土豆妮

Which of the following statements about foreign exchange quotes is most accurate?

A) Standard interbank dealer quotes are foreign currency over the U.S. dollar.

B) The ask price (KPW/USD) is what the bank will sell a KPW for.

C) If the KPW goes from 2 KPW/USD to 1.75 KPW/USD the dollar has appreciated.

土豆妮

Which of the following statements about foreign exchange quotes is most accurate?

A) Standard interbank dealer quotes are foreign currency over the U.S. dollar.

B) The ask price (KPW/USD) is what the bank will sell a KPW for.

C) If the KPW goes from 2 KPW/USD to 1.75 KPW/USD the dollar has appreciated.

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The asking price is what the bank will sell a dollar for. The bid price is what the bank will buy a dollar for. In regular interbank transactions the dollar is always in the denominator (European terms), the dollar depreciated while the KPW appreciated.

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土豆妮

Which of the following would least likely be a participant in the forward market?

A) Long-term investors.

B) Arbitrageurs.

C) Traders.

土豆妮

Which of the following would least likely be a participant in the forward market?

A) Long-term investors.

B) Arbitrageurs.

C) Traders.

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Forward contracts are for 30, 90, 180, and 360-day periods and would, therefore, be considered short-term investment choices. Other participants in the forward market are hedgers who use forward contracts to protect the home currency value of foreign currency denominated assets on their balance sheets over the life of the contracts involved.

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土豆妮

Which of the following statements related to the foreign exchange market is FALSE?

A) The bid-ask spread is a function of trading volume, volatility, and term of the forward contract.

B) The settlement date in the spot market is two days after the trade. A Friday trade would be settled on Monday.

C) Foreign exchange brokers provide information, anonymity, and reduced trading time.

土豆妮

Which of the following statements related to the foreign exchange market is FALSE?

A) The bid-ask spread is a function of trading volume, volatility, and term of the forward contract.

B) The settlement date in the spot market is two days after the trade. A Friday trade would be settled on Monday.

C) Foreign exchange brokers provide information, anonymity, and reduced trading time.

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In the spot market, currency trades are for immediate delivery, which is defined as two business days after the transaction.

土豆妮

Immediate delivery is assumed in which market?

A) Currency swap market.

B) Forward market.

C) Spot market.

土豆妮

Immediate delivery is assumed in which market?

A) Currency swap market.

B) Forward market.

C) Spot market.

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Forward markets are contracts for future delivery. Currency swaps involve a combination of spot and forward transactions.

土豆妮

Given the following information:

• The U.S. interest rate is 6%.

• The GBP/USD spot rate is 2.2.

• The GBP forward rate is 2 GBP/USD

• The domestic Great Britain interest rate is 8%.

Which of the following statements is correct?

A) Capital will flow into Great Britain.

B) If you start by borrowing $1,000, your arbitrage profits will be $128.

C) If you start by borrowing 1,000 GBP, your arbitrage profits will be 116 GBP.

土豆妮

Given the following information:

• The U.S. interest rate is 6%.

• The GBP/USD spot rate is 2.2.

• The GBP forward rate is 2 GBP/USD

• The domestic Great Britain interest rate is 8%.

Which of the following statements is correct?

A) Capital will flow into Great Britain.

B) If you start by borrowing $1,000, your arbitrage profits will be $128.

C) If you start by borrowing 1,000 GBP, your arbitrage profits will be 116 GBP.

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We know that arbitrage is possible because 2.2 × (1.08/1.06) = 2.2415 > 2.0. This means that the pound is overvalued in the forward market (it takes too few of them to buy one dollar), and should be sold forward. This means that we need to buy pounds today so that we have them to sell forward.

Step 1: Borrow $1,000 at 6% (repay $1,060 in one year), convert the $1,000 at the spot rate to 2,200 GBP
Step 2: Lend out the GBP 2,200 at 8% (will receive GBP 2,376 in one year)
Step 3: Sell the pounds forward at the quoted forward rate, 2,376/2 = $1,188
Step 4: Repay loan, $1,188 ? $1,060 = $128 profit

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