BAFI3200 Week 3 The Mechanisms of Foreign Exchange Market

When a tourist goes to a bank in a foreign country to convert money into the local

currency, the exchange rate used is the forward rate.

• True

• False

To minimize the risk of an unanticipated change in exchange rates, a company can

protect itself by entering into a forward exchange contract.

• True

• False

If the forward rate of a currency pair is lower than the spot rate, which of the following statements is true?

• The currency is expected to appreciate.
• The forward rate is irrelevant to the spot rate.
• The currency is expected to depreciate.
• The currency will remain stable.

What does a forward premium indicate in the foreign exchange market?

• A forward premium indicates an expected appreciation of a currency.
• A forward premium reflects a higher interest rate in the domestic market.
• A forward premium suggests no change in currency value.
• A forward premium indicates a decrease in currency value.

Which of the following scenarios is most likely to result in a forward premium for a currency?

• Strong demand for the currency due to higher interest rates.
• Increased supply of the currency in the market.
• Weak demand for the currency due to lower interest rates.
• Political instability leading to currency depreciation.

What is not a function of the forex market?

• Issuing stocks or bonds
• Currency Conversion

• Risk Management

• Speculation

Mai is Vietnamese currently studying in one of the universities in US. Mai has to pay his tuition fees pin US dollars. Mai’s father is planning to arrange a contract with a bank to buy USD as he is concerned about the fluctuations in the USD/VND exchange rate. Mai’s father is a (a)  

What is American terms?

• A foreign currency exchange quotation in terms of the amount of a foreign currency needed to buy one U.S. dollar

• A direct quotation

• An American currency quotation is how much U.S. currency it takes to buy one unit of foreign currency

• An indirect quotation

If transaction date is on Monday this week, when is the delivery date?

• Friday last week

• Tuesday this week

• Wednesday this week

• Friday this week

What is NOT correct about triangular arbitrage?

• a trading strategy in the foreign exchange market that exploits differences in exchange rates between three currencies to generate a profit.

• the strategy involves using the exchange rates of three different currencies

• • the investor would then compare the starting and ending exchange rates to see if a profit can be made.

• It is a form of high-risk profit-making by currency traders