Chapter 5

A foreign exchange quotation (quote) is:

A foreign exchange quotation is a statement of willingness to buy or sell at an announced rate

A foreign exchange rate is:

A foreign exchange rate is the price of one currency expressed in terms of another currency

A large proportion of speculation and arbitrage is conducted by __________

A large proportion of speculation and arbitrage is conducted by major banks

A swap transaction in the interbank market is the:

Is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates

Cross rate

Many currency pairs are only inactively traded, so their exchange rate is determined through their relationship to a widely traded third currency

Market makers profit from:

from buying foreign exchange at a "bid" price and reselling it at a slightly higher offer or "ask" price

A direct quote:

home currency price of a unit of foreign currency

In the foreign exchange market, individuals and firms:

individuals ad firms conduct commercial and investment transactions. Sometimes they use the market to "hedge" foreign exchange risk

The foreign exchange market is not a ________ market like the stock market

is not a centralized market

Triangular Arbitrage

is the act of exploiting an arbitrage opportunity resulting from a pricing discrepancy among three different currencies in the foreign exchange market.

A spot transaction in the interbank market is:

is the purchase of foreign exchange, with delivery and payment between banks to take place, normally, on the second following business day

Arbitragers try to profit from:

Arbitragers try to profit from simultaneous differences in exchange rates in different markets

The three major trading sessions are:

Asian Session, European Session, a nd North American Session

Central banks and treasuries use the foreign exchange market to:

Central banks and treasuries use the foreign exchange market to acquire or spend their country's currency reserves as well as to influence the price at which their own currency trades

Dealers maker their profit from:

Dealers make their profit form the spread between the buying and selling prices (foreign $/ home $)

Forward rates

Forward rates are typically quoted in terms of points

Speculators seek ______

Speculators seek all their profit from exchange rate changes

The two tiers to the foreign exchange market are:

The interbank or wholesale market, and the client or retail market

The participants in the foreign exchange market act as ________ and ___________

The participants in the foreign exchange market act as "liquidity seekers" and "profit seekers"

Speculators and arbitragers operate in the foreign exchange market for:

They operate for their own interest

Why do Dealers use Foreign Exchange Brokers?

To expedite the transaction and to remain anonymous since the identity of participants may influence short-term quotes

Transactions within this market can be executed on a ____, ____, or _____ basis

Transactions within this market can be executed on a spot, forward, or swap basis

The Foreign Exchange Market (FOREX) is the mechanism by which participants:

Transfer purchasing power between countries, obtain/provide credit for international trade transactions, and minimize exposure to the risks of exchange rate changes

foreign exchange intervention is when

a central bank takes an active participatory role in influencing the monetary funds transfer rate of the national currency

Foreign Exchange Brokers are

agents who facilitate trading between dealers without themselves becoming principals in the transaction

The five broad categories of participants that operate within the two tiers of the foreign exchange market are:

bank and non-bank foreign exchange dealers, individuals and firms conducting commercial or investment transactions, speculators and arbitragers, central banks and treasuries, and foreign exchange brokers

cross rates can be used to

cross rates can be used to check on opportunities for intermarket arbitrage

An indirect quote:

foreign currency price in a unit of the home currency

A forward quotation expressed in points is

not a foreign exchange rate, rather it is the difference between the forward rate and the spot rate

An outright forward transaction requires:

requires delivery at a future value date of a specified amount of one currency for a specified amount of another currency

the foreign exchange market spans the ______ with prices ________ and currencies trading ___________ hour of ____________ ________ day but _______ varies throughout the day

spans the globe with prices moving and currencies trading every hour of every business day but liquidity varies throughout the day

Some different types of swaps are:

spot against forward, forward-forward, and nondeliverable forwards (NDF)

Interbank "bid" is

the price at which a dealer will buy another currency

Interbank "ask" is

the price at which a dealer will sell another currency (home $/foreign $)

Interbank market refers to

transactions between "market makers" meaning the biggest banks