Foreign Exchange Market Overview
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Questions and Answers

What is the price of 1 USD in PHP according to the given exchange rate?

  • 56.25 PHP
  • 56.80 PHP (correct)
  • 57.00 PHP
  • 55.50 PHP

    • In the context of foreign exchange market conventions, which currency quotation expresses the cost of one unit of foreign currency in terms of local currency?

  • Volume Quotation
  • Price Quotation (correct)
  • Currency Conversion
  • Indirect Quotation

    • Which of the following currencies does NOT typically use the Price Quotation system?

  • British Pound
  • Canadian Dollar
  • Japanese Yen (correct)
  • Australian Dollar

    • What is the primary nature of a Foreign Exchange Contract?

    <p>It is a bilateral agreement to buy or sell currencies.</p> Signup and view all the answers

    What does 'Spot USD/PHP 56.25 – 56.75' indicate in terms of currency exchange?

    <p>The range for buying and selling USD in PHP.</p> Signup and view all the answers

    Who are the primary participants in the interbank market?

    <p>Banks and Other Financial Institutions</p> Signup and view all the answers

    What is one function of Governments and Central Banks in the FX market?

    <p>Providing the nation’s money supply and maintaining price stability</p> Signup and view all the answers

    What is a defining characteristic of a Foreign Exchange Contract?

    <p>A bilateral agreement to sell one currency against another</p> Signup and view all the answers

    In what scenario would a large commercial company like Apple participate in the FX market?

    <p>To purchase electronic parts by exchanging USD for JPY</p> Signup and view all the answers

    Which of the following describes the term 'managed float' in the context of exchange rate targets?

    <p>An unofficial target allowing some market-driven flexibility</p> Signup and view all the answers

    Which of the following is a common platform for speculators to trade FX?

    <p>Interactive Brokers</p> Signup and view all the answers

    What does a foreign exchange market participant do primarily?

    <p>Conduct transactions for the purpose of trade or investment</p> Signup and view all the answers

    Which of the following is NOT typically considered a market participant in the FX market?

    <p>Environmental NGOs</p> Signup and view all the answers

    What does a bilateral agreement in foreign exchange involve?

    <p>Two parties engaging in two cash flows</p> Signup and view all the answers

    In the context of FX rates, what is meant by 'commodity currency'?

    <p>The currency being bought or sold in the transaction</p> Signup and view all the answers

    What does the term 'oblique' signify in foreign exchange terminology?

    <p>A quotation style that indicates 'against' instead of 'per'</p> Signup and view all the answers

    When expressing FX rates, what does the term 'term currency' refer to?

    <p>The currency used as a reference for pricing</p> Signup and view all the answers

    How is a two-way quote in foreign exchange defined?

    <p>The price of one currency against another currency at a set rate</p> Signup and view all the answers

    How much is the foreign exchange loss when buying CAD 1,000,000 at CAD/PHP 42.3730 and selling it at CAD/PHP 42.3680?

    <p>PHP 5,000.00</p> Signup and view all the answers

    When a currency is said to appreciate, what does it mean?

    <p>It is worth more units of the term currency.</p> Signup and view all the answers

    If the USD/PHP exchange rate rises from 56.80 to 56.90, what has happened to the USD?

    <p>The USD has appreciated.</p> Signup and view all the answers

    In FX trading, if a trader believes that the PHP will strengthen, what position should they take?

    <p>Short USD position</p> Signup and view all the answers

    What is indicated by a fall in the price of a commodity currency generally?

    <p>The commodity currency is depreciating.</p> Signup and view all the answers

    When USD/PHP increased from 56.65 to 56.90, what does this indicate about the commodity currency?

    <p>The USD is more expensive.</p> Signup and view all the answers

    If the terms currency is becoming less expensive in relation to the commodity currency, what is happening to the terms currency?

    <p>It is depreciating.</p> Signup and view all the answers

    Which statement is true about a long position in foreign exchange trading?

    <p>You are buying the currency with expectations of a rising rate.</p> Signup and view all the answers

    What defines a Foreign Exchange Contract?

    <p>A bilateral agreement to buy or sell one currency against another at an agreed price.</p> Signup and view all the answers

    In the context of FX Cash Flow, what does inflow signify?

    <p>Currency bought</p> Signup and view all the answers

    How is FX Profit or Loss expressed and converted?

    <p>In terms currency and can be converted to commodity currency using the current rate.</p> Signup and view all the answers

    What is indicated by a price quote in foreign exchange transactions?

