Exercise

Answer the following questions.

1. When a foreign exchange is quoted in American terms and the exchange rate rises, which of the following are true?

I. The dollar is weakening.

II. The dollar is strengthening.

III. The foreign currency is appreciating.

IV. The foreign currency is depreciating.

A. I and III

B. I and IV

C. II and III

D. II and IV

2. Which of the following are true of foreign currency futures contracts?

I. They are cash settled.

II. They are marked to the market daily.

III. They always have a positive cost of carry.

IV. They extend to 20 months.

A. I and III

B. I and IV

C. II and III

D. II and IV

3. Which of the following are needed to determine the hedge ratio for a foreign exchange futures contract?

I. Cost of carry

II. Cost of import

III. Basis

IV. Size of contract

A. I and II

B. II and IV

C. I and III

D. III and IV

Answers

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. 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 tr