Chapter 6 FX - Foreign Exchange

Question 1

Charachteristics of an FX Spot

Answer 1

1. Exchange of 2 amounts of different currencies

2. T+2

Question 2

Pips (points)

Answer 2

The last 2 digits of an exchange rate

Question 3

Big figure

Answer 3

Number before the pips/points

Question 4

Conventions quotation

Answer 4

1. EURO
2. British pound, AUD, NZD
3. USD

Question 5

Indirect quotation

Answer 5

Reverse quotation for customer

Question 6

Long position

Answer 6

Buying an amount and not immediatly selling (=overbought)

Question 7

Short position

Answer 7

Sold an amount and not immediatly buying (=oversold)

Question 8

Charachteristics of an FX forward

Answer 8

1. Exchange of principals in 2 different currencies on a future date
2. Rate is set at the moment of concluding deal
3. Rate can be calculated and is not determined by market expectations

Question 9

If the base rate is lower than the countercurrency rate (=premium)

Answer 9

FX forward rate is higher than the spot date

Question 10

If the base rate is higher than the countercurrency rate (=discount)

Answer 10

FX forward rate is lower than the spot date

Question 11

Charachteristics of an FX swap

Answer 11

1. 2 amounts of currencies are exchanged under the agreement that exchange will later be reversed at a pre-agreed exchange rate
2. Pure liquidity instrument
3. Reduces credit risk
4. Can be regarded as 2 opposite deposits
5. 2 different MT 3XX messages (one for each leg)
6. <1 year
7. Difference between bid-ask is determined by liquidity of the market

Question 12

Price of an FX swap

Answer 12

Delta between the rates in 2 legs (=swap points)

Question 13

o/n

Answer 13

Overnight transactions: first leg on current day, second leg on t+1

Question 14

t/n

Answer 14

Tom/next: first leg on t+1, second leg on T+2

Question 15

Charachteristics of an Non-deliverable forward

Answer 15

1. Contracts for difference product
2. Virtual FX forward
3. FX forward with cash settlement
4. Used when supervisors impose administrative requirements for FX forwards

Question 16

If the rate on the fixing date is lower

Answer 16

The bank has to pay

Question 17

If the rate on the fixing date is higher

Answer 17

The bank receives

Question 18

Value dates in case of holiday

Answer 18

Value dates will not be split. In case of a public holiday in one of 2 currencies, it will be settled on the following business day