Economics 【Reading 17】Sample nation, exchange, equivalent

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A U.S. importer wants to buy stuffed toys from the nation of South Apoa for a total cost of 6 million Apoas. The spot exchange rate is Apoa:USD 0.50. The USD equivalent cost is:

A) USD 12,000,000.

B) Apoa 3,000,000.

C) USD 3,000,000.

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$0.50 times 6,000,000 Apoa = USD 3,000,000.

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Which of the following statements about the foreign exchange market is least accurate?

A) In the spot market, currencies are traded for immediate delivery but in the forward market, contracts are made to buy and sell currencies for future delivery.

B) A foreign currency is at a forward discount if the forward rate expressed in domestic currency is below the spot rate, whereas a forward premium exists if the forward rate is above the spot rate.

C) Foreign exchange quotations can be expressed on a direct basis–the foreign currency price of the home currency–or an indirect basis–the home currency price of another currency.

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Foreign exchange quotations can be expressed on a direct basis — the home currency price of another currency—or an indirect basis—the foreign currency price of the home currency.

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The direct method of foreign exchange quotations:

A) is used primarily in the U.K., Canada, and the U.S.

B) quotes the domestic currency per unit of foreign currency which is FCC.

C) quotes the foreign currency per unit of domestic currency which is DC:FC.

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The direct method of foreign exchange quotations is quoted as FCC.

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The direct quote method is:

A) Domestic Currency:Foreign Currency.

B) Foreign Currencyomestic Currency.

C) 1/(Foreign Currencyomestic Currency).

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Direct quotes are the usual method of quoting currencies. Indirect quotes are used in the U.K., Canada, and U.S.

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If the indirect quote for U.S. dollars in Sydney is 0.7927, what is the equivalent indirect quote in New York City for Australian dollars?

A) 0.3964.

B) 0.7927.

C) 1.2615.

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Indirect quotes are foreign currency per domestic currency or DC:FC. An indirect quote in Sydney for USD of 0.7927 means AUD:USD 0.7927 which equals an indirect quote in New York City of USD:AUD 1.26.

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An indirect quote for pesos to a $U.S. investor is 8.0000-8.5000. If you have $100, how many pesos will you be able to buy?

A) 800.

B) 11.8.

C) 850.

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For the examination, remember that the bank must make its profit through the bid-ask spread (the foreign-exchange market is typically transaction-fee free), so you will always buy at the "high" price and sell at the "low price." Here, the "high" price is 8.0000 USD:MXN (At 8.0000 USD:MXN the peso is worth more than at 8.5000 USD:MXN ).
$100.00 × 8.0000 = 800.0000 Pesos

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GBP:USD 0.5550 is:

A) an indirect quote in Great Britain.

B) a direct quote in Great Britain.

C) an indirect quote in the U.S.

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In country X, an indirect quote is foreign currency over domestic currency, or DCX:FC. The quote GBP:USD 0.5550 is DC:FC (or indirect) to an investor in Great Britain and FCC (or direct) to an investor in the United States.

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If the bid is GBP:USD 1.8709 and the ask is GBP:USD 1.8841, what is the bid−ask quote in USD:GBP?

A) 0.5345 − 0.5407.

B) 1.8841 − 1.8709.

C) 0.5308 − 0.5345.

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To convert to USD:GBP just take the reciprocal of each number and reverse the bid−ask quote.
1 / (GBP:USD 1.8709) = USD:GBP 0.5345 and 1 / (GBP:USD 1.8841) = USD:GBP 0.5308. The bid−ask quote is now 0.5308 − 0.5345.

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Suppose that the quote for the CAD in New York is CAD:USD 0.6666. What is the quote for USD in Toronto USD:CAD?

A) 1.5001.

B) 0.3333.

C) 1.0000.

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Take the reciprocal of 0.6666 = 1 / 0.6666 = 1.5001

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In Japan, the direct quote of USD:JPY 108.82 is the equivalent of an indirect quote of:

A) JPY:USD 0.091895.

B) JPY:USD 0.009189.

C) JPY:USD 0.918949.

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JPY:USD 0.009189 is the reciprocal of USD:JPY 108.82.