FX

Question 1

Factors That Impact Exchange Rates?

Answer 1

1) Inflation Rate Differentials
2) Interest Rate Differentials
3) Current-Account Deficits
4) Public Debt
5) Political & Economic Stability

Question 2

FX market is a two tiered market of…

Answer 2

Interbank Market and Client Market

Question 3

Supply in one currency is…

Answer 3

Demand in the other currency

Question 4

US increases its purchases of good from China increasing the current account deficit…

Answer 4

US supplies more dollars and demands more Chinese Yuan to purchase Chinese goods

Question 5

Spot stands for?

Answer 5

Immediate Settlement

S($/£)

Question 6

A forward is?

Answer 6

Contract for a future exchange

F3($/£)

Question 7

A forward premium occurs when…

Answer 7

The future rate is trading above the spot rate
If F>S then forward premium
If F<S then forward discount

Question 8

What is a Direct Quote and give an example?

Answer 8

• American Terms
• The amount of home currency per one unit of the foreign currency
• A US direct quote of the Pound is 1.5 dollars for 1 pound
• S($/£)

Question 9

What is an Indirect Quote and give an example?

Answer 9

• European Terms
• The amount of the foreign currency per one unit of the home currency
• A US indirect quote of the Pound is .667 pounds for 1 dollar
• S(£/$)

Question 10

What is the notation for the direct spot rate between the US dollar and the Mozambique Metical (MTn)

Answer 10

S($/MTn)

Question 11

What is the notation for the indirect spot rate between the US dollar and South African rand (R)

Answer 11

S(R/$)

Question 12

Write the direct forward rate in 6 months between US dollar and Swiss Franc

Answer 12

F6($/CHF)

Question 13

What is S(€/£)?

S(€/$) = .667 and S($/£) = 2

Answer 13

• Set it up so that the $ is in the numerator and denominator so that they cancel each other out
• 0.667*2 = 1.33 or 1.33 euro’s per pound

Question 14

What is the bid?

Answer 14

The offer to buy

Question 15

What is the ask?

Answer 15

The offer to sell

Question 16

What is the spread

Answer 16

Ask - Bid = Spread

Question 17

USD/GBP
Bid: $1.5878 = 1£ and Ask: $1.5882 = 1£
-You buy 1 million pounds with dollars then converted them back to dollars how much would you gain or lose?

Answer 17

-Buy £1mill pounds COSTS $1,588,200
(you have to find a seller) £1mill * 1.5882
-Convert back to dollars, $1,587,800
(you have to find a buyer) £1mill * 1.5878
-Loss of $400, no arbitrage

Question 18

Bid - Ask Spread

Answer 18

USD/GBP Bid when taking the reciprocal is then the GBP/USD Ask, and vice versa

Question 19

What is the Forward Premium/Discount equation?

Answer 19

[(F - S)/S] * 360/N

Question 20

Bid Ask
S(USD/CNY) .1521 .1525
What is the S(CNY/USD) bid and ask?

Answer 20

Bid Ask

S(CNY/USD) 6.5574 6.5746

Question 21

For a Forward Point Quote when the second number in the forward pair is smaller than the first then you would…?
when the second number is larger than the first you would…?

Answer 21

• forward points are subtracted from the spot price, at a discount
• points are added to the spot price, at a premium

Question 22

A swap forward is what?

Answer 22

A swap is an agreement to provide a counterparty with something he or she wants in exchange for something that you want. Often this is for something that is recurring.