Chapter 05 The Market for Foreign Exchange

Student: ___________________________________________________________________________

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

A. New York.
B. Tokyo.
C. London.
D. Hong Kong.

2. On average, worldwide daily trading of foreign exchange is closest to

A. impossible to estimate.
B. $15 billion.
C. $504 billion.
D. $3.21 trillion.

3. The foreign exchange market closes

A. Never.
B. 4:00 p.m. EST (New York time).
C. 4:00 p.m. GMT (London time).
D. 4:00 p.m. (Tokyo time).

4. Most foreign exchange transactions are for

A. intervention by central banks.

B. interbank trades between international banks or nonbank dealers.
C. retail trade.
D. purchase of hard currencies.

5. The difference between a broker and a dealer is

A. dealers sell drugs; brokers sell houses.

B. brokers bring together buyers and sellers, but carry no inventory; dealers stand ready to buy
and sell from their inventory.
C. brokers transact in stocks and bonds; currency is bought and sold through dealers.
D. none of the above
6. Most interbank trades are

A. speculative or arbitrage transactions.

B. simple order processing for the retail client.
C. overnight loans from one bank to another.
D. brokered by dealers.

7. At the wholesale level

A. most trading takes place OTC between individuals on the floor of the exchange.
B. most trading takes place over the phone.
C. most trading flows over Reuters and EBS platforms.
D. most trading flows through specialized "broking" firms.

8. 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.

9. The standard size foreign exchange transactions are for

A. $10 million U.S.

B. $1 million U.S.
C. €1 million.

10. Consider a U.S. importer desiring to purchase merchandise from a Dutch exporter invoiced in
euros, at a cost of €512,100. The U.S. importer will contact his U.S. bank (where of course he
has an account denominated in U.S. dollars) and inquire about the exchange rate, which the bank
quotes as €1.0242/$1.00. The importer accepts this price, so his bank will ____________ the
importer's account in the amount of ____________.

A. Debit; $500,000
B. Credit; €512,100
C. Credit; $500,000
D. Debit; €512,100
11. The current exchange rate is £1.00 = $2.00. Compute the correct balances in Bank A's
correspondent account(s) with Bank B if a currency trader employed at Bank A buys £45,000
from a currency trader at Bank B for $90,000 using its correspondent relationship with Bank B.

A. Bank A's dollar-denominated account at B will fall by $90,000.

B. Bank B's dollar-denominated account at A will rise by $90,000.
C. Bank A's pound-denominated account at B will rise by £45,000.
D. Bank B's pound-denominated account at A will fall by £45,000.
E. All of the above are correct

12. The current exchange rate is £1.00 = $2.00. Compute the correct balances in Bank A's
correspondent account(s) with Bank B if a currency trader employed at Bank A buys £45,000
from a currency trader at Bank B for $90,000 using its correspondent relationship with Bank B.

A. Bank A's dollar-denominated account at B will rise by $90,000.

B. Bank B's dollar-denominated account at A will fall by $90,000.
C. Bank A's pound-denominated account at B will rise by £45,000.
D. Bank B's pound-denominated account at A will rise by £45,000.

13. The current exchange rate is €1.00 = $1.50. Compute the correct balances in Bank A's
correspondent account(s) with Bank B if a currency trader employed at Bank A buys €100,000
from a currency trader at Bank B for $150,000 using its correspondent relationship with Bank B.

A. Bank A's dollar-denominated account at B will fall by $150,000.

B. Bank B's dollar-denominated account at A will fall by $150,000.
C. Bank A's pound-denominated account at B will fall by €100,000.
D. Bank B's pound-denominated account at A will rise by €100,000.

14. The spot market

A. involves the almost-immediate purchase or sale of foreign exchange.

B. involves the sale of futures, forwards, and options on foreign exchange.
C. takes place only on the floor of a physical exchange.
D. all of the above.

15. Spot foreign exchange trading

A. accounts for about 5 percent of all foreign exchange trading.

B. accounts for about 20 percent of all foreign exchange trading.
C. accounts for about 33 percent of all foreign exchange trading.
D. accounts for about 70 percent of all foreign exchange trading.
16.

Using the table shown, what is the most current spot exchange rate shown for British pounds?
Use a direct quote from a U.S. perspective.

A. $1.61 = £1.00
B. $1.60 = £1.00
C. $1.00 = £0.625
D. $1.72 = £1.00

17. Suppose that the current exchange rate is €0.80 = $1.00. The direct quote, from the U.S.
perspective is

A. €1.00 = $1.25.
B. €0.80 = $1.00.
C. £1.00 = $1.80.
D. None of the above

18. Suppose that the current exchange rate is €1.00 = $1.60. The indirect quote, from the U.S.
perspective is

A. €1.00 = $1.60.
B. €0.6250 = $1.00.
C. €1.60 = $1.00.
D. None of the above

19. Suppose that the current exchange rate is £1.00 = $2.00. The indirect quote, from the U.S.
perspective is

A. £1.00 = $2.00.
B. £1.00 = $0.50.
C. £0.50 = $1.00.
D. None of the above
20. Indirect exchange rate quotations from the U.S. perspective are

A. the price of one unit of the foreign currency in terms of the U.S. dollar.
B. the price of one U.S. dollar in the foreign currency.

21. It is common practice among currency traders worldwide to both price and trade currencies
against the U.S. dollar. In fact, 2007 BIS statistics indicate that about ______ percent of currency
trading in the world involves the U.S. dollar on one side of the transaction.

A. 86 percent
B. 75 percent
C. 45 percent
D. 15 percent

22. It is common practice among currency traders worldwide to both price and trade currencies
against the U.S. dollar. Consider a currency dealer who makes a market in 5 currencies against
the dollar. If he were to supply quotes for each currency in terms of all of the others, how many
quotes would he have to provide?

A. 36
B. 30
C. 60
D. 120
E. None of the above

23. The Bid price

A. is the price that the dealer has just paid for something, his historical cost of the most recent
trade.
B. is the price that a dealer stands ready to pay.
C. refers only to auctions like eBay, not over the counter transactions with dealers.
D. is the price that a dealer stands ready to sell at.

24. Suppose the spot ask exchange rate, Sa($|£), is $1.90 = £1.00 and the spot bid exchange rate,
Sb($|£), is $1.89 = £1.00. If you were to buy $10,000,000 worth of British pounds and then sell
them five minutes later, how much of your $10,000,000 would be "eaten" by the bid-ask spread?

A. $1,000,000
B. $52,910.05
C. $100,000
D. $52,631.58
25. If the $/€ bid and ask prices are $1.50/€ and $1.51/€, respectively, the corresponding €/$ bid and
ask prices are

A. €0.6667 and €0.6623.

B. $1.51 and $1.50.
C. €0.6623 and €0.6667.
D. cannot be determined with the information given.

26. In conversation, interbank foreign exchange traders use a shorthand abbreviation in expressing
spot currency quotations. Consider a $/£ bid-ask quote of $1.9072-$1.9077. The "big figure",
assumed to be known to all traders is _____.

A. 1.9077
B. 1
C. 1.90
D. 77

27. In conversation, interbank foreign exchange traders use a shorthand abbreviation in expressing
spot currency quotations. Consider a $/£ bid-ask quote of $1.9072-$1.9077. The currency dealer
would likely quote that as _____.

A. 72-77
B. 77-72
C. 5 points
D. None of the above

28. In the Interbank market, the standard size of a trade among large banks in the major currencies
is

A. for the U.S.-dollar equivalent of $10,000,000,000.

B. for the U.S.-dollar equivalent of $10,000,000.
C. for the U.S.-dollar equivalent of $100,000.
D. for the U.S.-dollar equivalent of $1,000.

