Lesson 3 Flashcards
What are the most traded 11 Currencies in the world?
The 8 Major currencies in addition to:
Norway Krone
Sweden Krona
Denmark Krone
The bulk of forex trading takes place on what’s called the “………………..“.
interbank market
Unlike other financial markets like the New York Stock Exchange (NYSE) or London Stock Exchange (LSE), the forex market has neither a physical location nor a central exchange.
FYI
The entire FX market is run electronically, within a network of ………… and ……………., continuously over a 24-hour period.
banks / non-bank financial institutions (NBFIs)
………………….. trading, refers to a trade that is not made on a formal exchange.
Over-the-counter trading, or OTC
………………………. are assets held on reserve by a central bank in foreign currencies.
Foreign exchange reserves
One of the main functions of the forex market is to protect businesses from losing money due to changes in exchange rates. When a company makes a deal to buy or sell something in another country’s currency, the value of that currency can change before the payment is made. By using the forex market, businesses can lock in a specific exchange rate at the time of the deal, ensuring they know exactly how much they’ll pay or receive, no matter what happens to the exchange rate later. This process is called “…………………”
hedging
……………. are contracts to buy or sell a specific amount of a currency at a set price on a future date.
Currency futures
If you agree to buy 10,000 euros for $1.10 each three months from now, you have a currency futures contract. No matter what happens to the exchange rate, you will buy those 10,000 euros for $1.10 each when the contract ends.
FX …………… give you the right, but not the obligation, to buy or sell a currency at a specific price before a certain date.
currency options
You buy an option to purchase 10,000 euros at $1.10 each within the next month. If the euro’s price goes above $1.10, you can use the option to buy euros at the lower price. If it stays below $1.10, you can let the option expire and not buy the euros.
FX ……………. are investment funds that track the performance of a specific currency or a basket of currencies.
currency ETFs (Exchange-Traded Funds)
You buy shares in an ETF that tracks the euro (EUR). If the value of the euro rises, the value of your ETF shares increases. This allows you to invest in the euro without directly buying the currency.
FX currency ETFs (Exchange-Traded Funds) are investment funds that track the performance of specific currencies or a basket of currencies, allowing investors to profit from currency movements without directly buying the currency. Unlike forex trading, which involves complexities and high leverage, ETFs are simpler to manage, offer diversification, potential dividends, and high liquidity as they are traded on stock exchanges. In forex trading, leverage allows controlling large positions with small capital, increasing potential profits but also amplifying losses and risks. ETFs, bought outright without leverage, provide a more straightforward and less risky investment option.
FYI
……………. is a secondary OTC market that provides a way for retail (“poorer”) traders to participate in the forex market.
Retail Forex
Access to Retail Forex is granted by so-called “………………….“.
forex trading providers
Forex trading providers trade in the ……………. on your behalf. They find the best available prices and then add a “…………….” before displaying the prices on their trading platforms.
primary OTC market / markup
This is similar to how a retail store buys inventory from a wholesale market, adds a markup, and shows a “retail” price to their customers.
Forex trading providers are also known as “forex brokers”. Technically, they are not brokers because a broker is supposed to simply act as a middleman between a buyer and a seller (“between two parties”). But this is not the case, because a forex trading provider acts as your counterparty. This means if you are the buyer, it acts as the seller. And if you are the seller, it acts as the buyer. To keep things simple for now, we will still use the term “forex broker” since that’s what most people are familiar with but it’s important to know the difference.
R 1
In forex trading, a …………. refers to the amount of a currency that a trader holds as a result of buying or selling.
position
…………….. is when a trader buys a currency, expecting its value to rise.
Long Position
…………….. is when a trader sells a currency, expecting its value to fall.
Short Position
An …………. in forex trading is a trade that has been entered into but has not yet been closed with an offsetting trade.
open position
Although a spot forex contract normally requires delivery of currency within two days, in practice, nobody takes delivery of any currency in forex trading.
R1
What are the 3 traits/functions that a unit (Currency) must have?
- Be used as a medium of exchange
- Store value
- Be a unit of value
Regarding the 3 traits/functions of a currency, what does store a value mean?
if I do sell apple in the winter only and nothing in the summer, what will I do? The idea of money is to store value. I got it in the winter but it is still has value in the summer
Regarding the 3 traits/functions of a currency, what does Be a unit of value mean?
I need to know how much 1 apple worth of this currency, how much 1 chair, how much 1 hat
What is a banknotes?
Banknotes are paper money (in comparison to coins) issued by a country’s central bank, used as a medium of exchange for goods and services. They come in various denominations, such as $1, $5, $10, and €5, €10, €20, making transactions convenient and standardized.
What is Currency denominations?
Currency denominations are the different values of money issued in a currency, such as banknotes and coins, which represent specific amounts. Examples include $1, $5, $10, and $20 bills in the US dollar
What does Debasing a currency mean?
Debasing a currency means reducing its value, typically by lowering the precious metal content in coins or increasing the money supply, leading to inflation. This can make the currency worth less, often to finance government spending or reduce debt burdens.
What is Fractional Reserve Banking
Fractional reserve banking is a system where banks keep a fraction of deposits as reserves and lend out the rest. This allows banks to create money through loans while maintaining enough reserves to meet withdrawal demands.
What does insolvent mean?
Insolvent describes a state where an individual or an organization cannot meet their financial obligations due to a lack of sufficient assets or funds.
What is a Bank Run?
A bank run occurs when many customers withdraw their money simultaneously from a bank, fearing it will become insolvent. This sudden demand for cash can deplete the bank’s reserves and potentially cause it to fail.
in this pair USD/CAD, which one is the base currency and which one is the qoute currency?
USD = Base Currency
CAD = Quote Currency
why is it called base currency?
because it is always one.
EUR/USD = 1.20, what does that mean?
it means 1 euro (base currency) is equal to 1.20 US dollars (quote currency).
in major pairs, why some of the pairs has the USD as base currency and why others as quote currency?
it is just a convention
what is a spot price?
the spot price is the current exchange rate at which a currency pair can be bought or sold for immediate delivery. It reflects the price for transactions that are settled “on the spot,” typically within two business days.
If the EUR/USD spot price is 1.20, it means you can buy 1 euro for 1.20 US dollars right now.
What is a pip?
A “pip” (percentage in point) is the standard unit of measurement for price movement in the forex market. It represents the smallest price change that a given exchange rate can make based on market convention.
For most currency pairs, a pip is 0.0001.
If EUR/USD moves from 1.2000 to 1.2001, it has moved 1 pip.
What is a pipette?
A “pipette” is one-tenth of a pip. It is also known as a fractional pip or a point.
For most currency pairs, a pipette is 0.00001.
If EUR/USD moves from 1.20000 to 1.20001, it has moved 1 pipette.
What is the standard lot?
100,000 units (of base currency)
What is Mini lot?
10,000 units (of base currency)
What is Micro lot?
1,000 units (of base currency)
