9- Foreign Exchange

Question 1

What is the standard FX settlement time?

Answer 1

T+2 days

Question 2

What is a pip in FX?

Answer 2

0.0001p

Question 3

How do you determine change to the bid-offer on a Forward pip adjustment?

Answer 3

If Bid>Offer subtract from spot

Question 4

What is Covered Interest Rate Parity?

Answer 4

When the relationship between interest rates, and spot and forward rates between two countries are in equilibrium- no interest rate arbitrage available

Question 5

What is Uncovered Interest Rate Parity?

Answer 5

When the difference in interest rates between the two countries equals the expected change exchange rates between those two countries

Question 6

How do you calculate fair value for the one-year spot?

Answer 6

Spot rate x euro interest/UK interest

Question 7

What is the International Fisher effect equation?

Answer 7

Fwd/Spot = (1+ieur)/(1+iuk)=(1+reur)/(1+rUK)

Question 8

What are the 3 main exchange rate regimes?

Answer 8

-Fixed exchange rate
-Floating exchange rate
-Managed regime

Question 9

What is a managed regime/dirty floating?

Answer 9

Some intervention to influence the foreign exchange rate

Question 10

How do you calculate time-weighted/geometric average returns?

Answer 10

(√total return)-1