29. A dealer in British pounds who thinks that the pound is about to appreciate

A. may want to widen his bid-ask spread by raising his ask price.
B. may want to lower his bid price.
C. may want to lower his ask price.
D. none of the above
30. A dealer in British pounds who thinks that the pound is about to depreciate

A. may want to widen his bid-ask spread by raising his ask price.
B. may want to lower his bid price and his ask price.
C. may want to lower his ask price.
D. none of the above.

31. A dealer in pounds who thinks that the exchange rate is about to increase in volatility

A. may want to widen his bid-ask spread.

B. may want to decrease his bid-ask spread.
C. may want to lower his ask price.
D. none of the above.

32.

Using the table shown, what is the spot cross-exchange rate between pounds and euro?

A. €1.00 = £0.75
B. £1.33 = €1.00
C. £1.00 = €0.75
D. none of the above

33. The dollar-euro exchange rate is $1.25 = €1.00 and the dollar-yen exchange rate is ¥100 = $1.00.
What is the euro-yen cross rate?

A. ¥125 = €1.00
B. ¥1.00 = €125
C. ¥1.00 = €0.80
D. None of the above
34. Suppose you observe the following exchange rates: €1 = $1.25; £1 = $2.00. Calculate the euro-
pound exchange rate.

A. €1 = £1.60
B. €1 = £0.625
C. €2.50 = £1
D. €1 = £2.50

35. The AUD/$ spot exchange rate is AUD1.60/$ and the SF/$ is SF1.25/$. The AUD/SF cross
exchange rate is _____.

A. 0.7813
B. 2.0000
C. 1.2800
D. 0.3500

36. Suppose you observe the following exchange rates: €1 = $1.50; £1 = $2.00. Calculate the euro-
pound exchange rate.

A. €1.3333 = £1.00
B. £1.3333 = €1.00
C. €3.00 = £1
D. €1.25 = £1.00

37. Suppose you observe the following exchange rates: €1 = $1.60; £1 = $2.00. Calculate the euro-
pound exchange rate.

A. €1.3333 = £1.00
B. £1.3333 = €1.00
C. €3.00 = £1
D. €1.25 = £1.00

38. Suppose you observe the following exchange rates: €1 = $1.50; ¥120 = $1.00. Calculate the
euro-pound exchange rate.

A. ¥133.33 = €1.00
B. €1.00 = ¥180
C. ¥80 = €1.00
D. €1 = £2.50
39. Suppose you observe the following exchange rates: €1 = $1.45; £1 = $1.90. Calculate the euro-
pound exchange rate.

A. €1.3103 = £1.00
B. £1.3333 = €1.00
C. €2.00 = £1
D. €3 = £1

40. What is the BID cross-exchange rate for Swiss Francs priced in euro?
Hint: Find the price that a currency dealer will pay in euro to buy Swiss francs.

A. €0.5386/CHF
B. €0.5389/CHF
C. €0.5463/CHF
D. €0.5466/CHF

41. What is the ASK cross-exchange rate for Swiss Francs priced in euro?
Hint: Find the price that a currency dealer will take in euro to sell Swiss francs.

A. €0.5386/CHF
B. €0.5389/CHF
C. €0.5463/CHF
D. €0.5466/CHF

42. Find the no-arbitrage cross exchange rate. The dollar-euro exchange rate is quoted as $1.60 =
€1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00.

A. €1.25/£1.00
B. $1.25/£1.00
C. £1.25/€1.00
D. €0.80/£1.00
43. What is the BID cross-exchange rate for Canadian dollars priced in euro?
Hint: Find the price that a currency dealer will pay in euro to buy Canadian dollars.

A. €0.6094/CAD
B. €0.6104/CAD
C. €0.6181/CAD
D. €0.6191/CAD

44. What is the ASK cross-exchange rate for Canadian dollars priced in euro?
Hint: Find the price that a currency dealer will take in euro to sell Canadian dollars.

A. €0.6094/CAD
B. €0.6104/CAD
C. €0.6181/CAD
D. €0.6191/CAD

45. Find the no-arbitrage cross exchange rate. The dollar-euro exchange rate is quoted as $1.60 =
€1.00 and the dollar-yen exchange rate is quoted at $1.00 = ¥120.

A. ¥192/€1.00
B. €1.92/¥100
C. €1.25/¥1.00
D. €1.00/¥1.92

46. The euro-pound cross exchange rate can be computed as:

A. S(€/£) = S($/£) × S(€/$)

B.

C.

D. all of the above

47. Suppose a bank customer wishes to trade out of British pounds and into Swiss francs.

A. In dealer jargon, this is a currency against currency trade.

B. The bank will frequently handle such a trade by selling British pounds for U.S. dollars and then
buying Swiss francs with U.S. dollars.
C. The bank would typically sell the British pounds directly for Swiss francs.
D. Both a and b

48. Including the transactions costs of the bid-ask spread, the euro-pound cross exchange rate for a
customer who wants to sell euro and buy pounds can be computed as

A.
B.
C.

D. All of the above

49. Suppose a bank customer with €1,000,000 wishes to trade out of euro and into Japanese yen.
The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-yen exchange rate is
quoted at $1.00 = ¥120. How many yen will the customer get?

A. ¥192,000,000
B. ¥5,208,333
C. ¥75,000,000
D. ¥5,208.33

50. Using the table above, what is the bid price of pounds in terms of euro?

A. €1.3371/£
B. €1.3378/£
C. £0.7475/€
D. £0.7479/€
51. Using the table above, what is the ask price of pounds in terms of euro?

A. €1.3371/£
B. €1.3378/£
C. £0.7475/€
D. £0.7479/€

52. Using the table above, what is the bid price of euro in terms of pounds?

A. €1.3371/£
B. €1.3378/£
C. £0.7475/€
D. £0.7479/€

53. Using the table above, what is the ask price of euro in terms of pounds?

A. €1.3371/£
B. €1.3378/£
C. £0.7475/€
D. £0.7479/€

54. Suppose you observe the following exchange rates: €1 = $.85; £1 = $1.60; and €2.00 = £1.00.
Starting with $1,000,000, how can you make money?

A. Exchange $1m for £625,000 at £1 = $1.60. Buy €1,250,000 at €2 = £1.00; trade for
$1,062,500 at €1 = $.85.
B. Start with dollars, exchange for euros at €1 = $.85; exchange for pounds at €2.00 = £1.00;
exchange for dollars at £1 = $1.60.
C. Start with euros; exchange for pounds; exchange for dollars; exchange for euros.
D. No arbitrage profit is possible.

55. You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is
quoted as $1.20 = €1.00 and the dollar-pound exchange rate is quoted at $1.80 = £1.00. If a bank
quotes you a cross rate of £1.00 = €1.50 how much money can an astute trader make?

A. No arbitrage is possible
B. $1,160,000
C. $500,000
D. $250,000
56. You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is
quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. If a bank
quotes you a cross rate of £1.00 = €1.20 how much money can an astute trader make?

A. No arbitrage is possible
B. $1,160,000
C. $41,667
D. $40,000

57. You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is
quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. If a bank
quotes you a cross rate of £1.00 = €1.20 how can you make money?

A. No arbitrage is possible
B. Buy euro at $1.60/€, buy £ at €1.20/£, sell £ at $2/£
C. Buy £ $2/£, buy € at €1.20/£, sell € at $1.60/€

58. The Singapore dollar—U.S. dollar (S$/$) spot exchange rate is S$1.60/$, the Canadian dollar—
U.S. dollar (CD/$) spot rate is CD1.33/$ and the S$/CD1.15. Determine the triangular arbitrage
profit that is possible if you have $1,000,000.

A. $44,063 profit
B. $46,093 loss
C. No profit is possible
D. $46,093 profit

59. You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is
quoted as $1.50 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. If a bank
quotes you a cross rate of £1.00 = €1.25 how can you make money?

