FIM Week 9 Tutorial

Which of the following is not correct?

• Arbitrage in the FX markets involves profits from simultaneous FX transactions with no exposure to risk.
• If the exchange rates between three currencies are out of perfect alignment, triangular arbitrage is possible.
• Risk-free profit opportunities often persist for long periods in the FX markets.
• Risk-free profit opportunities are rare in the FX markets.

Which of the following statements about the foreign exchange (FX) markets is not correct? 

• A primary function of the FX markets is to facilitate international trade and investment.
• An Australian importer who enters into a trade agreement denominated in USD will need to buy USD.
• The largest trading floor of the FX market is in London.
• The speed and efficiency of FX trading is facilitated by electronic communication systems.

Central banks enter the FX markets for various reasons. Which of the following statements about their reasons for entering the markets is correct? 

• to acquire foreign currency to pay interest on the government's overseas' borrowings
• to change the composition of the central bank's official reserve assets
• to influence the exchange rate
• all of the answers provided

The exchange rate regime varies across nations around the world. Identify which of the following statements best defines a crawling peg exchange rate regime.

• The exchange rate is purely determined by supply and demand. 
• The currency is allowed to move within a defined range relative to another major currency such as the USD. 
• The currency is allowed to move within a limited range established by the government. 
• The currency is directly linked to another currency. 

Identify which of the following statements best describes: ‘Aussie Sing Dollar is one thirty-six seventy-five–eighty-five'.

• The Australian dollar is the term currency. 
• The dealer is willing to sell 1AUD for 1.3675 SGD. 
• The bid price is AUD/SGD 1.3685. 
• None of the answers provided. 

The difference between an FX dealer's bid and offer quotes is referred to as the spread. Which of the following statements about the spread is not correct?

• The spread for wholesale transactions is usually only a few points. 
• Large transaction sizes allow dealers to make money despite spreads being small. 
• Spreads on retail transactions are much larger than those on wholesale transactions. 
• Spreads tend to narrow on days when there is a lot of news. 

An Australian exporter is due to receive USD5 million in two months' time. The company's financial manager is concerned that the value of the USD may fall and decides today to hedge using a forward contract. Which of the following would not be a feature of the forward contract?

• The contract to buy USD is entered into today.
• The price of the USD to be exchanged is determined today.
• The delivery date is in the future.
• The delivery date will be specified today.