Forex & Currency Markets Flashcards
7 cards from real CPT practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Forex & Currency Markets flashcards as text
What is the 'dollar smile' theory in forex markets?
Answer: The USD strengthens both during global growth booms and during risk-off crises, but weakens in moderate growth periods
The dollar smile theory, coined by Morgan Stanley, posits that the USD strengthens at both extremes—strong US growth and global risk-off flights to safety—but underperforms during steady global expansion.
Which risk is unique to holding positions in emerging market (EM) currencies compared to G10 currencies?
Answer: Convertibility and capital control risk
EM currencies carry the added risk that a government may impose capital controls or restrict convertibility, preventing investors from repatriating funds or closing positions.
How does the concept of 'sterilization' apply to central bank forex intervention?
Answer: The central bank offsets the domestic money supply impact of its FX purchases or sales using open market operations
Sterilized intervention means the central bank buys or sells FX while simultaneously conducting offsetting open market operations to neutralize the effect on domestic money supply.
What does a persistent current account deficit typically imply for a country's currency over the long run?
Answer: It tends to put downward pressure on the currency as the country must finance the deficit with capital inflows
A chronic current account deficit means a country spends more on imports than it earns from exports, requiring sustained foreign capital inflows or reserve drawdowns that can weaken the currency long-term.
In forex options, what does a 'risk reversal' position indicate when the implied volatility of puts exceeds that of calls for the same expiry?
Answer: The market has a net bearish bias on the base currency, with more demand for downside protection
A negative risk reversal (higher put implied vol than call) shows that market participants are paying a premium for downside protection, reflecting a bearish skew on the base currency.
What is the main difference between the interbank forex market and the retail forex market?
Answer: The interbank market involves large institutions trading directly with tighter spreads; retail traders access it through broker intermediaries at wider spreads
The interbank market is a network of large banks trading multimillion-dollar lots with razor-thin spreads, while retail traders access these rates through brokers who add a markup.
When a central bank announces a 'currency intervention,' which of the following is an example of verbal (jawboning) intervention?
Answer: An official publicly warns that the currency is overvalued and the bank stands ready to act
Jawboning (verbal intervention) uses official statements or threats to influence market expectations without actually transacting in the forex market.