A. No arbitrage is possible.
B. Buy euro at $1.50/€, buy £ at €1.25/£, sell £ at $2/£.
C. Buy £ $2/£, buy € at €1.25/£, sell € at $1.50/€.

60. Market microstructure refers to

A. the basic mechanics of how a marketplace operates.

B. the basics of how to make small (micro-sized) currency trades.
C. how macroeconomic variables such as GDP and inflation are determined.
D. none of the above
61. A recent survey of U.S. foreign exchange traders measured traders perceptions about how fast
news events that cause movements in exchange rates actually change the exchange rate. The
survey respondents claim that the bulk of the adjustment to economic announcements regarding
unemployment, trade deficits, inflation, GDP, and the Federal funds rate takes place within

A. ten seconds.
B. one minute.
C. five minutes.
D. one hour.

62. The forward price

A. may be higher than the spot price.

B. may be the same as the spot price.
C. may be less than the spot price.
D. all of the above

63. Relative to the spot price the forward price will be

A. usually less than the spot price.

B. usually more than the spot price.
C. usually equal to the spot price.
D. usually less than or more than the spot price more often than it is equal to the spot price.

64. For a U.S. trader working in American quotes, if the forward price is higher than the spot price

A. the currency is trading at a premium in the forward market.

B. the currency is trading at a discount in the forward market.
C. then you should buy at the spot, hold on to it and sell at the forward—it's a built-in arbitrage.
D. all of the above—it really depends if you're talking American or European quotes.

65. The forward market

A. involves contracting today for the future purchase of 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 of sale of foreign exchange at a price agreed
upon today.
C. involves contracting today for the right but not obligation to the future purchase of sale of
foreign exchange at a price agreed upon today.
D. none of the above
66. The $/CD spot bid-ask rates are $0.7560-$0.7625. The 3-month forward points are 12-16.
Determine the $/CD 3-month forward bid-ask rates.

A. $0.7548-$0.7609
B. $0.7572-$0.7641
C. $0.7512-$0.7616
D. cannot be determined with the information given

67. Restate the following one-, three-, and six-month outright forward American term bid-ask quotes
in forward points:

A.

B.

C.

D. None of the above

68. 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.
69. The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€. You enter
into a short position on €1,000. At maturity, the spot exchange rate is $1.60/€. How much have
you made or lost?

A. Lost $100
B. Made €100
C. Lost $50
D. Made $150

70. The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€. Based on
your analysis of the exchange rate, you are confident that the spot exchange rate will be $1.52/€
in three months. Assume that you would like to buy or sell €1,000,000. What actions do you need
to take to speculate in the forward market?

A. Take a long position in a forward contract on €1,000,000 at $1.50/€.

B. Take a short position in a forward contract on €1,000,000 at $1.50/€.
C. Buy euro today at the spot rate, sell them forward.
D. Sell euro today at the spot rate, buy them forward.

71. The current spot exchange rate is $1.45/€ and the three-month forward rate is $1.55/€. Based
upon your economic forecast, you are pretty confident that the spot exchange rate will be $1.50/€
in three months. Assume that you would like to buy or sell €100,000. What actions would you
take to speculate in the forward market? How much will you make if your prediction is correct?

A. Take a short position in a forward. If you're right you will make $15,000.
B. Take a long position in a forward contract on euro. If you're right you will make $5,000.
C. Take a short position in a forward contract on euro. If you're right you will make $5,000.
D. Take a long position in a forward contract on euro. If you're right you will make $15,000.

72. Consider a trader who takes a long position in a six-month forward contract on the euro. The
forward rate is $1.75 = €1.00; the contract size is €62,500. At the maturity of the contract the spot
exchange rate is $1.65 = €1.00.

A. The trader has lost $625.

B. The trader has lost $6,250.
C. The trader has made $6,250.
D. The trader has lost $66,287.88.
73. The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€. Based on
your analysis of the exchange rate, you are confident that the spot exchange rate will be $1.62/€
in three months. Assume that you would like to buy or sell €1,000,000. What actions do you need
to take to speculate in the forward market? What is the expected dollar profit from speculation?

A. Sell €1,000,000 forward for $1.50/€.

B. Buy €1,000,000 forward for $1.50/€.
C. Wait three months, if your forecast is correct buy €1,000,000 at $1.52/€.
D. Buy €1,000,000 today at $1.55/€; wait three months, if your forecast is correct sell €1,000,000
at $1.62/€.

74. The current spot exchange rate is $1.50/€ and the three-month forward rate is $1.55/€. Based on
your analysis of the exchange rate, you are confident that the spot exchange rate will be $1.62/€
in three months. Assume that you would like to buy or sell €1,000,000. What actions do you need
to take to speculate in the forward market? What is the expected dollar profit from speculation?

A. Sell €1,000,000 forward for $1.50/€.

B. Buy €1,000,000 forward for $1.55/€.
C. Wait three months, if your forecast is correct buy €1,000,000 at $1.62/€.
D. Buy €1,000,000 today at $1.50/€; wait three months, if your forecast is correct sell €1,000,000
at $1.62/€.

75. Which of the following are correct?

A.

B.

C.

D. All of the above are correct

76. Which of the following are correct?

A.

B.

C.

D. All of the above are correct

77. Which of the following are correct?

A.

B.

C.

D. All of the above are correct

78. Which of the following are correct?

A.

B.

C.

D. All of the above are correct

79. When a currency trades at a premium in the forward market

A. the exchange rate is more than one dollar (e.g. €1.00 = $1.28).
B. the exchange rate is less than one dollar.
C. the forward rate is less than the spot rate.
D. the forward rate is more than the spot rate.

80. When a currency trades at a discount in the forward market

A. the forward rate is less than the spot rate.

B. the forward rate is more than the spot rate.
C. the forward exchange rate is less than one dollar (e.g. €1.00 = $0.928).
D. the exchange rate is less than it was yesterday.

81. The SF/$ spot exchange rate is SF1.25/$ and the 180 day forward exchange rate is SF1.30/$.
The forward premium (discount) is

A. the dollar is trading at an 8% premium to the Swiss franc for delivery in 180 days.
B. the dollar is trading at a 4% premium to the Swiss franc for delivery in 180 days.
C. the dollar is trading at an 8% discount to the Swiss franc for delivery in 180 days.
D. the dollar is trading at a 4% discount to the Swiss franc for delivery in 180 days.

82. The €/$ spot exchange rate is $1.50/€ and the 120 day forward exchange rate is 1.45/€. The
forward premium (discount) is

A. the dollar is trading at an 8% premium to the euro for delivery in 120 days.
B. the dollar is trading at a 5% premium to the Swiss franc for delivery in 120 days.
C. the dollar is trading at a 10% discount to the euro for delivery in 120 days.
D. the dollar is trading at a 5% discount to the euro for delivery in 120 days.

83. The €/$ spot exchange rate is $1.50/€ and the 90-day forward premium is 10 percent. Find the
90-day forward price.

A. $1.65/€
B. $1.5375/€
C. $1.9125/€
D. None of the above
84. The SF/$ spot exchange rate is SF1.25/$ and the 180 day forward premium is 8 percent. What is
the outright 180 day forward exchange rate?

A. SF1.30/$
B. SF1.35/$
C. SF6.25/$
D. None of the above

85. The SF/$ 180-day forward exchange rate is SF1.30/$ and the 180 day forward premium is 8
percent. What is the outright spot exchange rate?

A. SF1.30/$
B. SF1.35/$
C. SF1.25/$
D. None of the above

86. Consider the following spot and forward rate quotations for the Swiss franc:

Which of the following is true:

A. The Swiss franc is definitely going to be worth more dollars in six months.
B. The Swiss franc is probably going to be worth less in dollars in six months.
C. The Swiss franc is trading at a forward discount.
D. The Swiss franc is trading at a forward premium.

