Exchange rates and Forex

Question 1

What is foreign exchange?

Answer 1

The exchange of currencies in the form of another

Question 2

What 2 kinds of activity lead to movement of bank notes across national borders?

Answer 2

Tourism and illegal activity

Question 3

The Forex market is a system of … through which … Participate in …

Answer 3

Financial institutions Households, banks/firms & governments the buying and selling of currencies

Question 4

What are the three most important cities for Forex?

Answer 4

London
NYC
Tokyo

Question 5

What are the 3 markets for Forex?

Answer 5

Interbank
Forex companies
Importer/exporters?

Question 6

How big are most Forex trades?

Answer 6

Over $1 million

Question 7

What are the top 3 currency pairs?

Answer 7

USD/EUR
USD/JPY
USD/GBP

Question 8

Most Forex market transactions are …… rather than….

Answer 8

Interbank between countries rather than imports and exports

Question 9

Who are the biggest players in Forex markets?

Answer 9

Hedge/mutual funds import/export firms governments banks

Question 10

What is interbank Forex trading?

Answer 10

The trading of foreign currencies in the interbank market

Question 11

What does the interbank forex market allow banks to do?

Answer 11

Adjust the weighting of their exposure to certain currencies quickly and easily

Question 12

Banks post the … at which they are willing to…

Answer 12

Rate - Buy sell a currency

Question 13

What is the exchange rate?

Answer 13

The price of one currency in terms of another

Question 14

Describe appreciation and depreciation

Answer 14

Appreciation – Price of the currency increases

Depreciation – Price of the currency falls/decreases

Question 15

How does the exchange rate affect certain prices?

Answer 15

A stronger local currency makes foreign imports cheaper and reduces the demand from foreign markets for local goods due to the higher costs

Question 16

How does a spot market differ from a forward exchange market?

Answer 16

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

Question 17

What is the difference between a bid & offer rate?

Answer 17

Bid is what a company will buy the currency for, and offer is what they will sell it for

Question 18

What is the spread?

Answer 18

The difference between the buy and ask price /bid and offer rate

Question 19

How is a currency bid/offer rate obtained?

Answer 19

Find the middle between bid/offer rate, last 3 digits go into rate

Question 20

What are the differences between arbitrage and speculation?

Answer 20

Arbitrage is borne from market disequilibrium and carries no risk, speculation is based on expected gain and carries risk

Question 21

What’s the difference between 2 and 3 point currency arbitrage?

Answer 21

2 point features 2 currencies, 3 point features 3

Question 22

Arbitrage arises when one … rate is above another … rate

Answer 22

Buy is above another sell rate

Question 23

How do banks adjust their bid and ask prices according to market activity?

Answer 23

When arbitrageurs buy and sell certain currencies, banks adjust their prices accordingly

Question 24

What is the “implicit cross rate”?

Answer 24

The exchange rate between 2 currencies derived from their respective exchange rate in regards to a common numerator

Question 25

Why does arbitrage profit “disappear”?

Answer 25

Because arbitrageurs buying and selling the respective bid and ask pairs drives the higher price down and lower price up, which ‘closes the gap’

Question 26

What are the 2 reasons exchange rates vary so much in the short run?

Answer 26

Inventory control

Asymmetrical information

Question 27

What is order flow and how does it affect rates?

Answer 27

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

Question 28

What is inside information and how does it affect rates?

Answer 28

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

Question 29

What causes the long-run fluctuations of the exchange rate?

Answer 29

Economic factors such as imports and exports

Question 30

What does the trade flow model argue?

Answer 30

That we can prove that Imports and exports can be modelled to affect exchange rates

Question 31

What is the exchange rate index?

Answer 31

A weighted average of all main trading currencies

Question 32

What is the trade-weighted exchange rate index?

Answer 32

The weighted index of major currencies, weighted by their importance in international trade

Question 33

What is the broad index of a currency?

Answer 33

The weighted index of a currency against all it’s major trading partners

Question 34

What is the major currency index?

Answer 34

An index of all major currencies against the US dollar