Question 1

If the spot rate is AUD/USD 0.5526-0.5531 and the 90-day forward rate is AUD/USD 0.5578-0.5588,the AUD is trading at a/an:
A) expected gain.
B) premium.
C) reciprocal.
D) discount.

Accepted Answer

The forward rate is higher than the spot rate, indicating that the AUD is trading at a premium. This means that the market expects the AUD to appreciate against the USD over the next 90 days.

Question 2

A bank has been asked to provide a three-month forward AUD/USD 'buy' quote for a corporate client.The following information is available to the FX dealer at the bank:
Spot rate:AUD/USD 0.7654-0.7659
US interest rates:7.73% per annum
Australian interest rates:8.64% per annum
Estimate the three-month forward 'buy' rate.
A) 0.7637
B) 0.7639
C) 0.7642
D) 0.7644

Accepted Answer

To estimate the three-month forward 'buy' rate, we use the interest rate parity formula, which accounts for the interest rate differential between the two currencies. The formula for calculating the forward rate is:Forward Rate = Spot Rate x (1 + Interest Rate of Quote Currency) / (1 + Interest Rate of Base Currency)Given that the 'buy' rate for AUD/USD means we are looking at buying AUD and selling USD, the quote currency is USD and the base currency is AUD. The spot rate to use is the 'buy' rate from the bank's perspective, which is 0.7654 (the lower rate in the spot quote).Plugging in the numbers:Forward Rate = 0.7654 x (1 + 0.0773/4) / (1 + 0.0864/4)This calculation takes into account that the interest rates are annual, and we are calculating for a three-month (or one-quarter) period, hence the division by 4.After performing the calculation:Forward Rate ≈ 0.7654 x (1 + 0.019325) / (1 + 0.0216) ≈ 0.7654 x 1.019325 / 1.0216 ≈ 0.7654 x 0.99776 ≈ 0.7637Therefore, the estimated three-month forward 'buy' rate is approximately 0.7637.

Question 3

When a currency is quoted against the USD and the USD is the base currency,this is direct quoting.

Accepted Answer

Having the USD as the unit makes the quote direct.

Question 4

A bank has been asked to provide a three-month forward EUR/USD 'buy' quote for a corporate client.The following information is available to the FX dealer at the bank:
$$\begin{array} { | l | l | l | } 
\hline &  { \text { Bid } } &{ \text { Offer } } \
\hline \text { Spot EURUSD } & 1.0770 & 1.0782 \
\hline \text { 3-month US interest rate } & 3.75 \% \text { p.a. } & 3.85 \% \text { p.a. } \
\hline \text { 3-month euro interest rate } & 2.65 \% \text { p.a. } & 2.75 \% \text { p.a. } \
\hline
\end{array}$$
Calculate the bid and ask a three-month forward rate.
A) EUR/USD 1.0796-1.0781
B) EUR/USD 1.0797-1.0782
C) EUR/USD 1.0738-1.0755
D) EUR/USD 1.0743-1.0750

Accepted Answer

The answer of A bank has been asked to provide...

Question 5

If an Australian importer has a contract for Japanese goods denominated in yen payable in three months' time and is concerned that the AUD may appreciate,the importer may enter into a forward contract to sell the yen for delivery in three months' time.

Accepted Answer

The importer should buy a forward contact to buy the yen (and sell the AUD) in three months' time.

Question 6

A USD/YEN quote means the price of USD1 in terms of YEN.

Accepted Answer

The first currency of a quote is the unit of the quotation.

Question 7

The financial institution responsible for monetary policy in the European Union is called the:
A) Bundesbank.
B) European Parliament.
C) Bank for International Settlements.
D) European Central Bank.

Accepted Answer

The European Central Bank (ECB) is responsible for monetary policy in the European Union. It was established in 1998 and is located in Frankfurt, Germany. The ECB's main objective is to maintain price stability in the euro area and it conducts monetary policy by setting interest rates and managing the money supply. The other options listed in the question (A, B, and C) are not responsible for monetary policy in the EU.

Question 8

If the forward exchange rate is priced higher than the spot rate the currency is said to be trading at a:
A) discount.
B) gain.
C) premium.
D) loss.

Accepted Answer

If the forward exchange rate is priced higher than the spot rate, the currency is said to be trading at a premium. This means that the forward exchange rate reflects a higher expected future exchange rate than the current spot exchange rate.

Question 9

Given the 3 month forward rate exchange between the USA and Switzerland is USD/CHF 1.1589 this suggests:
A) that interest rates in the USA are higher than in Switzerland.
B) the 3 month forward rate is at a premium.
C) that interest rates in the USA are lower than in Switzerland.
D) a person requires more data before making a conclusion.

Accepted Answer

A higher forward rate indicates that the currency of the country with lower interest rates is expected to depreciate relative to the currency of the country with higher interest rates. In this case, since the forward rate is USD/CHF 1.1589, it suggests that the market expects the Swiss franc to appreciate relative to the US dollar over the next three months, which means that interest rates in Switzerland are expected to be higher than in the US.

Question 10

All of the following are considered 'hard' or major currencies,except the:
A) US dollar.
B) euro.
C) Mexican peso.
D) British pound.

Accepted Answer

The Mexican peso is not considered a hard or major currency, as it is subject to high volatility and political instability. The other three options, US dollar, euro, and British pound, are all considered major currencies due to their stability, use in international transactions, and backing by strong economies.

