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Questions and Answers
What does the term 'Foreign Exchange' refer to?
What does the term 'Foreign Exchange' refer to?
- The money of a foreign country. (correct)
- The currency used for international trade only.
- The exchange rate between two local currencies.
- The savings accounts in foreign banks.
Which of the following is a characteristic of the Foreign Exchange Market?
Which of the following is a characteristic of the Foreign Exchange Market?
- It operates only during business hours.
- It is an over-the-counter market. (correct)
- It is a centralized marketplace.
- It involves only government transactions.
What is implied by the term 'high liquidity' in the context of the Foreign Exchange Market?
What is implied by the term 'high liquidity' in the context of the Foreign Exchange Market?
- Only major currencies can be traded.
- It is only open for limited hours.
- Currency is easily exchanged without significant price changes. (correct)
- There are many regulations controlling trades.
How often can trades occur in the Foreign Exchange Market?
How often can trades occur in the Foreign Exchange Market?
Which of the following participants is NOT typically involved in the Foreign Exchange Market?
Which of the following participants is NOT typically involved in the Foreign Exchange Market?
What is the main function of an exchange rate?
What is the main function of an exchange rate?
Which of the following is NOT a common currency code?
Which of the following is NOT a common currency code?
What does 'Bid-Ask Spread' refer to in the Foreign Exchange Market?
What does 'Bid-Ask Spread' refer to in the Foreign Exchange Market?
What is the cost in US dollars of a souvenir that costs 2000 Indian Rupees given the exchange rate of INR 45 per USD?
What is the cost in US dollars of a souvenir that costs 2000 Indian Rupees given the exchange rate of INR 45 per USD?
How much will a Japanese importer pay in yen for $1,000 worth of oranges if the exchange rate is ¥107.52 per USD?
How much will a Japanese importer pay in yen for $1,000 worth of oranges if the exchange rate is ¥107.52 per USD?
If a Japanese machine costs 30,000 yen, how many US dollars would an American importer need at an exchange rate of ¥107.52 per USD?
If a Japanese machine costs 30,000 yen, how many US dollars would an American importer need at an exchange rate of ¥107.52 per USD?
What does currency appreciation mean?
What does currency appreciation mean?
In the context of bid-ask spreads, what is the bid price?
In the context of bid-ask spreads, what is the bid price?
If the exchange rate changes from $1.06/€ to $1.28/€, what can be inferred about the currencies?
If the exchange rate changes from $1.06/€ to $1.28/€, what can be inferred about the currencies?
If the USD/GBP exchange rate is quoted as 2.0816 – 2.0820, what is the ask price?
If the USD/GBP exchange rate is quoted as 2.0816 – 2.0820, what is the ask price?
How do you convert currencies when the currencies are the same?
How do you convert currencies when the currencies are the same?
How many Egyptian pounds will a client receive for selling 150,000 Euros at the Ask price?
How many Egyptian pounds will a client receive for selling 150,000 Euros at the Ask price?
What is the reciprocal of the old Bid price for EUR/EGP if the old Bid price is 0.01850?
What is the reciprocal of the old Bid price for EUR/EGP if the old Bid price is 0.01850?
What amount of USD would an American traveler need to pay to buy 50,000 JPY at the Bid price of USD?
What amount of USD would an American traveler need to pay to buy 50,000 JPY at the Bid price of USD?
At what rate does the bank buy the Euro when a client sells it, given the indirect quote of EUR/EGP?
At what rate does the bank buy the Euro when a client sells it, given the indirect quote of EUR/EGP?
What is the difference between the new Ask and Bid price of EUR/EGP after obtaining the reciprocal?
What is the difference between the new Ask and Bid price of EUR/EGP after obtaining the reciprocal?
What does a direct quotation express in terms of currency exchange?
What does a direct quotation express in terms of currency exchange?
If the exchange rate is 1 USD = EGP 48, what is the indirect quotation?
If the exchange rate is 1 USD = EGP 48, what is the indirect quotation?
If you have EGP 52 and want to buy euros at the exchange rate of 1.00 EUR = EGP 52, how much EUR can you buy?
If you have EGP 52 and want to buy euros at the exchange rate of 1.00 EUR = EGP 52, how much EUR can you buy?
In which situation is JPY 114.75/$ considered a direct quote?
In which situation is JPY 114.75/$ considered a direct quote?
Using cross multiplication, how would you calculate the value of currency from $1 = C$ 1.5 to $10,000?
