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Questions and Answers
In the given examples, what does a BID in a currency pair represent?
In the given examples, what does a BID in a currency pair represent?
- The price at which the bank is willing to buy the base currency. (correct)
- The price at which the bank is willing to buy the counter currency.
- The price at which the bank is willing to sell the base currency.
- The price at which the bank is willing to sell the counter currency.
What would be a consequence of using ASK prices for all currency conversions in triangular arbitrage?
What would be a consequence of using ASK prices for all currency conversions in triangular arbitrage?
- Increased potential for profit due to lower prices.
- Reduced potential for profit due to higher prices. (correct)
- Balanced profit margins with minimal risk.
- No effect on the profit from the arbitrage.
Which currency pair represents a direct quotation?
Which currency pair represents a direct quotation?
- USD/JPY
- GBP/USD (correct)
- EUR/USD
- CHF/GBP
What type of quotation is 0,0345 EUR/CZK?
What type of quotation is 0,0345 EUR/CZK?
In the context of foreign exchange market, what does a bid price represent?
In the context of foreign exchange market, what does a bid price represent?
How many USD will a client get for 1000 GBP based on the provided bid and ask prices?
How many USD will a client get for 1000 GBP based on the provided bid and ask prices?
If you are a Czech dealer, which quotation would you use: 1,3212 USD/EUR or 27,1203 CZK/EUR?
If you are a Czech dealer, which quotation would you use: 1,3212 USD/EUR or 27,1203 CZK/EUR?
If 1 GBP can be exchanged for 1.4510 USD, how many GBP would you need to pay for 1000 USD?
If 1 GBP can be exchanged for 1.4510 USD, how many GBP would you need to pay for 1000 USD?
If you are an American dealer, which quotation would you use: 1,3212 USD/EUR or 28,236 CZK/USD?
If you are an American dealer, which quotation would you use: 1,3212 USD/EUR or 28,236 CZK/USD?
In a direct quotation, what does the base currency represent?
In a direct quotation, what does the base currency represent?
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Study Notes
Triangular Arbitrage
- Triangular arbitrage involves exploiting exchange rate differences between three currencies to earn a profit
- It involves buying and selling currencies in a triangular sequence to take advantage of rate discrepancies
- Example: Buy GBP from Dealer 1, then buy CHF from Dealer 3, and finally buy USD from Dealer 2, resulting in a profit
Dealer Quotations
- Dealers provide bid (buy) and ask (sell) prices for currencies
- Dealer 1: GBP/USD, bid = 0.8527, ask = 0.8533
- Dealer 2: CHF/USD, bid = 1.623, ask = 1.6240
- Dealer 3: CHF/GBP, bid = 1.9005, ask = 1.9015
Eliminating Arbitrage
- To eliminate arbitrage, the correct quotation of Dealer 3 should be adjusted to remove the profit opportunity
Cross Rates
- Cross rates are exchange rates between two currencies, neither of which is the domestic currency
- Example: CNY/HKD, KRW/JPY, JPY/KRW, JPY/SGD
- Calculating cross rates: CNY/HKD = USD/HKD * CNY/USD
BID and ASK
- BID is the price at which a dealer buys a currency
- ASK is the price at which a dealer sells a currency
- As a client, you pay the ASK price when buying and receive the BID price when selling
Appreciation and Depreciation
- Appreciation: An increase in the value of a currency
- Depreciation: A decrease in the value of a currency
- Revaluation: A change in the official exchange rate
- Devaluation: A decrease in the official exchange rate
- Examples: CZK appreciated, EUR appreciated, VEF devalued, TRY depreciated, KZT devalued
Types of Quotations
- American quotation: Direct quote (domestic currency per unit of foreign currency)
- European quotation: Indirect quote (foreign currency per unit of domestic currency)
- Cross rate quotation: Exchange rate between two foreign currencies
- Direct quotation: Quote for immediate delivery
- Indirect quotation: Quote for future delivery
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