Foreign exchange Market Flashcards
What is the Forex market?
Market where currencies are bought and sold
What is the spot market?
Immediate transactions within 2 days, and the settlement is in the respective country of the transaction
What is the forward market?
Current exchanged at a future date at a predetermined rate. It is an over-the-counter marketplace with direct help from a broker-dealer
What are spot fx deals?
When a deal is done on the spot market and delivery is within two working days
What is Based/Quote currency?
The based part is fixed, and the Quote part is variable. EUR/USD = 1:1.05
What is a pip?
The smallest movement in price (1.0500 to 1.0501)
What are direct vs indirect quotes?
Direct is a domestic per unit of a foreign. Later country is domestic. Indirect is foreign per unit of domestic. First country would be indirect for.
What are the risks in the foreign exchange market?
Transaction costs - forex costs higher
Taxes - double tax in each country
Politics - Gov may impose policies
Translation risk impacts financial statement of MNCs
How does inflation effect exchange rates?
High inflation within a country will depreciation currency
How do interest rates effect exchange rates?
If CB have a higher IR in a country, then this is attractive to investors, so it strengthens their currency
How does BoP effect?
If country in CA deficit then more import than exports which means increased supply of currency therefore weaker
What are cross rate?
It is the exchange rate between two non-local currencies. Euros and Yen in terms of dollars can be used to work out euros and yen
What is the forward rate?
Price guaranteed in advance at a specific date. Eliminates risk of future price changes
What is covered interest policy?
Pricing formula for forward exchange rate based on assumption that no arbitrage opportunities arise due to interest rate differentials
What is uncovered interest policy?
Same as covered but involves risk arbitrage thus meaning investors speculate on future exchange rates
