Currency Derivatives: Futures Contracts
40 Questions
0 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is a key feature of futures contracts?

  • They are used to hedge against interest rate risks
  • They are customized to meet the needs of individual buyers and sellers
  • They are a type of option contract
  • They are traded on an exchange and specify a standard volume of a particular currency (correct)

    • What is the primary purpose of corporations and governments accessing the international money market?

  • To obtain short-term funds denominated in a foreign currency (correct)
  • To lend funds to other countries
  • To speculate on currency fluctuations
  • To invest in foreign stocks and bonds

    • What is the main difference between a currency call option and a currency put option?

  • The type of currency underlying the option
  • The expiration date of the option
  • The strike price of the option
  • The right to buy or sell the underlying currency (correct)

    • What is the future spot rate?

    <p>The spot rate that will exist at a future point in time and is uncertain as of today</p> Signup and view all the answers

    Why has the international money market grown?

    <p>Due to the need for firms to borrow funds to pay for imports denominated in a foreign currency</p> Signup and view all the answers

    What is a characteristic of currency options contracts?

    <p>They provide the right to buy or sell a currency at a specified strike price</p> Signup and view all the answers

    What is the primary purpose of using currency derivatives?

    <p>To hedge against exchange rate risks</p> Signup and view all the answers

    What determines the value of a currency futures contract?

    <p>The future spot rate</p> Signup and view all the answers

    What is the primary purpose of the foreign exchange market?

    <p>To facilitate international trade or financial transactions</p> Signup and view all the answers

    What type of financial institutions serve as intermediaries in the foreign exchange market?

    <p>Commercial banks</p> Signup and view all the answers

    What is the primary composition of the international money markets?

    <p>Large commercial banks</p> Signup and view all the answers

    What is the primary function of the international credit markets?

    <p>To convert deposits into medium-term loans to governments and corporations</p> Signup and view all the answers

    What is an example of direct foreign investment?

    <p>Acquiring foreign real assets</p> Signup and view all the answers

    What is the primary purpose of the international money markets?

    <p>To provide short-term loans in various currencies</p> Signup and view all the answers

    What type of financial institutions are involved in the international credit markets?

    <p>Commercial banks</p> Signup and view all the answers

    What is the primary difference between the international money markets and the international credit markets?

    <p>The duration of the loans provided</p> Signup and view all the answers

    What is currency risk primarily caused by?

    <p>Economic or political conditions</p> Signup and view all the answers

    What does a direct quotation represent?

    <p>The number of dollars per unit of foreign currency</p> Signup and view all the answers

    What is a characteristic of a floating exchange rate system?

    <p>Currencies are allowed to fluctuate with market forces</p> Signup and view all the answers

    What is the relationship between direct and indirect quotations?

    <p>Indirect quotation = 1 / Direct quotation</p> Signup and view all the answers

    What is the role of foreign exchange dealers?

    <p>They serve as intermediaries in the foreign exchange market</p> Signup and view all the answers

    What happens to the indirect exchange rate of the euro when the euro appreciates against the dollar?

    <p>It declines</p> Signup and view all the answers

    What happens to the indirect exchange rate of the euro when the euro depreciates against the dollar?

    <p>It rises</p> Signup and view all the answers

    What is the term for an immediate exchange of one currency for another?

    <p>Spot market transaction</p> Signup and view all the answers

    What is an example of a direct quotation?

    <p>$1.40 per Euro</p> Signup and view all the answers

    Where do banks trade with each other?

    <p>Interbank market</p> Signup and view all the answers

    What is an example of an indirect quotation?

    <p>€0.7143 per Dollar</p> Signup and view all the answers

    What is the commonly accepted medium of exchange in the spot market?

    <p>U.S. Dollar</p> Signup and view all the answers

    What is the consequence of economic or political conditions on currency demand and supply?

    <p>Change in currency demand and supply</p> Signup and view all the answers

    What is a characteristic of trading in the spot market?

    <p>It is conducted 24 hours a day, 5 days a week</p> Signup and view all the answers

    What is the benefit of more buyers and sellers in the spot market?

    <p>More liquidity</p> Signup and view all the answers

    What is the term for a telecommunications network where companies normally exchange one currency for another?

    <p>Over-the-counter market</p> Signup and view all the answers

    What happens to aggregate demand for funds when economic conditions strengthen?

