Foreign Exchange Market and Yield Differentials Quiz

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Which market participants can derive cross-rates to expand trading opportunities?

Global entities

What is the market convention for quoting the exchange rate between the US dollar and the euro?

euro–dollar (USD/EUR)

What is the purpose of understanding the concept of arbitrage relationships in the foreign exchange market?

To understand market inputs

What is the decentralized market where global currencies are bought, sold, and exchanged?

Foreign exchange market

Which of the following best describes the relationship between spot and forward rates in the FX market?

The relationship between spot and forward rates varies depending on market conditions

What are forward points in the context of FX markets?

The difference between the spot exchange rate and the forward rate

How are forward rates typically quoted in professional FX markets?

In terms of pips

What factors determine the absolute number of forward points in FX markets?

The term to maturity and the yield differential between the two countries

Which equation correctly represents the calculation for obtaining a euro-Canada (CAD/EUR) quote?

CAD USD × USD EUR = CAD USD × USD EUR = CAD EUR

Which equation correctly represents the calculation for obtaining a Canada-yen (JPY/CAD) quote?

CAD USD × JPY USD = USD CAD × JPY USD = JPY CAD

Which equation correctly represents the calculation for obtaining a Canada-yen (JPY/CAD) quote based on the given spot exchange rates?

0.7680 × 111.94 = 85.97 JPY per CAD

Which statement accurately describes the market convention for quoting exchange rates?

The market uses rate quotes on defined conventional currency pairs.

Which of the following is an example of swap financing?

Converting foreign currency to domestic currency using a forward rate

What is the arbitrage relationship equation based on?

The underlying intuition of two alternative but equivalent investments

What is the formula for calculating the forward rate?

(1 + rd) = Sf/d(1 + rf)( _1 Ff/d)

What is the purpose of representing forward points as a percentage of the spot rate?

To calculate the percentage discount or premium in the forward market

Which equation represents the relationship between forward points (Ff/d - Sf/d), spot exchange rate (Sf/d), interest rate differential (rf - rd), and investment horizon (τ)?

Ff/d - Sf/d = Sf/d(rf - rd)(1 + rdτ)τ

What is the 30-day forward exchange rate given a 30-day domestic risk-free interest rate of 2.00 percent per year, a 30-day foreign risk-free interest rate of 3.00 percent per year, and a spot exchange rate (Sf/d) of 1.6555?

1.6569

What does a premium of 14 pips mean in the context of forward rates trading at a 30-day term?

The forward rate is higher than the spot rate by 14 pips

How are swap points related to the term of the forward contract?

Swap points are directly proportional to the term of the forward contract

Which equation can be used to calculate the 12-month forward rate (Ff/d) given the spot exchange rate (Sf/d), domestic risk-free rate (rd), and foreign risk-free rate (rf)?

(1 + rd) = (1/Sd/f)(1 + rf)Fd/f

What is the value of the 12-month forward rate (Ff/d) given the spot exchange rate (Sf/d) of 1.6535, domestic risk-free rate (rd) of 3.50%, and foreign risk-free rate (rf) of 5.00%?

1.6775

If the misquoted 12-month forward rate (Ff/d) is 1.6900, what is the return on the hedged foreign investment using the arbitrage equation?

1.0273

What does the equation _ Ff/d Sf/d = ( 1 + r _f 1 + rd) indicate about the relationship between forward rate and spot rate?

The forward rate will be higher than the spot rate if foreign interest rates are higher than domestic interest rates.

Which of the following statements is true about the relationship between the increase in the term of a forward contract and the increase in forward points?

The increase in forward points is not proportional to the increase in the term of the contract.

Which of the following statements is true about the relationship between the spread between foreign and domestic interest rates and the number of forward points?

The number of forward points is not proportional to the spread between foreign and domestic interest rates.

If the foreign interest rate is set to 4.00 percent, the domestic interest rate is unchanged, and the spot exchange rate is unchanged, what happens to the forward points of a 30-day forward contract?

The forward points increase.

What is the formula for calculating the forward points (Ff/d - Sf/d) of a 30-day forward contract when the foreign interest rate is set to 4.00 percent and the domestic interest rate and spot exchange rate are unchanged?

$Ff/d - Sf/d = 1.6555(0.0400 - 0.0200[\frac{30}{360}])$

What is the interest rate differential (rf - rd) of the original 30-day forward contract?

1.00 percent

What is the value of the forward points (Ff/d - Sf/d) when the foreign interest rate is set to 4.00 percent, the domestic interest rate and spot exchange rate are unchanged, and the term of the forward contract is 30 days?

0.0028

Understanding the complexities of the foreign exchange market and the limitations of yield differentials as a predictor of future spot rates.

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