87. Consider the following spot and forward rate quotations for the Swiss franc:

Calculate the 3-month forward premium in American terms. Assume 30-360 pricing convention.

A. 0.353.
B. 0.4235.
C. 0.1364.
D. 0.1412.
88. Swap transactions

A. involve the simultaneous sale (or purchase) of spot foreign exchange against a forward
purchase (or sale) of approximately an equal amount of the foreign currency.
B. account for about half of Interbank FX trading.
C. involve trades of one foreign currency for another without going through the U.S. dollar.
D. all of the above

89. As a rule, when the interest rate of the foreign currency is greater than the interest rate of the
quoting currency,

A. the outright forward rate is less than the spot exchange rate.
B. the outright forward rate is more than the spot exchange rate.
C. the currency will trade at a premium in the forward contract.
D. none of the above

90. Bank dealers in conversations among themselves use a shorthand notation to quote bid and ask
forward prices in terms of forward points. This is convenient because

A. forward points may change faster than spot and forward quotes.
B. forward points may remain constant for long periods of time, even if the spot rates change
frequently.
C. traders who are looking for violations of covered interest arbitrage are less interested in the
actual spot and forward exchange rates, but are interested in the premium or discount
differential measured in forward points.
D. both c and d are correct

91. Bank dealers in conversations among themselves use a shorthand notation to quote bid and ask
forward prices in terms of forward points. Complete the following table:

A. 1.9040-1.9047
B. 1.9042-1.9049
C. 1.9032-1.9030
D. none of the above
92. An exchange-traded fund (ETF) is

A. the same thing as a mutual fund.

B. a portfolio of financial assets in which shares representing fractional ownership of the fund are
sold and redeemed by the fund sponsor.
C. a portfolio of financial assets in which shares representing fractional ownership of the fund
trade on an organized exchange.
D. none of the above.

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

A. the Fleet Street Exchange in London.

B. the NYSE in New York.
C. the FX market.
D. none of the above.

94. Nondollar currency transactions

A. are priced by looking at the price that must exist to eliminate arbitrage.
B. allow for triangular arbitrage opportunities to keep the currency dealers employed.
C. are only for poor people who don't have dollars.
D. none of the above
95. Consider the balance sheets of Bank A and Bank B. Bank A is in Milan, Bank B is in New York.
The current exchange rate is €1.00 = $1.25. Show the correct balances in each account if a
currency trader employed at Bank A buys €100,000 from a currency trader at Bank B for
$125,000 using its correspondent relationship with Bank B.
96. Consider the balance sheets of Bank A and Bank B. Bank A is in London, Bank B is in New York.
The current exchange rate is £1.00 = $2.00. Show the correct balances in each account if a
currency trader employed at Bank A buys £45,000 from a currency trader at Bank B for $90,000
using its correspondent relationship with Bank B.
97. Consider the balance sheets of Bank A and Bank B. Bank A is in London, Bank B is in New York.
The current exchange rate is £1.00 = $2.00. Show the correct balances in each account if a
currency trader employed at Bank A buys £50,000 from a currency trader at Bank B for $100,000
using its correspondent relationship with Bank B.
98. Using the table, what is the Canadian dollar-euro spot cross-exchange rate?

99. Using the table what is the 6-month forward pound-yen cross-exchange rate?
100.Using the table, what is 3-month forward premium or discount (expressed as an annual
percentage rate) for the British pound in terms of U.S. dollars?
 Chapter 05 The Market for Foreign Exchange Key

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

A. New York.
B. Tokyo.
C. London.
D. Hong Kong.
Eun - Chapter 05 #1
Topic: Function and Structure of the FX Market

2. On average, worldwide daily trading of foreign exchange is closest to

A. impossible to estimate.
B. $15 billion.
C. $504 billion.
D. $3.21 trillion.
Eun - Chapter 05 #2
Topic: Function and Structure of the FX Market

3. The foreign exchange market closes

A. Never.
B. 4:00 p.m. EST (New York time).
C. 4:00 p.m. GMT (London time).
D. 4:00 p.m. (Tokyo time).
Eun - Chapter 05 #3
Topic: Function and Structure of the FX Market

4. Most foreign exchange transactions are for

A. intervention by central banks.

B. interbank trades between international banks or nonbank dealers.
C. retail trade.
D. purchase of hard currencies.
Eun - Chapter 05 #4
Topic: FX Market Participants
5. The difference between a broker and a dealer is

A. dealers sell drugs; brokers sell houses.

B. brokers bring together buyers and sellers, but carry no inventory; dealers stand ready to
buy and sell from their inventory.
C. brokers transact in stocks and bonds; currency is bought and sold through dealers.
D. none of the above
Eun - Chapter 05 #5
Topic: FX Market Participants

6. Most interbank trades are

A. speculative or arbitrage transactions.

B. simple order processing for the retail client.
C. overnight loans from one bank to another.
D. brokered by dealers.
Eun - Chapter 05 #6
Topic: FX Market Participants

7. At the wholesale level

A. most trading takes place OTC between individuals on the floor of the exchange.
B. most trading takes place over the phone.
C. most trading flows over Reuters and EBS platforms.
D. most trading flows through specialized "broking" firms.
Eun - Chapter 05 #7
Topic: FX Market Participants

8. 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.
Eun - Chapter 05 #8
Topic: FX Market Participants
9. The standard size foreign exchange transactions are for

A. $10 million U.S.

B. $1 million U.S.
C. €1 million.
Eun - Chapter 05 #9
Topic: FX Market Participants

10. Consider a U.S. importer desiring to purchase merchandise from a Dutch exporter invoiced in
euros, at a cost of €512,100. The U.S. importer will contact his U.S. bank (where of course he
has an account denominated in U.S. dollars) and inquire about the exchange rate, which the
bank quotes as €1.0242/$1.00. The importer accepts this price, so his bank will
____________ the importer's account in the amount of ____________.

A. Debit; $500,000
B. Credit; €512,100
C. Credit; $500,000
D. Debit; €512,100
Eun - Chapter 05 #10
Topic: Correspondent Banking Relationships

11. The current exchange rate is £1.00 = $2.00. Compute the correct balances in Bank A's
correspondent account(s) with Bank B if a currency trader employed at Bank A buys £45,000
from a currency trader at Bank B for $90,000 using its correspondent relationship with Bank
B.

A. Bank A's dollar-denominated account at B will fall by $90,000.

B. Bank B's dollar-denominated account at A will rise by $90,000.
C. Bank A's pound-denominated account at B will rise by £45,000.
D. Bank B's pound-denominated account at A will fall by £45,000.
E. All of the above are correct
Eun - Chapter 05 #11
Topic: Correspondent Banking Relationships
12. The current exchange rate is £1.00 = $2.00. Compute the correct balances in Bank A's
correspondent account(s) with Bank B if a currency trader employed at Bank A buys £45,000
from a currency trader at Bank B for $90,000 using its correspondent relationship with Bank
B.

A. Bank A's dollar-denominated account at B will rise by $90,000.

B. Bank B's dollar-denominated account at A will fall by $90,000.
C. Bank A's pound-denominated account at B will rise by £45,000.
D. Bank B's pound-denominated account at A will rise by £45,000.
Eun - Chapter 05 #12
Topic: Correspondent Banking Relationships

13. The current exchange rate is €1.00 = $1.50. Compute the correct balances in Bank A's
correspondent account(s) with Bank B if a currency trader employed at Bank A buys €100,000
from a currency trader at Bank B for $150,000 using its correspondent relationship with Bank
B.

