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.
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