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CFMP > Exam #3 Forex > Flashcards

Exam #3 Forex Flashcards

1
Q

termed as forex or FX

A

Foreign exchange

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2
Q

the conversion of one country’s currency into another

A

foreign exchange

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3
Q

the trading of one currency for another (e.g. one can swap the U.S. dollar for the euro)

A

foreign exchange

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4
Q

The value of any particular currency is determined by __________ related to trade, investment, tourism, and geopolitical risk

A

market forces

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5
Q

In a free economy, a country’s currency is valued according to the _____________

A

laws of supply and demand

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6
Q

Foreign exchange is handled globally between banks and all transactions fall under the auspice of the

A

Bank for International Settlements

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7
Q

Foreign exchange transactions can take place on the

A

foreign exchange market

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8
Q

It is a medium of exchange for goods and services

A

Currency

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9
Q

_______________ such as bitcoins have no physical existence and government backing and are traded and stored in electronic form

A

Virtual currencies

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10
Q

The value of money is determined by the demand for it, just like the value of goods and services

A
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11
Q

3 ways to measure the value of the dollar

A
  1. exchange rates
  2. demand for treasury notes
  3. foreign exchange reserves
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12
Q

_________ are the foreign assets held or controlled by the country central bank.

A

Foreign Exchange Reserves

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13
Q

__________- are made of gold or a specific currency.

A

Foreign Exchange Reserves

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14
Q

They can also be special drawing rights and marketable securities denominated in foreign currencies like treasury bills, government bonds, corporate bonds and equities, and foreign currency loans

A

Foreign exchange reserves

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15
Q

Factors Affecting Currency Value

A
  1. Market Forces-Based on Trade
  2. Investment
  3. Tourism
  4. Geo-political risk
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16
Q

4 Market Forces that Impact Trading Activity

A
  1. Cost of Production
  2. Geopolitics
  3. Barriers to Trade
  4. Cross-currency exchange rates
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17
Q

Asset or item that is purchased with the hope that it will generate income or appreciate in value at some point in the future

A

Investment

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18
Q

Refers to any mechanism used for generating future income, including bonds, stocks, real estate property, or a business, among other examples

A

Investment

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19
Q

Types of Investments

A
  1. Growth Investments - shares, property
  2. Defensive Investments - cash, fixed-interest (bonds)
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20
Q

Act and process of spending time away from home in pursuit of recreation, relaxation, and pleasure, while making use of the commercial provision of services.

A

Tourism

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21
Q
  • Probability that an investment’s profitability will suffer due to circumstances related to unexpected changes involving political revolutions, coups, elections, ethnic conflicts, disputes in arena national or international policy, property rights, and a number of similar factors
A

Geopolitical risk

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22
Q

Currencies are quoted and traded in pairs.

A

Currency pairs

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23
Q

2 Composition: each currency pair has

A

1 - base currency
2 - counter/quoted currency

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24
Q

EUR/USD = 1.13

A

EUR - base currency
USD - quoted currency

  • One EUR is equal to 1.13 USD
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25
Q

Most Traded Currencies

A

USD
EUR
JPY
GBP
AUD
CHF
CAD

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26
Q

Base Currency - to buy 1 unit of these

Quoted Currency - No. of these needed

A
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27
Q

Major Currency Pair

EUR/USD
USD/JPY
GBP/USD
USD/CHF
USD/CAD
AUD/USD
NZD/USD

  • always paired with USD
A
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28
Q

Minor Currency Pair:

EUR/GBP
EUR/JPY
GBP/JPY
GBP/CAD
CHF/JPY
EUR/AUD
NZD/JPY

  • always paired with other Major Currency Pair other than USD
A
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29
Q

Minimum lot to buy in FOREX

A

$200,000

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30
Q

Exotic Currency Pair - all currency pairs not found in the list of major and minor currency pairs

A
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31
Q

It is always the 1st currency and it has an assigned value of 1 - for every 1 of these you could BUY X of the Quote Currency

A

Base Currency

32
Q

This shows two prices

The highest BID PRICE and the lowest ASK PRICE for the currency pair

A

Quote/Rate

33
Q

The best price at which you can SELL this currency pair.

Always lower than the best price at which you can BUY IT (Ask Price)

A

Bid Price

34
Q

The difference between the Bid Price and the Ask Price.

It is the reason that, as you soon as you place a trade, your Profit/Loss will immediately be negative. This is because the price at which you can BUY is always higher than the price at which you can SELL.

A

Spread

35
Q

ASK price is always HIGHER than BID price.

A
36
Q

All forex trades are conducted in a _____ which consists of a Base Currency and a Quote Currency

A

Currency Pair

37
Q

It is always the 2nd currency. It would cost you X of these to BUY 1 of the Base Currency.

A

Quote Currency

38
Q

It is the best price at which you can BUY this currency pair.

It is always HIGHER than the best price at which you can SELL it (the BID price).

