Exchange rates and Forex Flashcards
What is foreign exchange?
The exchange of currencies in the form of another
What 2 kinds of activity lead to movement of bank notes across national borders?
Tourism and illegal activity
The Forex market is a system of … through which … Participate in …
Financial institutions Households, banks/firms & governments the buying and selling of currencies
What are the three most important cities for Forex?
London
NYC
Tokyo
What are the 3 markets for Forex?
Interbank
Forex companies
Importer/exporters?
How big are most Forex trades?
Over $1 million
What are the top 3 currency pairs?
USD/EUR
USD/JPY
USD/GBP
Most Forex market transactions are …… rather than….
Interbank between countries rather than imports and exports
Who are the biggest players in Forex markets?
Hedge/mutual funds import/export firms governments banks
What is interbank Forex trading?
The trading of foreign currencies in the interbank market
What does the interbank forex market allow banks to do?
Adjust the weighting of their exposure to certain currencies quickly and easily
Banks post the … at which they are willing to…
Rate - Buy sell a currency
What is the exchange rate?
The price of one currency in terms of another
Describe appreciation and depreciation
Appreciation – Price of the currency increases
Depreciation – Price of the currency falls/decreases
How does the exchange rate affect certain prices?
A stronger local currency makes foreign imports cheaper and reduces the demand from foreign markets for local goods due to the higher costs
How does a spot market differ from a forward exchange market?
Spot market are contracts for the immediate sale or purchase of a currency at a certain price, forward markets are contracts for a transaction scheduled for a future date
What is the difference between a bid & offer rate?
Bid is what a company will buy the currency for, and offer is what they will sell it for
What is the spread?
The difference between the buy and ask price /bid and offer rate
How is a currency bid/offer rate obtained?
Find the middle between bid/offer rate, last 3 digits go into rate
What are the differences between arbitrage and speculation?
Arbitrage is borne from market disequilibrium and carries no risk, speculation is based on expected gain and carries risk
What’s the difference between 2 and 3 point currency arbitrage?
2 point features 2 currencies, 3 point features 3
Arbitrage arises when one … rate is above another … rate
Buy is above another sell rate
How do banks adjust their bid and ask prices according to market activity?
When arbitrageurs buy and sell certain currencies, banks adjust their prices accordingly
What is the “implicit cross rate”?
The exchange rate between 2 currencies derived from their respective exchange rate in regards to a common numerator
Why does arbitrage profit “disappear”?
Because arbitrageurs buying and selling the respective bid and ask pairs drives the higher price down and lower price up, which ‘closes the gap’
What are the 2 reasons exchange rates vary so much in the short run?
Inventory control
Asymmetrical information
What is order flow and how does it affect rates?
Order flow is the circumstance in which people’s orders for certain currency sales and purchases becomes data in itself, this affects rates because people can “See” that there is something happening in a related market if for example there is a sudden increase in orders for a certain currency
What is inside information and how does it affect rates?
People adjust their orders whether they know something or they think they know something, and are influenced by market moves made by others based on inside info
What causes the long-run fluctuations of the exchange rate?
Economic factors such as imports and exports
What does the trade flow model argue?
That we can prove that Imports and exports can be modelled to affect exchange rates
What is the exchange rate index?
A weighted average of all main trading currencies
What is the trade-weighted exchange rate index?
The weighted index of major currencies, weighted by their importance in international trade
What is the broad index of a currency?
The weighted index of a currency against all it’s major trading partners
What is the major currency index?
An index of all major currencies against the US dollar
