FIA Foreign Exchange & Currency Markets Flashcards

What is a forward exchange contract primarily used for?

Answer: Hedging against future currency exchange rate risk

A forward exchange contract locks in an exchange rate for a future date, allowing businesses to hedge against the risk of adverse currency movements.

Which of the following best describes 'purchasing power parity' (PPP)?

Answer: A theory stating exchange rates adjust so identical goods cost the same in different countries

Purchasing power parity holds that exchange rates will adjust over time so that identical goods have equivalent prices across countries when expressed in a common currency.

In the context of FX markets, what does 'pip' stand for?

Answer: Percentage in point — the smallest standard price increment in a currency pair

A pip (percentage in point) is the smallest standard price move in a currency pair, typically the fourth decimal place for most pairs.

What is a 'currency swap'?

Answer: An agreement to exchange principal and interest in one currency for those in another currency

A currency swap involves two parties exchanging principal and interest payments in different currencies over a specified period.

Which factor does NOT typically cause a currency to depreciate?

Answer: Rising interest rates relative to other countries

Rising interest rates typically attract foreign capital seeking higher returns, which causes a currency to appreciate rather than depreciate.

What does 'triangular arbitrage' involve in the FX market?

Answer: Exploiting price discrepancies among three currency pairs to earn a risk-free profit

Triangular arbitrage involves converting one currency to a second, the second to a third, and the third back to the first to exploit inconsistencies in exchange rates.