Question 11

If interest rate parity holds,the currency of the country with the relatively _______ interest rates will trade at a forward _______ to the country with the relatively _______ interest rate.
A) high; premium; low
B) low; discount; high
C) high; discount; low
D) None of the given choices

Accepted Answer

Interest rate parity suggests that the currency of the country with higher interest rates will depreciate in the future, hence it will trade at a forward discount relative to the currency of the country with lower interest rates.

Question 12

Given USD/EURO0.6450-0.6455 an FX dealer would buy USD1 from you and give you EURO0.6455

Accepted Answer

The dealer would give you EUR0.6450

Question 13

Which of the following principles refers to the circumstance that interest rates in different countries provide equal returns,taking into account the spot and forward exchange rates between the two countries?
A) Exchange rate parity
B) Interest rate parity
C) Law of one price
D) Purchasing power parity

Accepted Answer

Interest rate parity refers to the condition where interest rates in different countries provide equal returns, after taking into account the spot and forward exchange rates between two currencies. This principle helps to explain why interest rate differentials between countries tend to be offset by exchange rate movements.

Question 14

An importer will be required to purchase USD in approximately six months to pay for a consignment of goods.The company is concerned that the AUD may depreciate before the due date and therefore decides to enter into a forward exchange contract to protect its position.The company receives the following quote: 'the Aussie is fifty-eight forty-five to fifty-three,sixty-two to sixty six'.Calculate the forward exchange rate.
A) AUD/USD 0.5783-87
B) AUD/USD 0.5907-19
C) AUD/USD 0.5911-15
D) AUD/USD 0.6465-13

Accepted Answer

The answer of An importer will be required to purchase...

Question 15

The FX brokers quote two-way prices at which they are prepared both to buy and sell foreign currencies and act as principals in the FX markets.

Accepted Answer

It is FX dealers that quote bid and ask prices.

Question 16

If the forward points are _______at a specific date,the base currency is at a _______.
A) rising; forward discount
B) falling; forward discount
C) rising; forward loss
D) falling; forward gain

Accepted Answer

Forward points are the difference between the spot exchange rate and the forward exchange rate. When the forward points are falling, it indicates that the forward exchange rate is lower than the spot exchange rate, which means that the base currency is at a forward discount. Therefore, option B is correct. Option A, C, and D are incorrect as they do not align with the relationship between forward points and the base currency.

Question 17

The largest FX market is based in New York.

Accepted Answer

Owing in part to historical factors, London is the largest FX market.

Question 18

The FX market is organised as an over-the-counter market in which deposits denominated in foreign currencies are bought and sold.

Accepted Answer

The FX markets are vast global markets.

Question 19

Which of the following statements is correct?
A) A currency with a higher interest rate will sell at a forward premium.
B) A currency with a higher interest rate will sell at a forward discount.
C) A currency with a higher interest rate will have a higher spot rate.
D) A currency with a higher interest rate will have a lower spot rate.

Accepted Answer

According to the interest rate parity theory, a currency with a higher interest rate will sell at a forward discount because investors will demand compensation for the higher risk of investing in that currency. Therefore, the forward rate will be lower than the spot rate, resulting in a forward discount.

Question 20

If the spot rate is AUD/USD 0.5510-0.5515,and the six-month forward points are 48 to 53,the six-month outright forward rate would be:
A) AUD/USD 0.5462-0.5462
B) AUD/USD 0.5563-0.5558
C) AUD/USD 0.5558-0.5563
D) AUD/USD 0.5558-0.5568

Accepted Answer

The answer of If the spot rate is AUD/USD 0.5510-0.5515,and...

Quiz 15: Foreign Exchange: The Structure and Operation of the Fx Market

If the spot rate is AUD/USD 0.5526-0.5531 and the 90-day forward rate is AUD/USD 0.5578-0.5588,the AUD is trading at a/an:

When a currency is quoted against the USD and the USD is the base currency,this is direct quoting.

If an Australian importer has a contract for Japanese goods denominated in yen payable in three months' time and is concerned that the AUD may appreciate,the importer may enter into a forward contract to sell the yen for delivery in three months' time.

A USD/YEN quote means the price of USD1 in terms of YEN.

The financial institution responsible for monetary policy in the European Union is called the:

If the forward exchange rate is priced higher than the spot rate the currency is said to be trading at a:

Given the 3 month forward rate exchange between the USA and Switzerland is USD/CHF 1.1589 this suggests:

All of the following are considered 'hard' or major currencies,except the:

If interest rate parity holds,the currency of the country with the relatively ___ interest rates will trade at a forward _ to the country with the relatively _____ interest rate.

Given USD/EURO0.6450-0.6455 an FX dealer would buy USD1 from you and give you EURO0.6455

Which of the following principles refers to the circumstance that interest rates in different countries provide equal returns,taking into account the spot and forward exchange rates between the two countries?

The FX brokers quote two-way prices at which they are prepared both to buy and sell foreign currencies and act as principals in the FX markets.

If the forward points are _at a specific date,the base currency is at a _.

The largest FX market is based in New York.

The FX market is organised as an over-the-counter market in which deposits denominated in foreign currencies are bought and sold.

Which of the following statements is correct?

If the spot rate is AUD/USD 0.5510-0.5515,and the six-month forward points are 48 to 53,the six-month outright forward rate would be: