Chapter 5 Flashcards
What are the 2 spot rates for a currency?
1) Bid rate
2) Offer rate
What is the bid rate?
The rate at which one currency can be purchased in exchange for another
What is the offer rate?
The rate at which one currency can be sold in exchange for another
What is the FX Market?
It is the financial market where currencies are bought and sold
What is the exchange rate?
It is the rate at which currencies are traded. It is the price of one currency in terms of another currency.
What is meant by “The exchange rate is in direct terms”
The price of 1 unit of foreign currency in terms of domestic currency
What is meant by “The exchange rate is in indirect terms”
The price of 1 unit of domestic currency in terms of foreign currency
Are currencies traded on an exchange or OTC?
OTC and takes place either telephonically or electronically
What is the role of the Foreign Exchange Working Group (FXWG)
To establish global principles of good practice for the foreign exchange markets
What are the 2 spot rates for a currency?
The bid rate - rate at which 1 currency can be purchased in exchange for another currency.
The offer rate - rate at which 1 currency can be sold in exchange for another currency.
How are cross rates calculated?
Domestic currency -> USD, USD -> Foreign Currency
How does futures and forward contracts differ?
Futures: traded on an exchange, and has a standard quantity, delivery rules and dates. Their performance is guaranteed
Forwards: traded OTC. Is more flexible and can be suited to the investor’s need
Who are the participants in the foreign exchange market?
1) Commercial banks ( offer to buy and sell foreign exchange on behalf of their customers)
2) Interdealer brokers ( facilitate the currency needs of price makers (banks) and relay the prices received from banks via electronic networks to their clients )
3) Non-bank financial institutions (insurance companies, hedge funds, pension funds, mutual funds etc.)
4) Firms and corporations ( international trade )
5) Central Banks (can only oversee and maintain an orderly FX market)
