BekaertHodrick_TB_Ch03 - Chapter 3 Forward Markets and Transaction Exchange Risk

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Chapter 3
Forward Markets and Transaction
Exchange Risk

DIFFICULTY LEVEL: EASY

3.1 What is the name of the contract where corporations, institutional investors, and individ-uals are required to pay or to receive a specific amount of foreign currency at a specific exchange rate at a particular date in the future?

a. Forward foreign exchange market
b. Forward currency contract
c. Forward rate contract
d. Future hedge contract

The forward foreign exchange market, p.81


3.2 One important purpose of the forward markets for foreign exchange allows global traders to protect themselves by ________.

a. hedging
b. arbitraging
c. speculating
d. preventing default

Forward contracts and hedging, p.74


3.3 What is the name of the exchange rate specified in the forward contract?

a. Spot rate
b. Forward rate
c. Future exchange rate
d. cross-rate

Forward contracts and hedging, p.74



3.4 If you want to hedge and owe a firm a foreign currency in the future, you would

a. buy the foreign currency forward.
b. Sell the foreign currency forward
c. Speculate on the possibility to not hedge
d. Buy the currency now and deposit into a bank account until needed

The costs and benefits of a forward hedge, p.77


3.5 A swap transaction in the forward market involves the simultaneous sale and purchase of a certain amount of foreign currency for ________.

a. one specific date in the future
b. many different dates in the future
c. two different dates in the future
d. speculation under the correct conditions

The foreign exchange swap market, p.87


3.6 In a forward contract no monies change hands until the maturity date of the contract known as the ________.

a. Spot Value date
b. Exercise date
c. Forward contract date
d. Forward settlement date

Forward contract maturities and value dates, p 82


3.7 In the forward market the bid-ask spreads begin to ________ as the maturity date of the contract grows closer.

a. Widen
b. narrow
c. stabilize
d. disappear

Forward market bid-ask spreads, p.83


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