FIA FIA Foreign Exchange & Currency Markets 2

Question 1

What is a forward exchange contract primarily used for?

Accepted Answer

Hedging against future currency exchange rate risk

Answer

A forward exchange contract locks in an exchange rate for a future date, allowing businesses to hedge against the risk of adverse currency movements.

Question 2

Which of the following best describes 'purchasing power parity' (PPP)?

Accepted Answer

A theory stating exchange rates adjust so identical goods cost the same in different countries

Answer

Purchasing power parity holds that exchange rates will adjust over time so that identical goods have equivalent prices across countries when expressed in a common currency.

Question 3

In the context of FX markets, what does 'pip' stand for?

Accepted Answer

Percentage in point — the smallest standard price increment in a currency pair

Answer

A pip (percentage in point) is the smallest standard price move in a currency pair, typically the fourth decimal place for most pairs.

Question 4

What is a 'currency swap'?

Accepted Answer

An agreement to exchange principal and interest in one currency for those in another currency

Answer

A currency swap involves two parties exchanging principal and interest payments in different currencies over a specified period.

Question 5

Which factor does NOT typically cause a currency to depreciate?

Accepted Answer

Rising interest rates relative to other countries

Answer

Rising interest rates typically attract foreign capital seeking higher returns, which causes a currency to appreciate rather than depreciate.

(FIA) Financial Information Associate Certification Practice Test

(FIA) Financial Information Associate Certification Practice Test

FIA FIA Foreign Exchange & Currency Markets 2