    <p>It increases</p> Signup and view all the answers

    What type of risk is associated with the potential for default?

    <p>Credit Risk</p> Signup and view all the answers

    What is the primary reason for the value of bonds to decline in response to rising long-term interest rates?

    <p>Interest Rate Risk</p> Signup and view all the answers

    What type of risk is associated with the potential for the value of bonds to decline due to currency depreciation?

    <p>Exchange Rate Risk</p> Signup and view all the answers

    What was the primary cause of the European bond crisis in 2010?

    <p>Weak economic conditions in Greece</p> Signup and view all the answers

    What was the response to the Greek crisis in May 2010?

    <p>European countries and the IMF agreed to provide new loans to Greece</p> Signup and view all the answers

    Which of the following countries was NOT mentioned as being affected by the Greek crisis?

    <p>Italy</p> Signup and view all the answers

    What is the effect of a consistently active market for bonds on their value?

    <p>It reduces liquidity risk</p> Signup and view all the answers

    Study Notes

    Currency Derivatives

    • Futures contracts are similar to forward contracts but are sold on an exchange, specifying a standard volume of a particular currency to be exchanged on a specific settlement date.
    • The futures rate is the exchange rate at which one can purchase or sell a specified currency on the specified settlement date.
    • The future spot rate is the spot rate that will exist at a future point in time and is uncertain as of today.

    Currency Options Contracts

    • A currency call option provides the right to buy currency at a specified strike price within a specified period of time.
    • A currency put option provides the right to sell currency at a specified strike price within a specified period of time.

    International Money Market

    • Corporations or governments need short-term funds denominated in a currency different from their home currency.
    • The international money market has grown because firms may need to borrow funds to pay for imports denominated in a foreign currency.
    • The floating exchange rate system allows widely traded currencies to fluctuate in accordance with market forces.

    Foreign Exchange Transactions

    • The over-the-counter market is the telecommunications network where companies normally exchange one currency for another.
    • Foreign exchange dealers serve as intermediaries in the foreign exchange market.
    • A foreign exchange transaction for immediate exchange is said to trade in the spot market, where the exchange rate is the spot rate.
    • Trading between banks occurs in the interbank market.

    Spot Market

    • The U.S. dollar is the commonly accepted medium of exchange in the spot market.
    • Spot market time zones are limited to normal business hours in a given location, allowing for 24-hour foreign exchange trading.
    • Spot market liquidity increases with more buyers and sellers.

    Attributes of Banks That Provide Foreign Exchange

    • Currency risk refers to economic or political conditions that cause the demand for and supply of the currency to change abruptly.

    Interpreting Foreign Exchange Quotations

    • Direct quotation represents the value of a foreign currency in dollars (number of dollars per currency).
    • Indirect quotation represents the number of units of a foreign currency per dollar.
    • Indirect quotation = 1 / Direct quotation

    Interpreting Changes in Exchange Rates

    • When the euro is appreciating against the dollar, the indirect exchange rate of the euro is declining.
    • When the euro is depreciating against the dollar, the indirect exchange rate is rising.

    Risk of International Bonds

    • Credit risk represents the potential for default.
    • Interest rate risk represents the potential for the value of bonds to decline in response to rising long-term interest rates.
    • Exchange rate risk represents the potential for the value of bonds to decline because the currency denominating the bond depreciates against the home currency.
    • Liquidity risk represents the potential for the value of bonds to decline because there is not a consistently active market for the bonds.

    Impact of the Greek Crisis on Bonds

    • Greece experienced weak economic conditions and a large increase in the government budget deficit in spring 2010.
    • Concern spread to other European countries with large budget deficits.
    • Many European countries and the IMF agreed to provide Greece with new loans in May 2010.

    International Stock Markets

    • Direct foreign investment involves the acquisition of foreign real assets.
    • Short-term investment or financing involves foreign securities.
    • Longer-term financing occurs in the international bond or stock markets.

    International Capital Markets

    • The international money markets are composed of several large banks that accept deposits and provide short-term loans in various currencies.
    • The international credit markets are composed of commercial banks that convert some of the deposits received into loans (for medium-term periods) to governments and large corporations.

    Studying That Suits You

    Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

    Quiz Team

    Description

    This quiz covers the basics of futures contracts, a type of currency derivative. Learn about the specifications and settlement dates of futures contracts.

    More Like This

    Use Quizgecko on...
    Browser
    Open
    Browser
    Browser