A

Ask Price

39
Q

In a ______-, traders are optimistic, they expect prices to RISE and make money by going “LONG”

A

Bullish market

40
Q

In a ______, traders are pessimistic, they expect prices to FALL and make money by going “SHORT”

A

Bearish market

41
Q

Position: a forex trader BUYS a currency pair hoping the price will RISE

A

Long position

42
Q

Position: a forex trader SELLS a currency pair hoping the price will FALL

A

Short position

43
Q

A 1/100% price movement, the smallest movement a currency pair can RISE or FALL by

A

PIP

44
Q

Quoted to 4 decimal places, a 1 PIP movement is

A

0.0001

45
Q

Quoted to 2 decimal places, a 1 PIP movement is

A

0.01

46
Q

It results from using borrowed capital as a funding source when investing to expand the firm’s asset base and generate returns on risk capital.

A

Leverage

47
Q

It is an investment strategy of using borrowed money—specifically, the use of various financial instruments or borrowed capital—to increase the potential return of an investment.

A

Leverage

48
Q

It can also refer to the amount of debt a firm uses to finance assets.

A

Leverage

49
Q

It means controlling a country’s currency rate by tying it to another country’s currency or steering an asset’s prior to option expiration.

It is also a strategy deployed by buyers and writers (sellers) of call and put options.

A

Pegging

50
Q

It is a risk management strategy employed to offset losses in investments by taking an opposite position in a related asset.

The reduction in risk provided by hedging also typically results in a reduction in potential profits.

A

Hedging

51
Q

Hedging strategies typically involve derivatives, such as options and futures contracts.

A
52
Q

It is the largest, most liquid market in the world, with trillions of dollars changing hands every day.

It has no centralized location.

It is an electronic network of banks, brokers, institutions, and individual traders (mostly trading through brokers or banks).

A

Foreign Exchange Market

53
Q

It has many available buyers and sellers.

Its prices change in comparatively small increments.

A

Liquid Market

54
Q

The opposite of a liquid market is called

A

a “thin market” or an “illiquid market.”

55
Q

Short-term system followers with a wide range of skill, knowledge, resources, and commitment. Risk takers.

A

Traders

56
Q

Long-term enablers of national, regional, or global economic goals. Market disruptors.

A

Governments

57
Q

Long-term trend followers with high level of skill resources, knowledge, and commitment. Risk avoiders.

A

Investment Funds

58
Q

Credit suppliers to corporations, governments, banks, and ancillary services

A

Banks

59
Q

Market Participants

A
  1. Traders
  2. Governments
  3. Investment Funds
  4. Banks
  5. Corporations
60
Q

It is number of units of a foreign currency required to obtain one unit of domestic currency.

A

Exchange rate

61
Q
  • The reciprocal of this rate expresses the number of units of a domestic currency required to obtain one unit of a foreign currency.
  • This rates can be thought of as the value of the domestic currency relative to a foreign [i.e. the value of $(dollar) relative to £(pound) or ¥(yen).
  • It is the price of a nation’s currency in terms of another currency.
A

Exchange rate

62
Q

2 Ways of Determining Currency Prices

A
  1. Floating rate
  2. Fixed rate
63
Q
  • Regime where the currency price of a nation is set by the forex market based on supply and demand relative to other currencies
  • Determined by supply and demand on the open market
A

Floating Rate

64
Q
  • Regime in which the government entirely or predominantly determines the rate
A

Fixed rate

65
Q

_______ is another currency model and this is where a currency is pegged or held at the same value relative to another currency

A

Fixed Exchange

66
Q

Types of FOREX Transactions

A
  1. Spot
  2. Forward
  3. Future
  4. Swap
  5. Option
67
Q
  • Fastest way to exchange currencies
  • Exchange or settlement of the currencies by the buyer and seller within 2 days of the deal without a signed contract
A

Spot Transactions

68
Q

_____ is the prevailing exchange rate in the market

A

Spot Exchange Rate

69
Q
  • It is when the buyer and seller enter into an agreement of purchase and sale of currency after 90 days
  • The agreement is framed on the basis of a fixed exchange rate for a definite date in the future
A

Forward Transactions

70
Q
  • Rate at which the deal is fixed is termed
A

Forward Exchange Rate

71
Q
  • Two parties (two companies, individuals, or government nodal agencies) agree to do a trade at some future date, at a stated price and quantity
  • No security deposit is required as no money changes hands when the deal is signed
A

Forward Transactions

72
Q
  • Tradeable
  • Also deals with contracts in the same manner as forward transactions
  • Standardized contracts in terms of features, date, and size should be considered
  • Whereas, regular forward transactions have flexibility and can be customized
A

Future Transactions

73
Q
  • Simultaneous lending and borrowing of two different currencies between two investors
  • One investor borrows a currency and repays in the form of a second currency to the second investor
  • Done to pay off obligations without suffering a foreign exchange risk
A

Swap transactions

74
Q
  • Exchange of currency from one denomination to another at an agreed rate on a specified date is an option for an investor
  • Every investor owns the right to convert the currency but is not obligated to do so
A

Option Transactions

75
Q
  • An option is a contract, which gives the buyer of the options the right but not the obligation to buy or sell the underlying asset at a future fixed date (and time) and at a fixed price
A
76
Q

Gives the right to buy

A

call option

77
Q

gives the right to sell

A

put option

CFMP (5 decks)

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