kr
d) Kr.0957-67/€
Ans: c
Section: Forward quotations
Level: Medium
7.26 Suppose the direct quote for sterling in New York is $1.3110-5. Then the direct
quote for dollars in London is:
a) .7110-5
b) 2.6220-30
c) .7625-8
d) 1.3110-5
Ans: c
Section: Spot quotations
Level: Medium
7.27 An American company that imports leather goods from England is most likely to
be
a) long pounds
b) short pounds
c) can't tell
Ans: b
Section: Spot quotations
Level: Medium
DIFFICULT (applied)
7.28 On December 3,2001, spot Japanese yen were sold at $0.008058. Suppose the 180-
day forward Japanese yen was selling at a 1.91% annualized premium, what is the 180-
day forward rate of the yen?
a) 0.008245
b) 0.008135
c) 0.008457
d) 0.010638
Ans: b
Section: Forward quotations
Level: Difficult
7.29 Suppose the spot rate and forward rate for the British pound are $1.4248 and
$1.4179 respectively. Assume the forward pound is selling at a 1.94% annualized
discount, what is the number of days of the forward contract?
Chapter 7, The Foreign Exchange Market
a) 180 days
b) 120 days
c) 90 days
d) 60 days
Ans: c
Section: Forward quotations
Level: Difficult
7.30 Suppose one observed the following direct spot quotations in New York and
London, respectively: $1.2500-60 and £.8000-50. Arbitrage profits per $1 million equal
a) $637
b) $0
c) $1,268
d) $4,492
Ans: b
Section: Currency arbitrage
Level: Difficult
7.31 Suppose it is January 1980 and the $/DM exchange rate is DM1 = $.35 and the
DM/FF exchange rate is FF1 = DM.31. What is the FF/$ exchange rate?
a) 3.226 French francs per dollar
b) 1.129 French francs per dollar
c) .886 French francs per dollar
d) 9.217 French francs per dollar
Ans: d
Section: Cross rates
Level: Difficult
7.32 Suppose the following direct quotes are received for spot and one-month French
francs in New York: .1260-684-6. Then the outright 30-day forward quote for the
French is:
a) .1256-62
b) .1264-74
c) .1266-72
d) .1254-64
Ans: b
Section: Forward quotations
Level: Difficult
7.33 If the direct price of the dollar is DKK5 in Copenhagen and transaction costs are
.5%, then the minimum-maximum direct quotes for the Danish krone in New York are
a) 4.9750-5.0250
Chapter 7, The Foreign Exchange Market
b) 4.9500-5.0500
c) .1980-.2020
d) .1990-.2010
Ans: c
Section: The spot quotations
Level: Difficult
7.34 Suppose the pound sterling is selling for $1.62 and the buying rate for the Swiss
franc is $0.71. Then the £/SFr cross rate is
a) £1 = SFr 0.4383
b) SFr 1 = £2.2817
c) £1 = SFr 2.2817
d) SFr 1 = £1.2817
Ans: c
Section: Cross rates
Level: Difficult
7.35 Suppose the quote for euro is $.9865-92/€. The percent spread is
a) 2.31%
b) 0.97%
c) 0.62%
d) 0.27%
Ans: d
Section: Transaction costs
Level: Difficult
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Transcriber’s Note
This transcription follows the text of the edition published by
Robert M. McBride & Company in 1919. The following alterations
have been made to correct what are believed to be unambiguous
printer’s errors:
“inheritence” to “inheritance” (Ch. I);
“anum” to “annum” (Ch. I);
“testatively” to “tentatively” (Ch. IV);
“noncommital” to “noncommittal” (Ch. IV);
“hershe” to “herself” (Ch. IV);
“irration” to “irritation” (Ch. IX);
“negotations” to “negotiations” (Ch. X);
“undveloped” to “undeveloped” (Ch. XI);
“possesssion” to “possession” (Ch. XII);
“thicker than flees” to “thicker than fleas” (Ch. XIII);
“satisisfaction” to “satisfaction” (Ch. XIII);
“tremondous” to “tremendous” (Ch. XIV);
“gussed” to “guessed” (Ch. XIV);
“comfortabe” to “comfortable” (Ch. XIV);
“nervelesly” to “nervelessly” (Ch. XV);
“tumultous” to “tumultuous” (Ch. XV);
“caught up the try” to “caught up the tray” (Ch. XV);
“purposly” to “purposely” (Ch. XVII);
“organizatin” to “organization” (Ch. XVII);
“innividual” to “individual” (Ch. XVII);
“susided” to “subsided” (Ch. XVII);
“comosed” to “composed” (Ch. XVII);
“adressing” to “addressing” (Ch. XVIII);
“serenly” to “serenely” (Ch. XIX);
“scarely” to “scarcely” (Ch. XIX);
“dependant” to “dependent” (Ch. XX);
“interupted” to “interrupted” (Ch. XXII);
“wondeful” to “wonderful” (Ch. XXII);
“accuresd” to “accursed” (Ch. XXII);
“twenty-eigth” to “twenty-eighth” (Chs. XXIII & XXVII);
“wthout” to “without” (Ch. XXVII).
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