5014 - Finance of International Trade - The nature of the FOREX market p47-66

Question 1

Which Commodity and Products are the most traded in the world?

Answer 1

Brent Crude Oil
Steel
WTI Crude Oil
Soya beans
Iron
Corn
Gold
Copper
Aluminium
Silver

Question 2

FOREX Market Size

Answer 2

On first look the FOREX market size makes no sense. Global merchandise trade is $19 trillion, Services is $5 trillion so $24 trillion total, but the volume is $1,800 Trillion + a year

Question 3

Reasons for Trading on the FOREX

Answer 3

To Pay for goods and services (surprisingly accounting for a tiny volume worth only 5 days of trading a year)

Speculation that a currency is going in the way you predict to make profit

Arbitrage - Buying and selling on 2 markets in large quantities at the same time to exploit price differences

Hedging to cover or remove risk for example a business in Venezuela would face volatile fluctuations form keeping it in their currency, so most use dollars as its much less volatile.

Question 4

What kind of trades happen on the FOREX?

Answer 4

Spot transactions

Forward Contracts - Like a futures contract but done privately and unstandardized

Options

Foreign Exchange Swaps

Currency Swaps

Question 5

Spot transactions

Answer 5

Buying and selling at todays exchange rate

Question 6

Forward transactions

Answer 6

Buying and selling in the future at an exchange rate agreed today

Question 7

Options

Answer 7

Same as forward contracts but can opt out so no obligation to honour agreed exchange rate

Question 8

Futures

Answer 8

Forward contract but more standardised

Question 9

Swaps

Answer 9

An exchange of currency with someone else, not bought or sold but swapped

Question 10

What does the FOREX support?

Answer 10

International trade through allowing currency conversion

Risk management

Arbitrage

Speculation

Question 11

Where is the bulk of FOREX trading conducted?

Answer 11

The UK followed by the US then Switzerland

Question 12

Why is the dollar a major traded currency?

Answer 12

The volume of trade conducted by the US creates a demand for buying and selling dollars

Oil is priced in dollars

The US is (arguably) economically and politically stable in comparison to other countries

Question 13

What are some of the most traded currencies?

Answer 13

US Dollar (number one)
Euro
Yen
Pound
AUS Dollar

Question 14

Is the foreign exchange market liquid?

Answer 14

The FOREX is the most liquid market there is

Question 15

Who trades Forex

Answer 15

Large banks
Central Banks
Institutional investors
Currency speculators
Governments
Financial Institutions
Retail Investors

Question 16

The FOREX is split up into different access levels based on what?

Answer 16

The amount of money being traded by an entity.

The top level includes the largest banks and securities dealers

Following this are smaller banks, multi-national corporations, hedge funds and some retail market makers

Question 17

FX dealers

Answer 17

Tend to specialise in one currency or a small group of closely related currencies. They make deals over the phone or electronically without the use on an exchange

Question 18

The role of Brokers

Answer 18

Broking firms do not quote FX rates or take positions in currencies, they act on behalf of the traders they do not reveal their prices and positions until the deal is agreed upon. These brokers operate on a commission basis related on size and complexity of the issue

Question 19

FOREX Market Characteristics

Answer 19

It has large trading volume and is the largest asset class so most liquid

Geographical dispersion

24 hours a day except weekend

Low margins of relative profit compared with other markets of fixed income

The use of leverage to enhance profit and loss margins with respect to account size