chapter 8- foreign exchange

Question 1

how is the OTC market self regulating?

Answer 1

over-the-counter
market participants decide who they trade with and on what basis
no single government or regulatory body is in control of it

Question 2

what does each country do through their central bank?

Answer 2

amass reserves
governments may use these reserves to buy their own currency In the market if it weakens- when they do this they are said to intervene in the forex market

Question 3

the forex market is said to…

Answer 3

follow the sun

this means it is active in any financial capital where markets are open

Question 4

Herstatt crisis

Answer 4

1974
German bank which defaulted owing over a billion dollars in incomplete forex trades
now known as herstatt risk/ counterpart risk

Question 5

what helps reduce Herstatt risk

Answer 5

netting

where at the end of each day, the banks tot up who owes who and pay over the difference

Question 6

what bank was set up in the wake of the Herstatt crisis?

Answer 6

Continuous Linked Settlement

set up to provide netting facility across the market throughout the trading day (intra-day netting)

Question 7

what is cable?

Answer 7

the name of the dollar/sterling trading trade

Question 8

what is the carry trade?

Answer 8

name given to a common FX strategy of borrowing in a strong currency, buying a weaker one and riding its rise, the profit from which is greater than the borrowing cost

Question 9

what is reserve currency?

Answer 9

term applied to whichever currency tends to be dominant in International trade and finance
for decades it was the dollar however this may change to the Chinese currency, renminbi

Question 10

what is flight to quality?

Answer 10

the term that applies when investors panic and dump shares and bonds for cash and specifically, gold