Forex with Bid-Ask Flashcards
What is a spot transaction?
Purchase of foreign exchange with delivery and payment between parties
What are the components of a foreign exchange trade?
- Foreign excahnge trade transaction agreement
- Electronic communication and notification for payment and settlement
- Final settlement of the trade currency trade (value date)
What is European terms for quotations?
Quotation of a specific currency per one U.S. dollar (most common and industry standard)
Non Us currency / $
What are american terms?
Us dollar price of one euro and us dollar price of one pound (only used for euro and U.K pound)
$ / non US currency
Also used for quotes for most options and futures and for deals with tourists
What is a direct quote?
Home currency price of a foreign currency (E.g. $/Euro in US)
What is indirect quote
Foreign currency price of a unit of home currency (E.g. Euro/$ in US)
What is bid/ask
Bid: price at which bank will buy currency
Ask: price at which bank will sell currency
Why do we use cross rates?
Many currency pairs are only traded inactively, so exchange rate is determined through their relationship to widely traded third currency (usually US and 90% of FX goes through US)
What is currency arbitrage?
Simultaneously buying and selling misprices currencies and realizing a riskless profit (cannot make profit if currencies are in equilibrium)
What is the difference of doing arbitrage with and without transaciton costs?
Without: If one direction is a loss, the other is always a gain
With: if one direction is a loss, the other might be a gain but could also be a loss due to transaction costs
What is an outright rate in forward quotations?
The actual price is quoted to commercial customers
What is points forward quotations?
As the firrence between forward rate and spot rate (aka swap rate) quoted by traders
What is a cash rate vs swap rates?
Cash rate: One year or less maturity
Swap: More than one year maturity
