Lecture 2: The Spot FX Market Flashcards
What is a liquid market? Is the FX market a liquid market?
Where transactions can take place readily, with low transaction costs and little impact on price.
The FX market has been described as ‘the most liquid market in the world’.
What are the four aspects of liquidity?
Transaction Costs: the spread between ask/bid prices.
Market Depth (Price Impact): markets ability to absorb large transactions with minimal effects on prices.
Market Resilience (Price Pressure): time taken for proces to return to normal after a temp. order imbalance.
Immediacy: speed at which trades are executed.
The FX market performes well in all aspects (graphs)
What are the four basic exchannge rate calculations?
- HC to FC
- Sell x units of HC
- Buy x units of FC
- FC to HC
- Sell x units of FC
- Buy x units of HC
What is locational currency arbitrage?
it is when two markets quote mismatched bid/ask prices for the same currency pair
What is a cross rate?
How are they calculated?
How are the calculations effected by direct/indirect quote combinations?
An exchange rate between two currencies computed by reference to a third currency, usually the US dollar (85% FX market).
What is triangular currency arbitrage?
Making an instantaneous risk-free profit
by trading in three related exchange rates.
How do you calculate trianngular currency arbitrage? What are th conditions that need to be satisfied for it to be possible?
