Chapter_10_Foreign_Currency_Transactions

Chapter_10_Foreign_Currency_Transactions

Complete Chapter Questions With Answers

Sample Questions Are Posted Below

1. When an economic transaction is denominated in a currency other than the entity’s domestic currency, the entity must establish a

ANSWER:	d
RATIONALE:	A rate of exchange must be established in order to record the transaction on the entity’s books in its domestic currency.
DIFFICULTY:	E
LEARNING OBJECTIVES:	ADAC.FISC.10-1

2. The best definition for direct quotes would be “direct quotes measure

	a.	how much foreign currency must be exchanged to receive 1 domestic currency.”
	b.	current or spot rates.”
	c.	how much domestic currency must be exchanged to receive 1 foreign currency.”
	d.	exchange rates at a future point in time.”

ANSWER:	c
RATIONALE:	Direct quotes allow the party using the quote to understand the price of the foreign currency in terms of its own “base” or domestic currency.
DIFFICULTY:	E
LEARNING OBJECTIVES:	ADAC.FISC.10-2

3. A bank dealing in foreign currency tells you that the foreign currency will buy you $.80 US dollars. The bank has given you

ANSWER:	a
RATIONALE:	Direct quotes allow the party using the quote to understand the price of the foreign currency in terms of its own “base” or domestic currency.
DIFFICULTY:	E
LEARNING OBJECTIVES:	ADAC.FISC.10-2

4. Which of the following is not true about exchange rates?

	a.	A strengthening currency is evidenced by an increase in the directly quoted exchange rate.
	b.	Importers benefit from a strong dollar.
	c.	If one can buy 1 FC for $.50, $1.00 will buy 2 FC.
	d.	The points in an exchange rate, or broker’s commission, are influenced by several factors, including supply and demand for currency.

ANSWER:	a
RATIONALE:	A weakening currency is evidenced by an increase in the directly quoted exchange rate. If 1 FC = $1; then 1 FC = $1.10, this indicates it takes more dollars to purchase the foreign currency.
DIFFICULTY:	E
LEARNING OBJECTIVES:	ADAC.FISC.10-2

5. The forward rate in a forward contract

	a.	is the spot rate at the expiration date of the contract.
	b.	changes as the spot rate changes.
	c.	is said to be at a discount if it exceeds the spot rate at the inception of the contract.
	d.	None of the above are true.

ANSWER:	a
RATIONALE:	At the expiration date of the contract, the forward date is the current date and, therefore, the forward rate at that time is the current spot rate. Thus, the value of a forward contract changes over the forward period.
DIFFICULTY:	M
LEARNING OBJECTIVES:	ADAC.FISC.10-2

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