Foreign Exchange

Question 1

When was the FX market born?

Answer 1

In 1973 after the collapse of the Bretton woods system

Question 2

FX market features

Answer 2

• traded OTC and on exchange
• huge turnover and liquidity
• low margins (tight spreads)
• 24 hour market
• huge number and variety of participants

Question 3

How do you say 1.1865

Answer 3

One, eighteen, sixty five

Question 4

Cable

Answer 4

GBP/USD exchange rate

Question 5

Loonie

Answer 5

Canadian dollar

Question 6

Dollar-CAD

Answer 6

USD/CAD exchange rate

Question 7

Stokkie

Answer 7

Swedish krone

Question 8

Nokkie

Answer 8

Norwegian krone

Question 9

How does the bid ask spread work for price makers?

Answer 9

Price maker (banks/brokers) buy on the bid (cheap) and sells on the ask (expensive) because they are obliged to sell if their price is met.

Question 10

How does the bid ask spread work for the price taker?

Answer 10

The price taker (investor) sells on the bid (cheap) and buys on the ask/offer (expensive) because they can choose whether or not to accept the price

Question 11

What do investment banks do?

Answer 11

•provide liquidity for different types of customers and activities

• commercial turnover, M&A activity
• hedging and speculation
• smaller banks, funds and corporations
• E-commerce platforms

Question 12

What does the FX trading desk do?

Answer 12

• has the spot desk which does majors, crosses snd emerging markets
• forwards
• options

Question 13

What does the FX sales desk do?

Answer 13

• corporations
• financial institutions
• hedge funds
• investors

Question 14

What does the FX research desk do?

Answer 14

• fundamentals
• macroeconomic
• political analysis
• technical analysis

Question 15

FX currency reserves

Answer 15

Reserve assets held by the central banks in foreign currencies used to back liabilities on their own issues currency and influence monetary policy

Question 16

Hedge funds

Answer 16

Offshore investment funds, engaging in market speculation of investor funds, typically formed as a private limited partnership

Question 17

How are hedge funds run?

Answer 17

• employ numerous different strategies to earn active returns for their investors
• aggressively managed to generate higher returns, they use credit or borrowed capital (leverage) as well as derivatives (futures and options)
• require less regulation than other funds so are generally only accessible to accredited investors

Question 18

How do hedge funds use FX?

Answer 18

They rarely speculate in FX but use currency overlay to…
•hedge FX exposure within their portfolios
•manage FX risk when switching equity portfolio between countries
•to generate extra profits

Question 19

IDBs

Answer 19

Inter dealer brokers match anonymous inter bank counterparts for small fees

Question 20

USD index (USDX)

Answer 20

A geometric weighted average of a basket of foreign currencies against the dollar. ATH=148.1 ATL=70.7