The Foreign Exchange Market

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Question 1

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The foreign exchange market is a market for converting the currency of one country into that of another country.

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Question 2

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The rate at which one currency is converted into another is known as the fluctuation rate.

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Question 3

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The risk that arises from volatile changes in exchange rates is known as foreign exchange risk.

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Question 4

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Currency speculation typically involves the long-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates.

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Question 5

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Carry trade is non-speculative in nature.

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Question 6

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When a tourist goes to a bank in a foreign country to convert money into the local currency,the exchange rate used is the forward rate.

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Question 7

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The value of a currency is determined by the interaction between the demand and supply of that currency relative to the demand and supply of other currencies.

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Question 8

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A spot exchange rate is quoted for 30 days,90 days,and 180 days into the future.

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Question 9

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When two parties agree to exchange currency and execute the deal at some specific time in the future,a forward exchange occurs.

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Question 10

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To minimize the risk of an unanticipated change in exchange rates,a company can protect itself by entering into a forward exchange contract.

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Question 11

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If $1 bought more yen with a spot exchange than with a 30-day forward exchange it indicates the dollar is expected to depreciate against the yen in the next 30 days.When this occurs,we say the dollar is selling at a premium on the 30-day forward market.

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Question 12

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Differences in the spot exchange rate and the 30-day forward rate are normal and reflect the expectations of the foreign exchange market about future currency movements.

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Question 13

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If the spot rate is $1 = ¥120,and the 30-day forward rate is $1 = ¥130,the dollar is selling at a discount in the forward market.

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Question 14

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A currency swap is the rate at which a foreign exchange dealer converts one currency into another on a particular day.

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Question 15

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A currency swap deal enables companies to insure themselves against foreign exchange risk.

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Question 16

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The foreign exchange market is a global network of banks,brokers,and foreign exchange dealers connected by electronic communications systems.

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Question 17

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The most important trading centers for currencies are Zurich,Frankfurt,Paris,Hong Kong,and Sydney.

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Question 18

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The foreign exchange market is open for only 12 hours in a day.

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Question 19

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Arbitrage opportunities abound in the foreign exchange markets and they tend to be available for long periods of time.

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Question 20

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Although a foreign exchange transaction can involve any two currencies,most transactions involve pounds on one side.

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