Question

1) The 4 main determinants of exchange rates include all of the below except

            a) Relative levels of political risks

            b) Relative levels of real interest rates

            c) Relative levels of nominal interest rates

            d) Relative levels of inflation rates

            e) Relative levels of economic risks

2) If the supply of the AUD will fall, while the demand for the AUD will rise, then the equilibrium quantity will _____, while the equilibrium exchange rate will _____.

            a) Definitely Rise, Definitely Rise

            b) Definitely Rise, Definitely Fall

            c) Definitely Fall, Definitely Rise

            d) Definitely Fall, Definitely Fall

            e) None of the above

            3) In today's highly competitive FOREX market is it ______ to take advantage of

                  triangular currency arbitrage, while the risk of losing money would be ______

            a) Impossible, Next to zero

            b) Impossible, Minimal

            c) Very difficult, Next to zero

            d) Relatively easy, Significant

            e) None of the above

4) The larger portion of FOREX spot market (by total volume) is related to

            a) Purchase of foreign capital assets

            b) Purchase of local real estate assets

            c) Foreign trade

            d) Foreign fixed income transactions

            e) None of the above

            5) In order to hedge the currency exchange risk associated with generating additional foreign currency denominated accounts receivable, a company could generate an

            a) Additional local currency denominated accounts payable

            b) Additional foreign currency denominated securities

            c) Additional foreign currency denominated accounts payable

            d) Additional local currency denominated accounts receivable

            e) None of the above

6) The major FOREX market participants include all of the below except

1. MNCs
2. Retail banks
3. Central banks
4. Brokers
5. Hedgers

7) A typical currency futures contract includes all of the following features except

1. Open interest
2. Contract size
3. Break-even margin
4. Initial margin
5. Underlying currency

            8) Main risks pertaining to international investing include all of the following except

1. Changes in currency exchange rate
2. Low value of foreign market beta
3. Lack of liquidity
4. Lack of information
5. Reliance on foreign legal system

Answer 1

Answer(1): c) Relative levels of nominal interest rates

Nominal interest rate is the interest rates that does not take inflation into consideration. This rate is not a determinant of exchange rate and it does not affect exchange rate.

Answer(2):  c) Definitely Fall, Definitely Rise

When the supply of AUD is decreasing so the quantity will also fall and exchange rate will rise.

Answer(3): c) Very difficult, Next to zero

Triangular arbitrage happens when there is discrepancy among the three foreign currency.  Triangular arbitrage is rare or very difficult to implement but it is risk free, it provides risk less profit.

Answer(4): e) None of the above

The larger portion of forex spot market contains commodities, currencies and securities (shares).

Answer(6): e) Hedgers

Hedgers are not the participants in forex market. Central bank, MNCs, Retail banks and brokers are the real and important participants in Forex market.

Answer(7): c) Break-even margin

Break even margin is not related to currency futures contract. It is related to sales and profit in business while Open interest, contract size, initial margin and underlying are related to currency futures.

Answer(8): d) Lack of information

Lack of information is not a risk in international investing while these all are the risk in international investing-

1. Changes in currency exchange rate
2. Low value of foreign market beta
3. Lack of liquidity
4. Reliance on foreign legal system