LM 8: Currency Exchange Rates Flashcards
What are currency exchange rates, specifically A/B?
A/B = number of units of currency A for one unit of currency B
A = price currency
B = base currency
Calculate HKD/USD given the following three spot exchange rates:
JPY/USD 132.12
JPY/CAD 94.51
HKD/CAD 5.75
8.04 (HKD/USD) = 132.13 * 1/94.51 * 5.75
What is points/pips formula?
points = forward rate - spot rate
points are positive if forward rate > spot rate
What is the forward rate formula?
spot + (forward rate/ (10,000))
+
(forward points/10,000)
What is the formula for avoiding arbitrage opportunities between a domestic currency and a foreign currency?
1 + domestic currency rate = exchange rate of currency * [ 1+ foreign currency rate] *
What is the real exchange rate formula?
Sd/f×(Pf/Pd)
Sd/f = is the spot exchange rate (number of units of domestic currency per one unit of foreign currency)
Pf = is the foreign price level quoted in foreign currency
Pd = domestic price level quoted in domestic currency
What does the real exchange rate tell us?
represents the real price you pay to purchase foreign goods and services
What are the majority of activities in FX markets?
capital transactions
What are spot transactions?
Spot transactions are used to exchange currencies immediately
What are forward transactions?
Forward transactions are agreements to exchange currencies further in the future.
What is the difference between futures contracts and forwards contracts in terms of contracts?
forward contracts can be negotiated
futures contracts have specific date, amount, etc.
What is the difference between forward and future contracts in terms of where they trade?
forward contracts trade OTC
future contracts trade on exchanges
What is the difference between forward contracts and future contracts in terms of collateral?
forwards don’t require collateral
futures require collateral usually in form of margin
What are FX options?
foreign exchange markets: give the right (not obligation) to make an FX transaction in the future. A fee must be paid upfront to purchase this option.
What is foreign exchange swaps?
foreign currency swap is an agreement between two parties to swap interest rate payments on their respective loans in their different currencies.
What are the 7 types of market participants? CRLRGC
- Corporate accounts
- Real money accounts (accounts managed by entities, eg. mutual funds, endowments, insurance.)
- Leveraged accounts (hedge funds)
- Retail accounts (individuals)
- Governments
- Central banks
- Sovereign wealth funds (SWFs)
What is the difference between indirect quote and direct quote?
direct quote = (domestic currency) / (foreign currency)
indirect quote = foreign currency / domestic currency
What is bid price vs ask price in currency exchange?
bid price = price bank is willing to buy the currency (buying base currency)
ask price = price bank is willing to sell currency (selling base currency)
What is EUR/USD exchange rate 0.9214 - 0.9216 mean
0.9214 = dealer willing to buy one US dollar for 0.9214 euro
0.9216 = dealer willing to sell one US dollar for 0.9216 EURO
How will an increase in exchange rate affect the currency?
an increase in exchange rate will appreciate the base currency and depreciate the foreign currency
What is the equation for forward FX rates for two currencies to make it not possible to earn arbitrage profits?
Ff/d=Sf/d(1+if)/ (1+id)
Ff/d = forward rate
Sf/d = current spot rate
iF = foreign risk free rate
iD = domestic risk free rate
