What is the primary function of the foreign exchange market?

To provide credit for foreign trade.

To conduct spot transactions of foreign exchange.

To transfer purchasing power between countries.

To speculate on currency exchange rates.

What is the primary purpose of the forward market in foreign exchange?

To conduct immediate currency transactions.

To speculate on future exchange rates.

To fix exchange rates for future transactions.

To transfer purchasing power between countries.

What is meant by the term "spot exchange rate"?

The exchange rate for future currency transactions.

The rate at which currencies are bought and sold immediately.

The rate at which credit is provided for foreign trade.

The rate at which currencies are exchanged in forward contracts.

What is the primary objective of hedging in the context of foreign exchange risk management?

To make a profit through speculation.

To minimize the risk of loss due to exchange rate fluctuations.

To avoid all foreign exchange transactions.

To maximize credit for foreign trade.

What is an advantage of using currency options for hedging foreign exchange risk?

They provide a fixed exchange rate for future transactions.

They are less expensive than forward contracts.

They offer asymmetric risk exposure.

They allow flexibility to benefit from favorable exchange rate movements.

What is the primary difference between transaction risk and economic risk in foreign exchange?

Transaction risk relates to short-term cash flows, while economic risk involves longer-term effects on market value.

Transaction risk is associated with imports, while economic risk is related to exports.

Transaction risk focuses on internal hedging techniques, while economic risk relies on external methods.

Transaction risk is easily quantifiable, while economic risk is difficult to measure.

In the context of foreign exchange, what does "leading and lagging" refer to?

A strategy to achieve a fixed exchange rate for all transactions.

The practice of delaying or expediting payments to benefit from exchange rate movements.

A method of internal hedging for economic exposure.

The use of currency options to hedge transaction risk.

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