Foreign Exchange Flashcards
1
Q
FX dealers
A
- buy at a low rate and sell at a higher rate for profit
- e.g. commercial banks, investment banks, brokerage firms
2
Q
Market makers
A
- provide liquidity to make it easier for buyers and sellers to transact
3
Q
Liquidity
A
- ease with which one can sell an asset at its fair value
- low tx costs
4
Q
FX brokers
A
- intermediaries: match buyers and sellers for a commission
5
Q
Other fx market participants
A
- central banks
- multinational corporations
6
Q
$ per £ (In the US)
A
Direct (American quote)
7
Q
£ per $ (In the US)
A
Indirect (European quote)
8
Q
Vehicle currency
A
- currency actively used in many international financial transactions
- used due to tx costs of making markets in certain currencies being too high
- USD primary vehicle currency (89% of tx)
9
Q
Cross-rates
A
- forex transaction between two currencies that are both valued against a third currency
10
Q
Triangular arbitrage
A
- keeps cross-rates in line with exchange rates
- occurs when one can trade three currencies and still make a profit i.e. €/£ < €/$ * $/£
- arbitrage possible if cross-rates are inconsistent
11
Q
Interbank market
A
- the wholesale part of the foreign exchange and external currency markets where major banks trade
12
Q
Cross-currency settlement risk (Herstatt)
A
- risk that a financial institution may not deliver the currency on one side of a completed transaction
13
Q
Currency appreciation
A
- strengthening or an increase in value of one currency relative to another
14
Q
Currency depreciation
A
- weakening or a decrease in value of one currency relative to another
15
Q
Revaluation
A
- currency value ‘allowed’ to rise by government
