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The Spot Market
A financial market where assets such as commodities and securities are bought and sold for immediate payment. Prices are determined by supply and demand.
Direct quotation
The US dollar equivalent “Japanese yen is worth about a penny”
Indirect quotation
The price of a US dollar in the foriegn currency “You get 100 yen to the dollar”
Market mircostructure
refers to the mechanics of how a marketplace operates.
a)Bid asks spread increase with
b)Decreases with
a) exchange rate volatility
b) decreases with dealer competition
A forward contract
an agreement to buy or sell an asset in the future at prices agreed upon today
a)If you agreed to sell anything (spot or forward) you are
b) If you agreed to sell forex forwards you are
a)short
b)short
a) If you agreed to buy forex forward you are
b) If you agreed to buy forex forward you are
a)Long
b)Long
Swaps
An agreement to provide a counterparty with something they want such as cash flows, assets, or liabilities over a period of time in exchange for something you want. Commonly used for hedging risks or speculative purposes in financial markets.
Participants of FX markets can be classified into 5 groups
International banks
Bank customers
Non bank dealers
FX brokers
Central banks
(SWIFT) The Society for Worldwide Interbank Financial Telecommunication
allows international banks to communicate instructions
Triangular Arbitrage
The purpose of a triangular arbitrage is to earn an arbitrage profit by trading among 3 currencies when the quoted cross-exchange rate is not in alignment with the implied cross-exchange rate
Implied cross-rate bid discipline
If the direct quote is not consistent with cross-exchange rates, a triangular arbitrage is possible
An outright forward transaction is an
uncovered speculative position in a currency.
Exchange -Traded Currency Funds
ETF is a portfolio of financial assets in which shares representing fractional ownership of the fund trade on an organized exchange. Allows small investors the opportunity to invest in portfolios that would have been difficult to construct individually.
The Fx market
the largest and most active financial market
The Retail market
Where international banks service their customers who need foreign exchange to conduct international commerce.
