Core FX Flashcards
What is FX?
Foreign Exchange is the process of converting one country’s currency into another
What is a currency?
A country/region’s official method of payment
What is an exchange rate?
The value of 1 currency in terms of another
What FX instruments are mostly traded on exchanges?
FX Futures
How are currencies quoted?
In pairs (base and term currency)
What are the 4 notable base currency exceptions?
EUR, GBP, AUD, NZD (in that order)
What is the Spot rate?
The exchange rate a currency can be traded at now, with settlement being T+1 or T+2 days in the future
Give 3 examples of currencies that settle on T+1
USD/CAD –> Canadian Dollar
USD/PHP –> Philippine Peso
USD/TRY –> Turkish Lira
USD/RUB –> Russian Ruble
Who’d have an interest in FX markets?
- Corporation treasurers (convert foreign earnings and pay employees)
- Central Banks (to control monetary policy)
- Investment Banks (facilitate trades for clients)
- Speculators
What is a Direct Quote?
1 Unit of a foreign currency is given in your local currency (USDJPY if you’re in Japan)
What is an Indirect Quote?
Where 1 Unit of your local currency is given in a foreign currency (JPYUSD if you’re in Japan)
What is a market maker?
An institution (like a broker or IB) that provides both bid and ask rates in order to “make” markets
What is a market taker?
Typically buy-side institutions (e.g. asset managers) that execute on rates provided by market-makers
What is a bid rate?
A rate at which the bank is willing to buy a currency (base ccy)
What is the ask rate?
The rate at which the bank is willing to sell a currency (base ccy)
Which is lower, the bid or the ask? And why?
The bid is always lower than the ask as the buyer wants to pay as little as possible for a currency and sell for as high as possible
JPM provides the following quote for GBPUSD, what does it mean?
1.20/1.30
JPM will buy 1 GBP for $1.20 and sell 1 GBP for $1.30
What are pips in an FX quote?
Smallest price movement in currency pairs (final decimal point)
E.g. USDJPY = 150.82 –> 150.90
Movement of 8 pips
If I want the bid/ask for GBPUSD in terms of dollars, how do I calculate this?
Find the reciprocal of the bid and ask rate
Ask reciprocal becomes Bid and Bid reciprocal becomes ask
What is a cross rate?
Spot rates where USD isn’t one of the currencies involved (e.g. EURGBP)
How do I calculate USGBP from GBPUSD?
1 / GBPUSD
What tickers can I use to cross-calculate NZDJPY
NZDUSD * USDJPY = NZDJPY
What is arbitrage?
When there’s a price mismatch in currency pairs that can be exploited for risk-free profit?