A. Bank A's dollar-denominated account at B will fall by $150,000.

B. Bank B's dollar-denominated account at A will fall by $150,000.
C. Bank A's pound-denominated account at B will fall by €100,000.
D. Bank B's pound-denominated account at A will rise by €100,000.
Eun - Chapter 05 #13
Topic: Correspondent Banking Relationships

14. The spot market

A. involves the almost-immediate purchase or sale of foreign exchange.

B. involves the sale of futures, forwards, and options on foreign exchange.
C. takes place only on the floor of a physical exchange.
D. all of the above.
Eun - Chapter 05 #14
Topic: The Spot Market

15. Spot foreign exchange trading

A. accounts for about 5 percent of all foreign exchange trading.

B. accounts for about 20 percent of all foreign exchange trading.
C. accounts for about 33 percent of all foreign exchange trading.
D. accounts for about 70 percent of all foreign exchange trading.
Eun - Chapter 05 #15
Topic: The Spot Market
16.

Using the table shown, what is the most current spot exchange rate shown for British pounds?
Use a direct quote from a U.S. perspective.

A. $1.61 = £1.00
B. $1.60 = £1.00
C. $1.00 = £0.625
D. $1.72 = £1.00
Eun - Chapter 05 #16
Topic: Spot Rate Quotations

17. Suppose that the current exchange rate is €0.80 = $1.00. The direct quote, from the U.S.
perspective is

A. €1.00 = $1.25.
B. €0.80 = $1.00.
C. £1.00 = $1.80.
D. None of the above
Eun - Chapter 05 #17
Topic: Spot Rate Quotations

18. Suppose that the current exchange rate is €1.00 = $1.60. The indirect quote, from the U.S.
perspective is

A. €1.00 = $1.60.
B. €0.6250 = $1.00.
C. €1.60 = $1.00.
D. None of the above
Eun - Chapter 05 #18
Topic: Spot Rate Quotations
19. Suppose that the current exchange rate is £1.00 = $2.00. The indirect quote, from the U.S.
perspective is

A. £1.00 = $2.00.
B. £1.00 = $0.50.
C. £0.50 = $1.00.
D. None of the above
Eun - Chapter 05 #19
Topic: Spot Rate Quotations

20. Indirect exchange rate quotations from the U.S. perspective are

A. the price of one unit of the foreign currency in terms of the U.S. dollar.
B. the price of one U.S. dollar in the foreign currency.
Eun - Chapter 05 #20
Topic: Spot Rate Quotations

21. It is common practice among currency traders worldwide to both price and trade currencies
against the U.S. dollar. In fact, 2007 BIS statistics indicate that about ______ percent of
currency trading in the world involves the U.S. dollar on one side of the transaction.

A. 86 percent
B. 75 percent
C. 45 percent
D. 15 percent
Eun - Chapter 05 #21
Topic: Spot Rate Quotations

22. It is common practice among currency traders worldwide to both price and trade currencies
against the U.S. dollar. Consider a currency dealer who makes a market in 5 currencies
against the dollar. If he were to supply quotes for each currency in terms of all of the others,
how many quotes would he have to provide?

A. 36
B. 30
C. 60
D. 120
E. None of the above
Eun - Chapter 05 #22
Topic: Spot Rate Quotations
23. The Bid price

A. is the price that the dealer has just paid for something, his historical cost of the most recent
trade.
B. is the price that a dealer stands ready to pay.
C. refers only to auctions like eBay, not over the counter transactions with dealers.
D. is the price that a dealer stands ready to sell at.
Eun - Chapter 05 #23
Topic: The Bid-Ask Spread

24. Suppose the spot ask exchange rate, Sa($|£), is $1.90 = £1.00 and the spot bid exchange
rate, Sb($|£), is $1.89 = £1.00. If you were to buy $10,000,000 worth of British pounds and
then sell them five minutes later, how much of your $10,000,000 would be "eaten" by the bid-
ask spread?

A. $1,000,000
B. $52,910.05
C. $100,000
D. $52,631.58
Eun - Chapter 05 #24
Topic: The Bid-Ask Spread

25. If the $/€ bid and ask prices are $1.50/€ and $1.51/€, respectively, the corresponding €/$ bid
and ask prices are

A. €0.6667 and €0.6623.

B. $1.51 and $1.50.
C. €0.6623 and €0.6667.
D. cannot be determined with the information given.
Eun - Chapter 05 #25
Topic: The Bid-Ask Spread

26. In conversation, interbank foreign exchange traders use a shorthand abbreviation in

expressing spot currency quotations. Consider a $/£ bid-ask quote of $1.9072-$1.9077. The
"big figure", assumed to be known to all traders is _____.

A. 1.9077
B. 1
C. 1.90
D. 77
Eun - Chapter 05 #26
Topic: Spot FX Trading
27. In conversation, interbank foreign exchange traders use a shorthand abbreviation in
expressing spot currency quotations. Consider a $/£ bid-ask quote of $1.9072-$1.9077. The
currency dealer would likely quote that as _____.

A. 72-77
B. 77-72
C. 5 points
D. None of the above
Eun - Chapter 05 #27
Topic: Spot FX Trading

28. In the Interbank market, the standard size of a trade among large banks in the major
currencies is

A. for the U.S.-dollar equivalent of $10,000,000,000.

B. for the U.S.-dollar equivalent of $10,000,000.
C. for the U.S.-dollar equivalent of $100,000.
D. for the U.S.-dollar equivalent of $1,000.
Eun - Chapter 05 #28
Topic: Spot FX Trading

29. A dealer in British pounds who thinks that the pound is about to appreciate

A. may want to widen his bid-ask spread by raising his ask price.
B. may want to lower his bid price.
C. may want to lower his ask price.
D. none of the above
Eun - Chapter 05 #29
Topic: Spot FX Trading

30. A dealer in British pounds who thinks that the pound is about to depreciate

A. may want to widen his bid-ask spread by raising his ask price.
B. may want to lower his bid price and his ask price.
C. may want to lower his ask price.
D. none of the above.
Eun - Chapter 05 #30
Topic: Spot FX Trading
31. A dealer in pounds who thinks that the exchange rate is about to increase in volatility

A. may want to widen his bid-ask spread.

B. may want to decrease his bid-ask spread.
C. may want to lower his ask price.
D. none of the above.
Eun - Chapter 05 #31
Topic: Spot FX Trading

32.

Using the table shown, what is the spot cross-exchange rate between pounds and euro?

A. €1.00 = £0.75
B. £1.33 = €1.00
C. £1.00 = €0.75
D. none of the above
Eun - Chapter 05 #32
Topic: Cross-Exchange Rate Quotations

33. The dollar-euro exchange rate is $1.25 = €1.00 and the dollar-yen exchange rate is ¥100 =
$1.00. What is the euro-yen cross rate?

A. ¥125 = €1.00
B. ¥1.00 = €125
C. ¥1.00 = €0.80
D. None of the above
Eun - Chapter 05 #33
Topic: Cross-Exchange Rate Quotations
34. Suppose you observe the following exchange rates: €1 = $1.25; £1 = $2.00. Calculate the
euro-pound exchange rate.

A. €1 = £1.60
B. €1 = £0.625
C. €2.50 = £1
D. €1 = £2.50
Eun - Chapter 05 #34
Topic: Cross-Exchange Rate Quotations

35. The AUD/$ spot exchange rate is AUD1.60/$ and the SF/$ is SF1.25/$. The AUD/SF cross
exchange rate is _____.

A. 0.7813
B. 2.0000
C. 1.2800
D. 0.3500
Eun - Chapter 05 #35
Topic: Cross-Exchange Rate Quotations

36. Suppose you observe the following exchange rates: €1 = $1.50; £1 = $2.00. Calculate the
euro-pound exchange rate.

A. €1.3333 = £1.00
B. £1.3333 = €1.00
C. €3.00 = £1
D. €1.25 = £1.00
Eun - Chapter 05 #36
Topic: Cross-Exchange Rate Quotations

37. Suppose you observe the following exchange rates: €1 = $1.60; £1 = $2.00. Calculate the
euro-pound exchange rate.

A. €1.3333 = £1.00
B. £1.3333 = €1.00
C. €3.00 = £1
D. €1.25 = £1.00
Eun - Chapter 05 #37
Topic: Cross-Exchange Rate Quotations
38. Suppose you observe the following exchange rates: €1 = $1.50; ¥120 = $1.00. Calculate the
euro-pound exchange rate.

