Lecture 4 (1)

Question 1

Exchange rate

Answer 1

The price of one countrys currency in terms of another

Question 2

Foreign exchange (FX) market encompasses

Answer 2

The conversion of purchasing power from one currency into another

Bank deposits of foreign currency

The extension of credit denominated in a foreign currency

Foreign trade financing

Trading in foreign currency options and futures contracts

Currency swaps

Question 3

Commercial bankers

Answer 3

Assist clients in the conduct of international finance

Question 4

FX market participants

Answer 4

Wholesale/interbank market

Retail/client market

Question 5

Wholesale/interbank market (FX market participants)

Answer 5

Large commercial and investment banks and securities houses worldwide that actively make a market in foreign exchange

Nonbank dealers such as mutual funds, pensions funds and hedge funds that have their own trading rooms

Question 6

Retaiil/client market
(FX market participants)

Answer 6

Market participants include M N Cs, money managers and private speculators

Question 7

Correspondent banking relationships

Answer 7

Interbank market is made up of a network of correspondent banking relationships, with large commercial banks maintaining demand deposit accounts (that is, correspondent banking accounts) with one another

Correspondent bank account network facilitates the efficient functioning of the FX market

Question 8

Clearing house interbank payment system (CHIP>S)

Answer 8

S>erves as a clearing house for most of the interbank settlement

Question 9

spot market

Answer 9

Involves almost immediate purchase or sale of foreign exchange

One can buy (take a long position) or sell (take a short position) foreign exchange

Question 10

spot rate currency

Answer 10

Direct or indirect quotations

Question 11

direct quotations

Answer 11

Refer to the price of one unit of a foreign currency in terms of the domestic currency

For example, from the perspective of an american investor, 1 euro is equivalent to 1.1233 US dollars or 1euro = 1.1233$

Question 12

Indirect quotation

Answer 12

Is the price of one domestic currency in terms of a foreign currency

For example, from the perspective of an american investor U>S dollar is equivalent to 0.8903 euros or 1$ =0.8903euro

Question 13

Reciprocity

Answer 13

For example, the direct quotations from the US perspective is an interact quote from the british perspective

Question 14

Spot market
European terms

Answer 14

The US dollar is priced in terms of the foreign currency (an indirect quote form the US perspective

Question 15

Spot market
american terms

Answer 15

the other currencies (pound, euro, yen etc.) is priced in terms of the US dollar (a direct quote from the US perspective)

American term is a global norm