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Questions and Answers
What distinguishes a forward transaction from a spot transaction?
What is the primary characteristic of future transactions compared to forward transactions?
Which of the following correctly describes swap transactions?
In option transactions, what do investors have the right to do?
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What is the role of the initial margin in future transactions?
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What is the main purpose of executing a spot transaction?
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Which term describes the rate at which a forward transaction is fixed?
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What is a potential drawback of engaging in swap transactions?
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What does the term 'Spot Exchange Rate' refer to?
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When do forward transactions typically occur?
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Study Notes
Spot Transactions
- Fastest method for currency exchange, settled within two days.
- No signed contract is necessary for the transaction.
- The prevailing market rate at the time of the transaction is known as the Spot Exchange Rate.
Forward Transactions
- Involves an agreement between buyer and seller to exchange currencies after 90 days.
- Fixed exchange rate is established for a specific future date.
- The established rate is referred to as the Forward Exchange Rate.
Future Transactions
- Similar to forward transactions but uses standardized contracts regarding features, size, and date.
- Requires an initial margin to be held as collateral, establishing a future position.
- Offers less flexibility compared to forward transactions.
Swap Transactions
- Involves simultaneous lending and borrowing of two distinct currencies.
- One investor borrows a currency and repays in another currency, facilitating obligation payments.
- Designed to mitigate foreign exchange risk.
Option Transactions
- Provides investors the right to exchange currency at an agreed rate on a specified date.
- Unlike forward contracts, investors are not obliged to convert the currency.
Conclusion
- Foreign exchange encompasses the conversion of one country's currency into another to settle payments.
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Description
This quiz covers the fundamentals of various foreign exchange transactions, including spot, forward, future, and swap transactions. Understand the key characteristics and differences among these transaction types, alongside their implications in currency exchange. Test your knowledge on the mechanisms that facilitate international trade and investment through efficient currency management.
