Practice Question Set: Foreign Exchange Markets

Chapter 9. Foreign Exchange Markets Practice Question set contains 31 pages covering the following learning objectives:

* Explain and describe the mechanics of spot quotes, forward quotes, and futures quotes in the foreign exchange markets, and distinguish between bid and ask exchange rates.

* Calculate bid-ask spread and explain why the bid-ask spread for spot quotes may be different from the bid-ask spread for forward quotes.

* Compare outright (forward) and swap transactions.

* Define, compare, and contrast transaction risk, translation risk, and economic risk.

* Describe examples of transaction, translation, and economic risks, and explain how to hedge these risks.

* Describe the rationale for multi-currency hedging using options.

* Identify and explain the factors that determine exchange rates.

* Calculate and explain the effect of an appreciation/depreciation of a currency relative to a foreign currency.

* Explain the purchasing power parity theorem and use this theorem to calculate the appreciation or depreciation of a foreign currency.

* Describe the relationship between nominal and real interest rates.

* Describe how a non-arbitrage assumption in the foreign exchange markets leads to the interest rate parity theorem, and use this theorem to calculate forward foreign exchange rates.

* Distinguish between covered and uncovered interest rate parity conditions.

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