A. ¥133.33 = €1.00
B. €1.00 = ¥180
C. ¥80 = €1.00
D. €1 = £2.50
Eun - Chapter 05 #38
Topic: Cross-Exchange Rate Quotations

39. Suppose you observe the following exchange rates: €1 = $1.45; £1 = $1.90. Calculate the
euro-pound exchange rate.

A. €1.3103 = £1.00
B. £1.3333 = €1.00
C. €2.00 = £1
D. €3 = £1
Eun - Chapter 05 #39
Topic: Cross-Exchange Rate Quotations

Eun - Chapter 05

40. What is the BID cross-exchange rate for Swiss Francs priced in euro?
Hint: Find the price that a currency dealer will pay in euro to buy Swiss francs.

A. €0.5386/CHF
B. €0.5389/CHF
C. €0.5463/CHF
D. €0.5466/CHF
Eun - Chapter 05 #40
Topic: Cross-Exchange Rate Quotations
41. What is the ASK cross-exchange rate for Swiss Francs priced in euro?
Hint: Find the price that a currency dealer will take in euro to sell Swiss francs.

A. €0.5386/CHF
B. €0.5389/CHF
C. €0.5463/CHF
D. €0.5466/CHF
Eun - Chapter 05 #41
Topic: Cross-Exchange Rate Quotations

42. Find the no-arbitrage cross exchange rate. The dollar-euro exchange rate is quoted as $1.60 =
€1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00.

A. €1.25/£1.00
B. $1.25/£1.00
C. £1.25/€1.00
D. €0.80/£1.00
Eun - Chapter 05 #42
Topic: Cross-Exchange Rate Quotations

Eun - Chapter 05

43. What is the BID cross-exchange rate for Canadian dollars priced in euro?
Hint: Find the price that a currency dealer will pay in euro to buy Canadian dollars.

A. €0.6094/CAD
B. €0.6104/CAD
C. €0.6181/CAD
D. €0.6191/CAD
Eun - Chapter 05 #43
Topic: Cross-Exchange Rate Quotations
44. What is the ASK cross-exchange rate for Canadian dollars priced in euro?
Hint: Find the price that a currency dealer will take in euro to sell Canadian dollars.

A. €0.6094/CAD
B. €0.6104/CAD
C. €0.6181/CAD
D. €0.6191/CAD
Eun - Chapter 05 #44
Topic: Cross-Exchange Rate Quotations

45. Find the no-arbitrage cross exchange rate. The dollar-euro exchange rate is quoted as $1.60 =
€1.00 and the dollar-yen exchange rate is quoted at $1.00 = ¥120.

A. ¥192/€1.00
B. €1.92/¥100
C. €1.25/¥1.00
D. €1.00/¥1.92
Eun - Chapter 05 #45
Topic: Cross-Exchange Rate Quotations

46. The euro-pound cross exchange rate can be computed as:

A. S(€/£) = S($/£) × S(€/$)

B.

C.

D. all of the above

Eun - Chapter 05 #46
Topic: Alternative Expressions for the Cross-Exchange Rate

47. Suppose a bank customer wishes to trade out of British pounds and into Swiss francs.

A. In dealer jargon, this is a currency against currency trade.

B. The bank will frequently handle such a trade by selling British pounds for U.S. dollars and
then buying Swiss francs with U.S. dollars.
C. The bank would typically sell the British pounds directly for Swiss francs.
D. Both a and b
Eun - Chapter 05 #47
 Topic: The Cross-Rate Trading Desk

48. Including the transactions costs of the bid-ask spread, the euro-pound cross exchange rate for
a customer who wants to sell euro and buy pounds can be computed as

A.
B.
C.

D. All of the above

Eun - Chapter 05 #48
Topic: The Cross-Rate Trading Desk

49. Suppose a bank customer with €1,000,000 wishes to trade out of euro and into Japanese yen.
The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-yen exchange rate is
quoted at $1.00 = ¥120. How many yen will the customer get?

A. ¥192,000,000
B. ¥5,208,333
C. ¥75,000,000
D. ¥5,208.33
Eun - Chapter 05 #49
Topic: The Cross-Rate Trading Desk

Eun - Chapter 05

50. Using the table above, what is the bid price of pounds in terms of euro?

A. €1.3371/£
B. €1.3378/£
C. £0.7475/€
D. £0.7479/€
Eun - Chapter 05 #50
Topic: The Cross-Rate Trading Desk
51. Using the table above, what is the ask price of pounds in terms of euro?

A. €1.3371/£
B. €1.3378/£
C. £0.7475/€
D. £0.7479/€
Eun - Chapter 05 #51
Topic: The Cross-Rate Trading Desk

52. Using the table above, what is the bid price of euro in terms of pounds?

A. €1.3371/£
B. €1.3378/£
C. £0.7475/€
D. £0.7479/€
Eun - Chapter 05 #52
Topic: The Cross-Rate Trading Desk

53. Using the table above, what is the ask price of euro in terms of pounds?

A. €1.3371/£
B. €1.3378/£
C. £0.7475/€
D. £0.7479/€
Eun - Chapter 05 #53
Topic: The Cross-Rate Trading Desk

54. Suppose you observe the following exchange rates: €1 = $.85; £1 = $1.60; and €2.00 = £1.00.
Starting with $1,000,000, how can you make money?

A. Exchange $1m for £625,000 at £1 = $1.60. Buy €1,250,000 at €2 = £1.00; trade for
$1,062,500 at €1 = $.85.
B. Start with dollars, exchange for euros at €1 = $.85; exchange for pounds at €2.00 = £1.00;
exchange for dollars at £1 = $1.60.
C. Start with euros; exchange for pounds; exchange for dollars; exchange for euros.
D. No arbitrage profit is possible.
Eun - Chapter 05 #54
Topic: Triangular Arbitrage
55. You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is
quoted as $1.20 = €1.00 and the dollar-pound exchange rate is quoted at $1.80 = £1.00. If a
bank quotes you a cross rate of £1.00 = €1.50 how much money can an astute trader make?

A. No arbitrage is possible
B. $1,160,000
C. $500,000
D. $250,000
Eun - Chapter 05 #55
Topic: Triangular Arbitrage

56. You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is
quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. If a
bank quotes you a cross rate of £1.00 = €1.20 how much money can an astute trader make?

A. No arbitrage is possible
B. $1,160,000
C. $41,667
D. $40,000
Eun - Chapter 05 #56
Topic: Triangular Arbitrage

57. You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is
quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. If a
bank quotes you a cross rate of £1.00 = €1.20 how can you make money?

A. No arbitrage is possible
B. Buy euro at $1.60/€, buy £ at €1.20/£, sell £ at $2/£
C. Buy £ $2/£, buy € at €1.20/£, sell € at $1.60/€
Eun - Chapter 05 #57
Topic: Triangular Arbitrage

58. The Singapore dollar—U.S. dollar (S$/$) spot exchange rate is S$1.60/$, the Canadian
dollar—U.S. dollar (CD/$) spot rate is CD1.33/$ and the S$/CD1.15. Determine the triangular
arbitrage profit that is possible if you have $1,000,000.

A. $44,063 profit
B. $46,093 loss
C. No profit is possible
D. $46,093 profit
Eun - Chapter 05 #58
Topic: Triangular Arbitrage
59. You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is
quoted as $1.50 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. If a
bank quotes you a cross rate of £1.00 = €1.25 how can you make money?

