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Question 1

All of the following statements about foreign exchange dealers are true EXCEPT..?

The matched-book dealer profits from deviations from covered interest parity

A dealer buying FX spot and selling FX forward is hedged against price risk

A matched book dealer is exposed to liquidity risk, not price risk

Dealers, both matched book and speculative, are willing to take on more risk only if they are compensated for it

Question 2

Which of the following is NOT one of the mechanisms by a central bank may defend its currency against speculative attack?

Sell liquid assets, such as public debt, to put upward pressure on domestic interest rates

Use international reserve holdings to buy domestic currency

Flood the market with liquidity by expanding balance sheet, buying foreign assets with domestic currency

Borrow international reserves to buy domestic currency

Question 3

Under a gold standard, all of the following statements are correct EXCEPT...?

When the price of foreign currency falls to the gold point, foreign exchange will be sold to central banks rather than price dealers

The survival constraint is more of problem for deficit dealers than for surplus dealers

Balance sheet expansion can satisfy external drains, but not internal drains

The exchange rate can move away from mint par because of the cost of transporting gold

Question 4

Consider a dealer that is being asked to purchase FX and pay out dollars. Which of the following would provide incentive for the dealer to do that trade?

Forward rate moves closer to expected spot rate

Counterparties reduce their willingness to roll over the dealer's funding liabilities

Positive report about US economic growth

A positive differential between the FX forward rate and the expected spot rate

Question 5

All of the following statements regarding (potential) arbitrage conditions are true, EXCEPT...?

By covered interest parity, any change in the differential between forward and spot exchange rates must be accompanied by similar change in the overnight interest rate differential

Forward interest parity is a true arbitrage condition because all of the relevant interest rates, including term rate and forward rate, are known.

The failure of uncovered interest parity provides an incentive for foreign exchange dealers to make markets

Uncovered interest parity is not a true riskless arbitrage condition because the future spot rate is unknown at the moment that the corresponding forward rate is determined.

Question 6

Consider a matched book FX dealer that is borrowing short and lending long in dollars. All of the following are true, EXCEPT...?

The dealer will be willing to increase risk exposure only if he can buy spot relatively more cheaply than forward

He makes money by speculating on the difference between forward rates and expected spot rates

A matched book dealer relies on covered interest parity being true

The dealer is exposed to liquidity risk, not price risk

In accordance with the Coursera Honor Code, I (KK Fong) certify that the answers here are my own work.

You cannot submit your work until you agree to the Honor Code. Thanks!

Economics of Money and Banking, Part Two

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by Perry G Mehrling

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Economics of Money and Banking, Part Two

Economics of Money and Banking, Part Twoby Perry G Mehrling

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Economics of Money and Banking, Part Two
by Perry G Mehrling