Summary Questions Flashcards
What is a currency pair in Forex?
A currency pair is a pairing of currencies where the value of one is relative to the other.
(I.e: GBP/USD is the value of the British pound relative to the U.S. dollar.)
What are the major currency pairs?
Major currency pairs (“majors”) are those that include the U.S. dollar and the most frequently traded.
There are seven of them: EUR/USD, USD/JPY, GBPUSD, USD/CAD, USD/CHF, AUD/USD, and NZD/USD.
What are the currency crosses?
Currency crosses (“crosses”) are the more frequently traded currencies that do NOT include the U.S. dollar in their pairing.
Crosses include EUR/GBP, EUR/CAD, GBP/JPY, EUR/CHF, EUR/JPY, etc.
How many currency pairs exist?
There are HUNDREDS of currency pairs in existence but not all can be traded in the FX market. The United Nations currently recognizes 180 currencies. If you were to pair each currency up with another, it’s a lot.
The bulk of forex trading takes place on what?
The interbank market (The market that has neither a physical location nor a central exchange)
Why is the forex market referred to as an OTC? (Over The Counter) Market?
All the trading happens essentially electronic within a network of banks 24/7 no physical location.
Most Actively Traded Currencies
participants determine who they want to trade with depending on trading conditions, the attractiveness of prices, and the reputation of the trading counterparty (the other party who takes the opposite side of your trade).
What does liquidity mean when it comes to forex trading?
The scale of the forex market – the amount of buying and selling volume happening at any given time – is extreme
What are the most popular forex financial instruments (methods of using/access forex) ?
Among the financial instruments, the most popular ones are retail forex, spot FX, currency futures, currency options, currency exchange-traded funds (or ETFs), forex CFDs, and forex spread betting.
Which financial instruments cater to institutional traders?
Created by the Chicago Mercantile Exchange (1972) A currency future is a contract that details the price at which a currency could be bought or sold, and sets a specific date for the exchange.
Standardized and traded on a centralized exchange, the market is very transparent and well-regulated.
This means that price and transaction information are readily available.
Notes on currency options
If a trader “sold” an option, then he or she would be obliged to buy or sell an asset at a specific price at the expiration date.
Just like futures, options are also traded on an exchange, such as the Chicago Mercantile Exchange (CME), the International Securities Exchange (ISE), or the Philadelphia Stock Exchange (PHLX).
However, the disadvantage in trading FX options is that market hours are limited for certain options and the liquidity is not nearly as great as the futures or spot market.
Notes on ETF’s?
ETFs are created and managed by financial institutions that buy and hold currencies in a fund. They then offer shares of the fund to the public on an exchange allowing you to buy and trade these shares just like stocks.
Like currency options, the limitation in trading currency ETFs is that the market isn’t open 24 hours. Also, ETFs are subject to trading commissions and other transaction costs. Currency ETFs can be used to speculate on forex, diversify a portfolio, or hedge against currency risks.