A. No arbitrage is possible.
B. Buy euro at $1.50/€, buy £ at €1.25/£, sell £ at $2/£.
C. Buy £ $2/£, buy € at €1.25/£, sell € at $1.50/€.
Eun - Chapter 05 #59
Topic: Triangular Arbitrage

60. Market microstructure refers to

A. the basic mechanics of how a marketplace operates.

B. the basics of how to make small (micro-sized) currency trades.
C. how macroeconomic variables such as GDP and inflation are determined.
D. none of the above
Eun - Chapter 05 #60
Topic: Spot Foreign Exchange Market Microstructure

61. A recent survey of U.S. foreign exchange traders measured traders perceptions about how
fast news events that cause movements in exchange rates actually change the exchange rate.
The survey respondents claim that the bulk of the adjustment to economic announcements
regarding unemployment, trade deficits, inflation, GDP, and the Federal funds rate takes place
within

A. ten seconds.
B. one minute.
C. five minutes.
D. one hour.
Eun - Chapter 05 #61
Topic: Spot Foreign Exchange Market Microstructure

62. The forward price

A. may be higher than the spot price.

B. may be the same as the spot price.
C. may be less than the spot price.
D. all of the above
Eun - Chapter 05 #62
Topic: The Forward Market
63. Relative to the spot price the forward price will be

A. usually less than the spot price.

B. usually more than the spot price.
C. usually equal to the spot price.
D. usually less than or more than the spot price more often than it is equal to the spot price.
Eun - Chapter 05 #63
Topic: The Forward Market

64. For a U.S. trader working in American quotes, if the forward price is higher than the spot price

A. the currency is trading at a premium in the forward market.

B. the currency is trading at a discount in the forward market.
C. then you should buy at the spot, hold on to it and sell at the forward—it's a built-in arbitrage.
D. all of the above—it really depends if you're talking American or European quotes.
Eun - Chapter 05 #64
Topic: The Forward Market

65. The forward market

A. involves contracting today for the future purchase of 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 of sale of foreign exchange at a price
agreed upon today.
C. involves contracting today for the right but not obligation to the future purchase of sale of
foreign exchange at a price agreed upon today.
D. none of the above
Eun - Chapter 05 #65
Topic: The Forward Market

66. The $/CD spot bid-ask rates are $0.7560-$0.7625. The 3-month forward points are 12-16.
Determine the $/CD 3-month forward bid-ask rates.

A. $0.7548-$0.7609
B. $0.7572-$0.7641
C. $0.7512-$0.7616
D. cannot be determined with the information given
Eun - Chapter 05 #66
Topic: Forward Rate Quotations
67. Restate the following one-, three-, and six-month outright forward American term bid-ask
quotes in forward points:

A.

B.

C.

D. None of the above

Eun - Chapter 05 #67
Topic: Forward Rate Quotations

68. 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.
Eun - Chapter 05 #68
Topic: Long and Short Forward Positions
69. The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€. You
enter into a short position on €1,000. At maturity, the spot exchange rate is $1.60/€. How
much have you made or lost?

A. Lost $100
B. Made €100
C. Lost $50
D. Made $150
Eun - Chapter 05 #69
Topic: Long and Short Forward Positions

70. The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€. Based
on your analysis of the exchange rate, you are confident that the spot exchange rate will be
$1.52/€ in three months. Assume that you would like to buy or sell €1,000,000. What actions
do you need to take to speculate in the forward market?

A. Take a long position in a forward contract on €1,000,000 at $1.50/€.

B. Take a short position in a forward contract on €1,000,000 at $1.50/€.
C. Buy euro today at the spot rate, sell them forward.
D. Sell euro today at the spot rate, buy them forward.
Eun - Chapter 05 #70
Topic: Long and Short Forward Positions

71. The current spot exchange rate is $1.45/€ and the three-month forward rate is $1.55/€. Based
upon your economic forecast, you are pretty confident that the spot exchange rate will be
$1.50/€ in three months. Assume that you would like to buy or sell €100,000. What actions
would you take to speculate in the forward market? How much will you make if your prediction
is correct?

A. Take a short position in a forward. If you're right you will make $15,000.
B. Take a long position in a forward contract on euro. If you're right you will make $5,000.
C. Take a short position in a forward contract on euro. If you're right you will make $5,000.
D. Take a long position in a forward contract on euro. If you're right you will make $15,000.
Eun - Chapter 05 #71
Topic: Long and Short Forward Positions
72. Consider a trader who takes a long position in a six-month forward contract on the euro. The
forward rate is $1.75 = €1.00; the contract size is €62,500. At the maturity of the contract the
spot exchange rate is $1.65 = €1.00.

A. The trader has lost $625.

B. The trader has lost $6,250.
C. The trader has made $6,250.
D. The trader has lost $66,287.88.
Eun - Chapter 05 #72
Topic: Long and Short Forward Positions

73. The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€. Based
on your analysis of the exchange rate, you are confident that the spot exchange rate will be
$1.62/€ in three months. Assume that you would like to buy or sell €1,000,000. What actions
do you need to take to speculate in the forward market? What is the expected dollar profit from
speculation?

A. Sell €1,000,000 forward for $1.50/€.

B. Buy €1,000,000 forward for $1.50/€.
C. Wait three months, if your forecast is correct buy €1,000,000 at $1.52/€.
D. Buy €1,000,000 today at $1.55/€; wait three months, if your forecast is correct sell
€1,000,000 at $1.62/€.
Eun - Chapter 05 #73
Topic: Long and Short Forward Positions

74. The current spot exchange rate is $1.50/€ and the three-month forward rate is $1.55/€. Based
on your analysis of the exchange rate, you are confident that the spot exchange rate will be
$1.62/€ in three months. Assume that you would like to buy or sell €1,000,000. What actions
do you need to take to speculate in the forward market? What is the expected dollar profit from
speculation?

A. Sell €1,000,000 forward for $1.50/€.

B. Buy €1,000,000 forward for $1.55/€.
C. Wait three months, if your forecast is correct buy €1,000,000 at $1.62/€.
D. Buy €1,000,000 today at $1.50/€; wait three months, if your forecast is correct sell
€1,000,000 at $1.62/€.
Eun - Chapter 05 #74
Topic: Long and Short Forward Positions
75. Which of the following are correct?

A.

B.

C.

D. All of the above are correct

Eun - Chapter 05 #75
Topic: Forward Cross-Exchange Rates

76. Which of the following are correct?

A.

B.

C.

D. All of the above are correct

Eun - Chapter 05 #76
Topic: Forward Cross-Exchange Rates
77. Which of the following are correct?

A.

B.

C.

D. All of the above are correct

Eun - Chapter 05 #77
Topic: Forward Cross-Exchange Rates

78. Which of the following are correct?

A.

B.

C.

