Chapter 05

The Market for Fo`reign Exchange

Number of Questions: 13

Chapter 05 The Market for Foreign Exchange Answer Key

Multiple Choice Questions

24. Suppose the spot ask exchange rate, Sa($|), is $1.90 = 1.00 and the spot bid
exchange rate, Sb($|), is $1.89 = 1.00. If you were to buy $10,000,000 worth of
British pounds and then sell them five minutes later, how much of your
$10,000,000 would be "eaten" by the bid-ask spread?

A. $1,000,000
B. $52,910.05
C. $100,000
D. $52,631.58

Topic: The Bid-Ask Spread

25. If the $/ bid and ask prices are $1.50/ and $1.51/, respectively, the
corresponding /$ bid and ask prices are

A. 0.6667 and 0.6623.

B. $1.51 and $1.50.
C. 0.6623 and 0.6667.
D. cannot be determined with the information given.

Topic: The Bid-Ask Spread

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33. The dollar-euro exchange rate is $1.25 = 1.00 and the dollar-yen exchange rate is
100 = $1.00. What is the euro-yen cross rate?

A. 125 = 1.00
B. 1.00 = 125
C. 1.00 = 0.80
D. None of the above

Topic: Cross-Exchange Rate Quotations

40. What is the BID cross-exchange rate for Swiss Francs priced in euro?
Hint: Find the price that a currency dealer will pay in euro to buy Swiss francs.

A. 0.5386/CHF
B. 0.5389/CHF
C. 0.5463/CHF
D. 0.5466/CHF

Topic: Cross-Exchange Rate Quotations

41. What is the ASK cross-exchange rate for Swiss Francs priced in euro?
Hint: Find the price that a currency dealer will take in euro to sell Swiss francs.

A. 0.5386/CHF
B. 0.5389/CHF
C. 0.5463/CHF
D. 0.5466/CHF

Topic: Cross-Exchange Rate Quotations

42. Find the no-arbitrage cross exchange rate. The dollar-euro exchange rate is quoted
as $1.60 = 1.00 and the dollar-pound exchange rate is quoted at $2.00 = 1.00.

A. 1.25/1.00
B. $1.25/1.00
C. 1.25/1.00
D. 0.80/1.00

Topic: Cross-Exchange Rate Quotations

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45. Find the no-arbitrage cross exchange rate. The dollar-euro exchange rate is quoted
as $1.60 = 1.00 and the dollar-yen exchange rate is quoted at $1.00 = 120.

A. 192/1.00
B. 1.92/100
C. 1.25/1.00
D. 1.00/1.92

Topic: Cross-Exchange Rate Quotations

49. Suppose a bank customer with 1,000,000 wishes to trade out of euro and into
Japanese yen. The dollar-euro exchange rate is quoted as $1.60 = 1.00 and the
dollar-yen exchange rate is quoted at $1.00 = 120. How many yen will the
customer get?

A. 192,000,000
B. 5,208,333
C. 75,000,000
D. 5,208.33

69. The current spot exchange rate is $1.55/ and the three-month forward rate is
$1.50/. You enter into a short position on 1,000. At maturity, the spot exchange
rate is $1.60/. How much have you made or lost?

A. Lost $100
B. Made 100
C. Lost $50
D. Made $150

Topic: Long and Short Forward Positions

72. Consider a trader who takes a long position in a six-month forward contract on the
euro. The forward rate is $1.75 = 1.00; the contract size is 62,500. At the
maturity of the contract the spot exchange rate is $1.65 = 1.00.

A. The trader has lost $625.

B. The trader has lost $6,250.
C. The trader has made $6,250.
D. The trader has lost $66,287.88.

Topic: Long and Short Forward Positions

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83. The /$ spot exchange rate is $1.50/ and the 90-day forward premium is 10
percent. Find the 90-day forward price.

A. $1.65/
B. $1.5375/
C. $1.9125/
D. None of the above

Topic: Forward Premium

85. The SF/$ 180-day forward exchange rate is SF1.30/$ and the 180 day forward
premium is 8 percent. What is the outright spot exchange rate?

A. SF1.30/$
B. SF1.35/$
C. SF1.25/$
D. None of the above

Topic: Forward Premium

92. An exchange-traded fund (ETF) is

A. the same thing as a mutual fund.

B. a portfolio of financial assets in which shares representing fractional ownership
of the fund are sold and redeemed by the fund sponsor.
C. a portfolio of financial assets in which shares representing fractional ownership
of the fund trade on an organized exchange.
D. none of the above.

Topic: Exchange Traded Currency Funds

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