Question

1. In the IMF currency classification scheme, the US dollar would fall into what category
   1. Category 1: Hard peg
   2. Category 2: Soft peg
   3. Category 3: Floating arrangements
   4. Category 4: Residual
2. Which of the following would eliminate the possibility of triangular arbitrage?
   1. Quoting all exchange rates in terms of USD
   2. Forbidding currency swaps
   3. All countries choose to focus on exchange rate stability
   4. Eliminating Herstatt risk
3. You are worried that you may have to pay more for your next round of debt financing because your credit score has changed. You are worried about:
   1. Repricing risk
   2. Credit risk
   3. Herstatt risk
   4. Refinancing risk
4. You owe interest payments based on LIBOR. Which one of these investments would work best to reduce your exposure to interest rates?
   1. Interest rate swap, take the fixed leg
   2. Interest rate swap, take the variable leg
   3. Long currency put
   4. Long currency call

Answer 1

1. United State dollars have never pegged itself against another currency as it is a floating currency which rate is not controlled and whose rate is not fixed by the Federal Reserve so it can never be said to be a soft peg or hard peg. It is neither a residual currency.

The exchange rate of United States dollars is arrived through the fair price mechanism of demand and supply and then the price discovery is done.

So United State Dollars would fall in the floating arrangements.

Hence the correct answer would be -option(C)Category 3: Floating arrangements