D. All of the above are correct

Eun - Chapter 05 #78
Topic: Forward Cross-Exchange Rates

79. When a currency trades at a premium in the forward market

A. the exchange rate is more than one dollar (e.g. €1.00 = $1.28).
B. the exchange rate is less than one dollar.
C. the forward rate is less than the spot rate.
D. the forward rate is more than the spot rate.
Eun - Chapter 05 #79
Topic: Forward Premium
80. When a currency trades at a discount in the forward market

A. the forward rate is less than the spot rate.

B. the forward rate is more than the spot rate.
C. the forward exchange rate is less than one dollar (e.g. €1.00 = $0.928).
D. the exchange rate is less than it was yesterday.
Eun - Chapter 05 #80
Topic: Forward Premium

81. The SF/$ spot exchange rate is SF1.25/$ and the 180 day forward exchange rate is SF1.30/$.
The forward premium (discount) is

A. the dollar is trading at an 8% premium to the Swiss franc for delivery in 180 days.
B. the dollar is trading at a 4% premium to the Swiss franc for delivery in 180 days.
C. the dollar is trading at an 8% discount to the Swiss franc for delivery in 180 days.
D. the dollar is trading at a 4% discount to the Swiss franc for delivery in 180 days.
Eun - Chapter 05 #81
Topic: Forward Premium

82. The €/$ spot exchange rate is $1.50/€ and the 120 day forward exchange rate is 1.45/€. The
forward premium (discount) is

A. the dollar is trading at an 8% premium to the euro for delivery in 120 days.
B. the dollar is trading at a 5% premium to the Swiss franc for delivery in 120 days.
C. the dollar is trading at a 10% discount to the euro for delivery in 120 days.
D. the dollar is trading at a 5% discount to the euro for delivery in 120 days.
Eun - Chapter 05 #82
Topic: Forward Premium

83. The €/$ spot exchange rate is $1.50/€ and the 90-day forward premium is 10 percent. Find the
90-day forward price.

A. $1.65/€
B. $1.5375/€
C. $1.9125/€
D. None of the above
Eun - Chapter 05 #83
Topic: Forward Premium
84. The SF/$ spot exchange rate is SF1.25/$ and the 180 day forward premium is 8 percent. What
is the outright 180 day forward exchange rate?

A. SF1.30/$
B. SF1.35/$
C. SF6.25/$
D. None of the above
Eun - Chapter 05 #84
Topic: Forward Premium

85. The SF/$ 180-day forward exchange rate is SF1.30/$ and the 180 day forward premium is 8
percent. What is the outright spot exchange rate?

A. SF1.30/$
B. SF1.35/$
C. SF1.25/$
D. None of the above
Eun - Chapter 05 #85
Topic: Forward Premium

86. Consider the following spot and forward rate quotations for the Swiss franc:

Which of the following is true:

A. The Swiss franc is definitely going to be worth more dollars in six months.
B. The Swiss franc is probably going to be worth less in dollars in six months.
C. The Swiss franc is trading at a forward discount.
D. The Swiss franc is trading at a forward premium.
Eun - Chapter 05 #86
Topic: Forward Premium
87. Consider the following spot and forward rate quotations for the Swiss franc:

Calculate the 3-month forward premium in American terms. Assume 30-360 pricing
convention.

A. 0.353.
B. 0.4235.
C. 0.1364.
D. 0.1412.
Eun - Chapter 05 #87
Topic: Forward Premium

88. Swap transactions

A. involve the simultaneous sale (or purchase) of spot foreign exchange against a forward
purchase (or sale) of approximately an equal amount of the foreign currency.
B. account for about half of Interbank FX trading.
C. involve trades of one foreign currency for another without going through the U.S. dollar.
D. all of the above
Eun - Chapter 05 #88
Topic: Swap Transactions

89. As a rule, when the interest rate of the foreign currency is greater than the interest rate of the
quoting currency,

A. the outright forward rate is less than the spot exchange rate.
B. the outright forward rate is more than the spot exchange rate.
C. the currency will trade at a premium in the forward contract.
D. none of the above
Eun - Chapter 05 #89
Topic: Swap Transactions
90. Bank dealers in conversations among themselves use a shorthand notation to quote bid and
ask forward prices in terms of forward points. This is convenient because

A. forward points may change faster than spot and forward quotes.
B. forward points may remain constant for long periods of time, even if the spot rates change
frequently.
C. traders who are looking for violations of covered interest arbitrage are less interested in the
actual spot and forward exchange rates, but are interested in the premium or discount
differential measured in forward points.
D. both c and d are correct
Eun - Chapter 05 #90
Topic: Swap Transactions

91. Bank dealers in conversations among themselves use a shorthand notation to quote bid and
ask forward prices in terms of forward points. Complete the following table:

A. 1.9040-1.9047
B. 1.9042-1.9049
C. 1.9032-1.9030
D. none of the above
Eun - Chapter 05 #91
Topic: Swap Transactions

92. An exchange-traded fund (ETF) is

A. the same thing as a mutual fund.

B. a portfolio of financial assets in which shares representing fractional ownership of the fund
are sold and redeemed by the fund sponsor.
C. a portfolio of financial assets in which shares representing fractional ownership of the fund
trade on an organized exchange.
D. none of the above.
Eun - Chapter 05 #92
Topic: Exchange Traded Currency Funds
93. The largest and most active financial market in the world is

A. the Fleet Street Exchange in London.

B. the NYSE in New York.
C. the FX market.
D. none of the above.
Eun - Chapter 05 #93
Topic: Summary

94. Nondollar currency transactions

A. are priced by looking at the price that must exist to eliminate arbitrage.
B. allow for triangular arbitrage opportunities to keep the currency dealers employed.
C. are only for poor people who don't have dollars.
D. none of the above
Eun - Chapter 05 #94
Topic: Summary
95. Consider the balance sheets of Bank A and Bank B. Bank A is in Milan, Bank B is in New
York. The current exchange rate is €1.00 = $1.25. Show the correct balances in each account
if a currency trader employed at Bank A buys €100,000 from a currency trader at Bank B for
$125,000 using its correspondent relationship with Bank B.

(See also the PowerPoint presentation for this chapter)

Eun - Chapter 05 #95

Topic: Correspondent Banking Relationships
96. Consider the balance sheets of Bank A and Bank B. Bank A is in London, Bank B is in New
York. The current exchange rate is £1.00 = $2.00. Show the correct balances in each account
if a currency trader employed at Bank A buys £45,000 from a currency trader at Bank B for
$90,000 using its correspondent relationship with Bank B.

(See also the PowerPoint presentation for this chapter)

Eun - Chapter 05 #96

Topic: Correspondent Banking Relationships
97. Consider the balance sheets of Bank A and Bank B. Bank A is in London, Bank B is in New
York. The current exchange rate is £1.00 = $2.00. Show the correct balances in each account
if a currency trader employed at Bank A buys £50,000 from a currency trader at Bank B for
$100,000 using its correspondent relationship with Bank B.

(See also the PowerPoint presentation for this chapter)

Eun - Chapter 05 #97

Topic: Correspondent Banking Relationships
 Eun - Chapter 05

98. Using the table, what is the Canadian dollar-euro spot cross-exchange rate?

Eun - Chapter 05 #98

Topic: Forward Cross-Exchange Rates

99. Using the table what is the 6-month forward pound-yen cross-exchange rate?

Eun - Chapter 05 #99

Topic: Forward Cross-Exchange Rates
100. Using the table, what is 3-month forward premium or discount (expressed as an annual
percentage rate) for the British pound in terms of U.S. dollars?

Eun - Chapter 05 #100

Topic: Forward Cross-Exchange Rates
Chapter 05 The Market for Foreign Exchange Summary

Category # of Questions
Eun - Chapter 05 104
Topic: Alternative Expressions for the Cross-Exchange Rate 1
Topic: Correspondent Banking Relationships 7
Topic: Cross-Exchange Rate Quotations 14
Topic: Exchange Traded Currency Funds 1
Topic: Forward Cross-Exchange Rates 7
Topic: Forward Premium 9
Topic: Forward Rate Quotations 2
Topic: Function and Structure of the FX Market 3
Topic: FX Market Participants 6
Topic: Long and Short Forward Positions 7
Topic: Spot Foreign Exchange Market Microstructure 2
Topic: Spot FX Trading 6
Topic: Spot Rate Quotations 7
Topic: Summary 2
Topic: Swap Transactions 4
Topic: The Bid-Ask Spread 3
Topic: The Cross-Rate Trading Desk 7
Topic: The Forward Market 4
Topic: The Spot Market 2
Topic: Triangular Arbitrage 6