2.5 - asset classes: FX

what kind of marketplace is used to trade FX

OTC

what kind of institution dominates this marketplace

banks

is there a physical marketplace for FX

no

2 types of transaction in FX

spot

forward

4 most quoted currency pairs

USD/JPY

USD/CHF

GBP/USD

EUR/USD

what does bps mean

same as pips, basis points, and even cents in some FX transactions (eg. cable)

they all mean 0.01%

what are the pips in a cable price

the last two digits of a price that is to 4 decimal places

what do you do with a forward transaction that you don’t with a spot one

adjust it

what are the two types of forward adjustment u can do

discount —> you add on to the two way price (so you are given more variable currency for the same amount of base currency)

premium —> you take away from the two way price (so you are given less variable currency for the same amount of base currency)

two ways to calculate the forward rate

IRP - interest rate parity

PPP - purchasing power parity

why do forward rates exist

to avoid arbitrage using the different interest or inflation rates in different countries

what is a cross rate

exchange rate of a pair that doesn’t involve the USD

but the rate is calculated using USD anyways

what is a cryptocurrency

virtual or electronic currency

how are cryptocurrencies issued

through encryption technology

what else does this encryption technology do

records ownership + payments

crypto can be held in a…

…digital wallet

crypto is largely considered….

…high risk or speculative

6 risks to consider with cryptocurrencies

dvrrss

decentralised

volatility

regulation is evolving + inconsistent

not reserve backed

susceptible to human error, technical glitches + hacking

scalability

when are FX spot transaction setlled

T+2