Ch. 12: The Foreign-Exchange Market Exam
Questions and Answers
1. Foreign-exchange market (FEM) Correct Answer: the market where one country's
money is traded for that of another country
2. Exchange rate Correct Answer: the price of one country's money in terms of another
3. Spot market Correct Answer: where currencies are traded "on the spot", that is, for immediate
delivery
4. Spot exchange rates Correct Answer: the price of foreign money for immediate delivery
(within 2 working days)
5. Bid price Correct Answer: the price dealers will pay to buy that currency at that particular
moment in time
6. Offer price Correct Answer: the asked price; the price that dealers are willing to sell that currency
also at that moment
7. Spread Correct Answer: the ditterence between the buying price and the selling price of a
currency
8. Exchange rate index Correct Answer: a weighted average of a currency's value relative
to other currencies, where the weights are based on the relative trade importance of each
currency
9. Forward exchange rate Correct Answer: the price of foreign money for delivery at some
future date (1, 3, or 6 months later)
10. Hedging Correct Answer: foreign-exchange market transactions aimed at reducing exposure
to risk
11. Forward premium Correct Answer: a currency is selling at a forward premium if its
forward rate exceeds its spot rate
12. Forward discount Correct Answer: a currency is selling at a forward discount if its
forward rate is less than its spot rate
13. Flat currency Correct Answer: when the forward rate and the spot rate are equal
14. Cross rate Correct Answer: the exchange rate implied between any two currencies by
using a third currency to buy the first and then sell it for the second
15. Covered interest parity Correct Answer: the pricing formula for the forward
exchange rate
16. Arbitrage Correct Answer: the search for riskless profit opportunities in the foreign-
exchange market by exploiting price ditterentials
17. Foreign-exchange swap Correct Answer: the sale of foreign currency with a
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3
Questions and Answers
1. Foreign-exchange market (FEM) Correct Answer: the market where one country's
money is traded for that of another country
2. Exchange rate Correct Answer: the price of one country's money in terms of another
3. Spot market Correct Answer: where currencies are traded "on the spot", that is, for immediate
delivery
4. Spot exchange rates Correct Answer: the price of foreign money for immediate delivery
(within 2 working days)
5. Bid price Correct Answer: the price dealers will pay to buy that currency at that particular
moment in time
6. Offer price Correct Answer: the asked price; the price that dealers are willing to sell that currency
also at that moment
7. Spread Correct Answer: the ditterence between the buying price and the selling price of a
currency
8. Exchange rate index Correct Answer: a weighted average of a currency's value relative
to other currencies, where the weights are based on the relative trade importance of each
currency
9. Forward exchange rate Correct Answer: the price of foreign money for delivery at some
future date (1, 3, or 6 months later)
10. Hedging Correct Answer: foreign-exchange market transactions aimed at reducing exposure
to risk
11. Forward premium Correct Answer: a currency is selling at a forward premium if its
forward rate exceeds its spot rate
12. Forward discount Correct Answer: a currency is selling at a forward discount if its
forward rate is less than its spot rate
13. Flat currency Correct Answer: when the forward rate and the spot rate are equal
14. Cross rate Correct Answer: the exchange rate implied between any two currencies by
using a third currency to buy the first and then sell it for the second
15. Covered interest parity Correct Answer: the pricing formula for the forward
exchange rate
16. Arbitrage Correct Answer: the search for riskless profit opportunities in the foreign-
exchange market by exploiting price ditterentials
17. Foreign-exchange swap Correct Answer: the sale of foreign currency with a
1/
3
