Question 1

The _______ quote is the number of units of foreign currency an Australian FX dealer is willing to give,in order to buy the unit of the quotation,that of AUD 1.

Accepted Answer

The bid quote represents the amount of foreign currency an FX dealer is willing to pay to buy a unit of the base currency, in this case, AUD 1.

Question 2

The _______ quote is the number of units of foreign currency an Australian FX dealer is willing to take,in order to buy the unit of the quotation,that of AUD 1.

Accepted Answer

The answer of The _______ quote is the number of...

Question 3

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 high interest rate.

Accepted Answer

According to interest rate parity, the currency of the country with the relatively high interest rates should trade at a forward premium to the country with the relatively low interest rate. This is because investors would demand a higher return to invest in the country with a lower interest rate, which would reduce demand for its currency and cause it to trade at a discount in the forward market. Therefore, the answer is B, indicating that the currency with the low interest rates will trade at a forward premium.

Question 4

An indirect exchange rate can be converted to a direct exchange rate by:

Accepted Answer

To convert an indirect exchange rate to a direct exchange rate, you need to transpose the indirect rate. This involves swapping the numerator and denominator of the fraction. For example, an indirect exchange rate of 0.8 GBP/USD would become a direct exchange rate of 1.25 USD/GBP (1 ÷ 0.8 = 1.25). Dividing the indirect rate by 100 (choice A) or the number of US dollars required to purchase one unit of the terms' currency (choice C) would not result in a direct exchange rate. Multiplying the indirect rate by the spot rate (choice B) is not a step required in converting an indirect rate to a direct rate.

Question 5

The convention in the FX markets is for the first currency mentioned in a FX quote is:

Accepted Answer

In FX markets, the first currency mentioned in a quote is the base currency, which is the unit of the quotation.

Question 6

The difference between the spot rate and the forward rate quotation is the:

Accepted Answer

The difference between the spot rate and the forward rate is referred to as forward points. Spot rate refers to the current exchange rate while the forward rate is the expected future rate of exchange. Therefore, the answer is B.

Question 7

For the Aussie/euro spot rate (AUD/EUR 1.8088-1.8098),the percentage spread is:

Accepted Answer

To calculate the percentage spread, we need to find the difference between the bid and ask prices and then divide it by the midpoint.

Midpoint = (1.8088+1.8098)/2 = 1.8093

Spread = 1.8098 - 1.8088= 0.0010

Percentage Spread = (Spread/ Midpoint) x 100 = (0.0010/1.8093) x 100 = 0.0550 or 5.5%

Therefore, the correct answer is B: 5.5.

Question 8

The theory that the annual percentage differential in the forward market for a currency quoted in terms of another currency is equal to the approximate difference in the interest rates between two countries is known as:

Accepted Answer

This theory is known as interest rate parity. Covered interest arbitrage involves using forward contracts to cover exchange rate risk, the Fisher equation relates nominal and real interest rates, and a forward rate agreement is a personalized contract between two parties to exchange currencies at a future date.

Question 9

A company treasurer has received the following foreign exchange quote from an FX dealer: AUD/USD 0.5655-60.For the financial report to the board of directors,the treasurer is required to ensure the USD is the unit of the quotation.Which exchange rate quotation will the treasurer include in the report?

Accepted Answer

The treasurer needs to convert the quote to USD/AUD. The reciprocal of AUD/USD 0.5655-60 is USD/AUD 1.7668-83.

Question 10

In the FX markets a/an _____ quote is where the USD is the unit of the quotation.

Accepted Answer

In a direct quote, the domestic currency is the quoted currency and the foreign currency is the base currency. As the question states that the USD is the unit of the quotation, it is a direct quote.

Question 11

In the FX markets a/an _____ quote is where the USD is the base currency.

Accepted Answer

In a direct quote, the domestic currency is the base currency and the foreign currency is the quote currency. As the question specifies that USD is the base currency, the answer would be a direct quote.

Question 12

If it takes 1.25 euros to buy 1 US dollar,the direct quote for the exchange rate is:

Accepted Answer

The direct quote for the exchange rate is the amount of the foreign currency needed to purchase one unit of the domestic currency. In this case, it takes 1.25 euros to buy 1 US dollar, so the exchange rate is direct and equal to 1.25.

Question 13

The convention in the FX markets is the first-named currency in a FX quote is:

Accepted Answer

In FX markets, the first-named currency in a quote is the base currency, which is the unit of the quotation.

Question 14

An Australian company is to export electronic equipment into Europe,in particular Germany and Sweden,and needs to consider the exchange rate implications of conducting business in euros and Swedish kroner.Spot rates quoted are:
USD/EUR 0.9275-85
USD/SEK 8.4531-41
Calculate the EUR/SEK cross-rate.

Accepted Answer

The answer of An Australian company is to export electronic...

Question 15

The convention in the FX markets is the currency on the left hand side of a quote is:

Accepted Answer

The correct convention is that the currency on the left hand side of a quote is the base currency, while the currency on the right hand side is the terms or quote currency. Therefore, the correct choice is D - base currency.

Question 16

In the FX markets a/an _____ quote is where the USD is the terms currency and the other currency is the unit of the quotation.

Accepted Answer

An indirect quote is where the USD is the terms currency, meaning the foreign currency is quoted in terms of how much one unit of the foreign currency is worth in USD.

Question 17

An Australian export company wishes to sell its euro receipts,EUR 500 000,through an FX dealer and receives the following quote: 'Aussie mark spot is one-twenty-two fifty-five to sixty five'.What is the value of the export receipt?

Accepted Answer

The quote 'Aussie mark spot is one-twenty-two fifty-five to sixty five' means the exchange rate is 1.2255 to 1.2265. Since the company is selling euros, they will use the bid rate of 1.2255. Therefore, EUR 500,000 * 1.2255 = AUD 612,750.00.

Question 18

A student researching the AUD/USD exchange rate on a particular day is confused to find the following two quotations:
i.AUD/USD 0.5825-30
ii.USD/AUD 1.7152-67
Which of the following statements is correct?

Accepted Answer

Quote i shows the value of one Australian dollar in terms of US dollars, which is the convention adopted in Australia and is an indirect quote. Quote ii shows the value of one US dollar in terms of Australian dollars, which is the convention used outside of Australia and is also a direct quote.

Question 19

When a smaller amount of a foreign currency is required to buy the Australian dollar,the currency is said to have _______ with respect to the dollar.

Accepted Answer

When a smaller amount of a foreign currency is required to buy the Australian dollar, it means that the foreign currency has become stronger in comparison to the Australian dollar. This is known as appreciation.

Question 20

The principle of interest rate parity asserts that the:

Accepted Answer

The principle of interest rate parity states that the difference in interest rates between two countries will determine the relative value of their currencies in the future. This means that the exchange rate for two currencies is determined by the difference in interest rates between the countries they belong to. Therefore, the relativity between spot and forward exchange rates reflects the interest rate differentials between countries. A is incorrect because it refers to spot exchange rates determining the forward exchange rates, which is not true according to the interest rate parity principle. C and D are also incorrect as they reverse the cause-and-effect relationship between interest rates and exchange rates described by the principle of interest rate parity.

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