Exercise

Answer the following questions.

1. 1. When a foreign exchange is quoted in American terms and the exchange rate rises, which of the following are true?
2. I. The dollar is weakening.
3. II. The dollar is strengthening.
4. III. The foreign currency is appreciating.
5. IV. The foreign currency is depreciating.
6. A. I and III
7. B. I and IV
8. C. II and III
9. D. II and IV
10. 2. Which of the following are true of foreign currency futures contracts?
11. I. They are cash settled.
12. II. They are marked to the market daily.
13. III. They always have a positive cost of carry.
14. IV. They extend to 20 months.
15. A. I and III
16. B. I and IV
17. C. II and III
18. D. II and IV
19. 3. Which of the following are needed to determine the hedge ratio for a foreign exchange futures contract?
20. I. Cost of carry
21. II. Cost of import
22. III. Basis
23. IV. Size of contract
24. A. I and II
25. B. II and IV
26. C. I and III
27. D. III and IV

Answers

1. 1. A. When a foreign exchange is quoted in American terms, an increased rate means that foreign currency appreciates as the dollar gets weaker.
2. 2. D. Foreign currency futures contracts are settled by delivery of the underlying currency. Like other futures contracts, positions are marked to market daily, and profits or losses are posted to the trader’s account every day. The contracts extend to 20 months. Finally, foreign exchange futures may have either a positive or negative cost of carry.
3. 3. B. The he