Chapter 5-The Foreign Exchange Market

Question 1

Three Function of Money

Answer 1

1. Unit of account
2. Store of value
3. Medium of exchange

Question 2

Correspondent Bank

Answer 2

A bank that holds deposits for and provides services to another bank, located in another geographic area, on a reciprocal basis.

Question 3

Herstatt Risk

Answer 3

The risk arising from foreign exchange trades between banks operating in different countries and different time zones. Also termed ­settlement risk.

Question 4

2 Major FOREX participants

Answer 4

1. Liquidity seekers

2. Profit seekers

Question 5

Arbitrage

Answer 5

A trading strategy based on the purchase of a commodity, including foreign exchange, in one market at one price while simultaneously selling it in another market at a more advantageous price, in order to obtain a risk-free profit on the price differential.