    <p>The exchange rate for converting one currency into another.</p> Signup and view all the answers

    What does the term 'pips' refer to in the Foreign Exchange market?

    <p>A minimal unit of change in currency prices.</p> Signup and view all the answers

    What is the significance of the pricing conventions in foreign exchange transactions?

    <p>To standardize how currencies are quoted and traded internationally.</p> Signup and view all the answers

    In the example given, what is the calculated FX profit from the transactions assumed?

    <p>CHF 1,000.00</p> Signup and view all the answers

    What does a 'cross rate' refer to in foreign exchange?

    <p>The direct exchange rate between two currencies without using the US dollar.</p> Signup and view all the answers

    Study Notes

    Foreign Exchange Market

    • Interbank market: A key component of the FX market where banks and financial institutions execute large transactions, both for their clients and themselves.
    • Market Participants:
      • Banks and Financial Institutions: Dominate the interbank market, handling significant FX transactions daily. Examples include UBS, Barclays Capital, Deutsche Bank, and Citigroup.
      • Large Commercial Companies: Engage in FX trading for business purposes. For example, Apple exchanges USD for JPY to purchase components from Japan.
      • Speculators: Individuals who trade currencies on online platforms like OANDA, FXCM, Interactive Brokers, and eToro, aiming to profit from price fluctuations.
      • Governments and Central Banks: Primarily responsible for managing a nation's money supply and price stability. They may have:
        • Official Exchange Rate Target: A fixed rate or peg, like USD/CNY.
        • Unofficial Exchange Rate Target: Managed float, like EUR/CHF.
        • No Exchange Rate Target: Free float, like USD/PHP.

    Foreign Exchange Contract

    • A bilateral agreement between two parties to buy or sell one currency against another at a predetermined price on a specific date.
    • Involves two cash flows - one inflow and one outflow.
    • Defined by:
      • Two parties involved.
      • Two cash flows.
      • Two currencies.
      • An agreed price (two-way quote).
      • A specific value date.

    FX Market Conventions

    • Currencies:
      • Commodity Currency: The currency being priced or bought/sold.
      • Term Currency: The currency used as a reference for pricing (also known as price currency or quote currency).
      • Quotation System:
        • Price Quotation (Direct Quotation): Shows the cost of one unit of foreign currency in units of local currency (e.g., USD/PHP 56.80, meaning 1 USD = 56.80 PHP).
        • Volume Quotation (Indirect Quotation): Shows the cost of one unit of local currency in units of foreign currency.

    Understanding FX Rates

    • USD/PHP 56.80: Implies 1 USD can be exchanged for 56.80 PHP.
    • Buying USD: You pay PHP.
    • Selling USD: You receive PHP.

    FX Profits or Losses

    • Generated by price differences between buying and selling the commodity currency.
    • Calculated by keeping the commodity currency constant and determining the difference in the terms currency.
    • Expressed in terms currency and can be converted to commodity currency using the current rate.

    Currency Appreciation and Depreciation

    • Appreciation: Commodity currency becomes worth more units of term currency (price rises).
    • Depreciation: Commodity currency becomes worth less units of term currency (price falls).

    FX Trading

    • Long Position: Buying USD or buying another currency against USD, hoping for a rate increase.
    • Short Position: Selling USD or selling another currency against USD, hoping for a rate decrease.

    FX Jargon

    • Pip: Point in Percentage. The smallest unit of change in an FX rate.
    • Trade Date: The date when the transaction is agreed upon.
    • Settlement Date: The date when the transaction is actually completed.
    • Cross Rate: The exchange rate between two currencies that are not directly quoted against each other. Calculated by using a third common currency.
    • Explicit Quote: An FX quote expressed as the price of one unit of the commodity currency in terms of the term currency (e.g., USD/PHP 56.80).
    • Implied Quote: The reciprocal of the explicit quote.

    Treasury FX Activity

    • Aims to profit from FX rate movements by taking positions based on views on currency strength or weakness.
    • Uses FX trading to manage currency risk associated with cross-border transactions.
    • May use a combination of spot, forward, and option contracts to address FX exposures.

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    Foreign Exchange Activity PDF

    Description

    This quiz explores the dynamics of the foreign exchange market, focusing on key concepts such as the interbank market, market participants, and roles of banks, companies, speculators, and governments. Test your knowledge on how these entities interact within the FX landscape.

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