Using cross multiplication, how would you calculate the value of currency from $1 = C$ 1.5 to $10,000?
What is the reciprocal of an exchange rate quoted as 1 USD = EGP 47.5?
What is the reciprocal of an exchange rate quoted as 1 USD = EGP 47.5?
Which of the following statements best describes the nature of exchange rates?
Which of the following statements best describes the nature of exchange rates?
When quoting an exchange rate as $0.008715/JPY, which type of quotation is this in the US?
When quoting an exchange rate as $0.008715/JPY, which type of quotation is this in the US?
What does the bid-ask spread measure?
What does the bid-ask spread measure?
In the exchange rate GBP/USD 0.4803 – 0.4804, which quote represents the bank’s selling price?
In the exchange rate GBP/USD 0.4803 – 0.4804, which quote represents the bank’s selling price?
When converting direct quotations to indirect quotations, what happens to the bid and ask prices?
When converting direct quotations to indirect quotations, what happens to the bid and ask prices?
If USD/GBP is 2.0816 – 2.0820, what is the bid-ask spread in percentage?
If USD/GBP is 2.0816 – 2.0820, what is the bid-ask spread in percentage?
If an Egyptian client wants to exchange 10,000 USD at the rate of EGP/USD 47 - 48, how much will they receive?
If an Egyptian client wants to exchange 10,000 USD at the rate of EGP/USD 47 - 48, how much will they receive?
Ellen wants to buy EUR 5,000 and the rate is EUR 1 = 1.30 - 1.40 USD. How much will she pay?
Ellen wants to buy EUR 5,000 and the rate is EUR 1 = 1.30 - 1.40 USD. How much will she pay?
What is the correct formula to calculate the bid-ask spread percentage?
What is the correct formula to calculate the bid-ask spread percentage?
When buying a currency, which price should be used from the bank’s quotes?
When buying a currency, which price should be used from the bank’s quotes?
Study Notes
Exchange Rate Quotation
- Direct Quote (American way): The price of 1 unit of foreign currency expressed in home currency. This is essentially the domestic price of the foreign currency - how many home currency units are needed to buy one unit of foreign currency.
- Example: USD 1.00 = EGP 48, meaning it would take EGP 48 to buy $1.
- Indirect Quote (European way): The price of 1 unit of home currency expressed in foreign currency. This is the foreign price of the domestic currency - how many foreign currency units are needed to purchase one unit of home currency.
- Example: EGP 1.00 = USD 0.02, meaning it would take $0.02 to buy 1 EGP.
Key Points on Quotes
- Reciprocals: A direct quote and an indirect quote are reciprocals of each other. The direct quote is the inverse of the indirect quote.
- Cross Multiplication can be used to find the equivalent amount of one currency based on a given exchange rate.
Examples
- If USD/GBP is 2.0816 – 2.0820, this is a direct quote in the US and an indirect quote in the UK.
- Bid Price is the price a dealer (bank) is ready to buy a currency at.
- Ask Price is the price a dealer (bank) is ready to sell a currency at.
- Bid-Ask Spread is the difference between the ask and bid prices. It's a profit margin for dealers.
- Percentage Spread: (ask rate - bid rate) / ask rate.
Key Participants in Foreign Exchange Markets
- Central Banks
- Commercial Banks
- Firms (Importers and Exporters)
- Individuals
- Portfolio Managers
- FOREX Brokers
- **Speculators **
- Investors (Traders)
Forex Market Characteristics
- Over-the-Counter (OTC) Market: Transactions happen electronically, not in a physical location.
- 24/7 Operation: Trading occurs across different time zones, making it a continuous market.
- High Liquidity: Due to high trading volume, currencies are easily bought and sold.
- Largest Financial Market in the World: Forex is the largest and most active financial market, with substantial trading volume.
Currency Appreciation and Depreciation
- Currency Appreciation (Strengthening): When a currency's value increases relative to another currency.
- Currency Depreciation (Weakening): When a currency’s value decreases relative to another currency.
Example:
- A traveler wants to buy 50,000 JPY. The bank quotes USD 1= 149 JPY – 150 JPY.
- The traveler buys JPY (selling USD), so the bank will purchase USD at the bid price of USD 1 = 149 JPY.
- The traveler would pay USD 335.57 (50,000 JPY / 149 JPY per USD)
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Description
Test your understanding of exchange rate quotations with this quiz. Learn about direct and indirect quotes, how they relate, and practice with examples. See if you can determine the reciprocal relationships between different currencies!
