CH 6: Concepts of foreign exchange
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Questions and Answers

Which type of foreign exchange transaction involves an immediate or nearly immediate buying and selling of currency?

  • Forward Transactions
  • Swap Transactions
  • Options Transactions
  • Spot Transactions (correct)

    • In a ___ transaction, two parties simultaneously borrow and lend two different currencies.

  • Options
  • Forward
  • Spot
  • Swap (correct)

    • Which type of foreign exchange transaction gives the holder the right, but not the obligation, to buy or sell currency at a specified rate on or before a specified date?

  • Spot Transactions
  • Swap Transactions
  • Forward Transactions
  • Options Transactions (correct)

    • Which participant in the foreign exchange market contributes to the liquidity and depth of the market?

    <p>All of the above</p> Signup and view all the answers

    Which type of foreign exchange transaction involves an agreement to buy or sell a certain amount of foreign currency at a predetermined future date and rate?

    <p>Forward Transactions</p> Signup and view all the answers

    Which participant in the foreign exchange market has different needs than the other participants?

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

    Which type of foreign exchange transaction involves the simultaneous buying and selling of two different currencies?

    <p>Swap Transactions</p> Signup and view all the answers

    What does the term 'foreign exchange' refer to?

    <p>Conversion or trading of one currency into another</p> Signup and view all the answers

    Why is the foreign exchange market considered crucial for international trade?

    <p>To facilitate the conversion of currencies for payments</p> Signup and view all the answers

    What role does the foreign exchange market play in cross-border trade?

    <p>Facilitating currency conversions for payments</p> Signup and view all the answers

    How are exchange rates determined in the foreign exchange market?

    <p>Based on market supply and demand dynamics</p> Signup and view all the answers

    Which term is used to describe the price at which one currency can be exchanged for another?

    <p>Exchange rate</p> Signup and view all the answers

    What factors influence exchange rates in the foreign exchange market?

    <p>Interest rates, inflation, and economic performance</p> Signup and view all the answers

    Why do tourists need to exchange their home currency for local currency when visiting other countries?

    <p>To pay for goods and services in the visited country</p> Signup and view all the answers

    What does the term 'forex' stand for in the context of finance?

    <p>Foreign exchange</p> Signup and view all the answers

    Which factor does NOT influence exchange rates in the foreign exchange market?

    <p>Geographical location</p> Signup and view all the answers

    What is the main purpose of fixing or pegging exchange rates by governments or central banks?

    <p>To establish a stable value for the currency</p> Signup and view all the answers

    How does the foreign exchange market impact international travel?

    <p>It enables tourists to exchange their home currency for local currency</p> Signup and view all the answers

    Which aspect of the foreign exchange market is vital for businesses engaged in international trade?

    <p>Currency conversion for goods/services payments</p> Signup and view all the answers

    What distinguishes floating exchange rates from pegged/fixed exchange rates?

    <p>Fixed rates are tied to a major currency, while floating rates change based on market forces.</p> Signup and view all the answers

    Why is the foreign exchange market described as crucial for investment purposes?

    <p>For buying/selling currencies for profit or hedging strategies</p> Signup and view all the answers

    What type of foreign exchange transaction involves contracts that give the holder the right, but not the obligation, to buy or sell currency at a specified rate on or before a specified date?

    <p>Options Transactions</p> Signup and view all the answers

    Which participant in the foreign exchange market is primarily responsible for managing a country's monetary policy and foreign exchange reserves?

    <p>Central Banks</p> Signup and view all the answers

    In which type of foreign exchange transaction do two parties agree to buy or sell a certain amount of foreign currency at a predetermined future date and rate?

    <p>Forward Transactions</p> Signup and view all the answers

    Which type of foreign exchange transaction involves the immediate buying and selling of currency?

    <p>Spot Transactions</p> Signup and view all the answers

    What is the key feature of swap transactions in the foreign exchange market?

    <p>Simultaneous borrowing and lending of two different currencies</p> Signup and view all the answers

    Which foreign exchange market participant focuses on facilitating international payments and providing financial services to clients?

    <p>Financial Institutions</p> Signup and view all the answers

    What distinguishes options transactions from other types of foreign exchange transactions in terms of buyer obligations?

    <p>No obligation to buy or sell currency</p> Signup and view all the answers

    What distinguishes a swap transaction from other foreign exchange transactions?

    <p>It involves simultaneous borrowing and lending of two different currencies</p> Signup and view all the answers

    Which participant in the foreign exchange market focuses on managing a country's monetary policy and foreign exchange reserves?

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

    What is the key feature of options transactions in the foreign exchange market?

    <p>Contracts that give the holder the right, but not the obligation, to buy or sell currency at a specified rate on or before a specified date</p> Signup and view all the answers

    Which factor contributes to the liquidity and depth of the foreign exchange market?

    <p>Various market participants with different needs</p> Signup and view all the answers

    What differentiates forward transactions from spot transactions in the foreign exchange market?

    <p>Forward transactions are agreements for future exchange rates, while spot transactions are immediate exchanges.</p> Signup and view all the answers

    Which type of transaction involves contracts that grant the holder the right to buy or sell currency at a specified rate by a certain date in the future?

    <p>Options transaction</p> Signup and view all the answers

    Which aspect contributes to making central banks participants crucial to the foreign exchange market?

    <p>They manage a country's monetary policy and foreign exchange reserves</p> Signup and view all the answers

    Which statement best describes the role of foreign exchange in facilitating international trade and investment?

    <p>It enables businesses to convert currencies to pay for goods and services abroad, and allows investors and companies to buy or sell currencies for profit or hedging purposes.</p> Signup and view all the answers

    Which of the following factors does NOT directly influence exchange rates in the foreign exchange market?

    <p>Currency speculation by market participants</p> Signup and view all the answers

    In the context of foreign exchange, what does the term 'pegged' or 'fixed' exchange rate refer to?

    <p>Exchange rates that are set by governments or central banks against a major currency or basket of currencies.</p> Signup and view all the answers

    Which of the following statements accurately describes the concept of foreign exchange swaps?

    <p>They are transactions where two parties simultaneously borrow and lend two different currencies.</p> Signup and view all the answers

    Which statement best describes the relationship between the foreign exchange market and international travel?

    <p>The foreign exchange market enables tourists to exchange their home currency for the local currency of the countries they are visiting, facilitating international travel.</p> Signup and view all the answers

    Which participant in the foreign exchange market is primarily responsible for managing a country's monetary policy and foreign exchange reserves?

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

    In the context of foreign exchange, what does the term 'forex' or 'FX' stand for?

    <p>Foreign exchange</p> Signup and view all the answers

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