Chapter 5

Question 1

Participants in the foreign exchange market include what two seekers?

Answer 1

Liquidity seekers and profit seekers

Question 2

profit from buying foreign exchange at a bid price and reselling it at a slightly higher ask or offer price.

Answer 2

Banks and nonbank dealers

Question 3

use the foreign exchange market to facilitate execution of commercial or investment transactions.

Answer 3

Commercial and investment transactions

Question 4

seek to profit from trading in the market itself.

Answer 4

Speculators and arbitragers

Question 5

use the market to acquire or spend their country’s foreign exchange reserves as well as to influence the price at which their own currency is traded, a practice known as foreign exchange intervention

Answer 5

Central banks and treasuries

Question 6

are agents who facilitate trading between dealers without themselves becoming principals in the transaction.

Answer 6

Foreign exchange brokers

Question 7

What is the world’s largest financial market

Answer 7

The foreign exchange market

Question 8

The date of settlement

Answer 8

Value date

Question 9

the purchase of foreign exchange with delivery and payment between banks taking place normally on the second following business day.

Answer 9

Spot transaction

Question 10

requires delivery at a future value date of a specified amount of one currency for a specified amount of another currency.

Answer 10

Outright forward transaction

Question 11

describe the same transaction (the only difference is the order in which currencies are referenced).

Answer 11

Buying forward and selling forward

Question 12

is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.

Answer 12

Swap transaction

Question 13

What are some different types of swaps?

Answer 13

• Spot against forward
• Forward-forward
• Non-deliverable forwards (NDF)

Question 14

The FOREX market has a daily transaction volume of roughly

Answer 14

$5.3 trillion, or a $1.5 quadrillion annual volume

Question 15

The primary driver of rapid growth in recent years: increasing profit seeker activity facilitated by __________ ________ and access to the greater market.

Answer 15

electronic trading

Question 16

the price of one currency expressed in terms of another currency

Answer 16

Foreign exchange rate

Question 17

a statement of willingness to buy or sell at an announced rate.

Answer 17

Foreign exchange quotation (quote)

Question 18

a home currency price of a unit of foreign currency.

Answer 18

A direct quote

Question 19

a foreign currency price of a unit of home currency.

Answer 19

Indirect quote

Question 20

the price (i.e., exchange rate) in one currency at which a dealer will buy another currency.

Answer 20

Bid

Question 21

the price (i.e., exchange rate) at which a dealer will sell the other currency.

Answer 21

Ask

Question 22

Dealers ___ at one price and ___ at a slightly higher price, making their profit from the spread.

Answer 22

bid; sell

Question 23

an agreement to buy or sell an asset in the future at prices agreed upon today

Answer 23

A forward contract

Question 24

Spot rates are typically quoted on an

Answer 24

Outright basis (meaning all digits expressed)

Question 25

Forward rates are typically quoted

Answer 25

Points or pips (the last digits of a currency quotation)

Question 26

are sometimes called forward outrights, are usually quoted as the difference in pips—forward points—from the current exchange rate.

Answer 26

Forward prices

Question 27

What type of rates on quoted on an outright basis?

Answer 27

Spot rates

Question 28

What type of rates are quoted in points

Answer 28

Foreward rates

Question 29

Forward rates of one year or less maturity are termed

Answer 29

Cash rates

Question 30

If the F rate is lower than the spot rate, the base current is at a

Answer 30

discount