Forex Trading Advanced Topics 2

Question 1

What does the term 'carry trade' refer to in forex?

Accepted Answer

Borrowing in a low-interest currency to invest in a high-interest currency

Answer

A carry trade involves borrowing in a low-yield currency and investing in a higher-yield currency to profit from the interest rate differential.

Question 2

Which risk most directly threatens a carry trade position?

Accepted Answer

Sharp reversal of the high-yield currency

Answer

A sudden depreciation of the high-yield currency can wipe out the accumulated interest income and produce large capital losses.

Question 3

In forex options, what does 'delta' measure?

Accepted Answer

Sensitivity of option price to a $1 move in the underlying

Answer

Delta measures how much an option's price changes for each one-unit (one pip) move in the underlying currency pair.

Question 4

What is 'gamma' in the context of forex options?

Accepted Answer

The rate of change of delta with respect to the underlying price

Answer

Gamma measures how quickly delta changes as the underlying price moves, indicating the curvature of the option's value.

Question 5

A trader opens a USD/CHF long position and simultaneously sells USD/JPY. This is an example of what strategy?

Accepted Answer

A synthetic cross-rate trade

Answer

Trading two USD pairs in opposite directions effectively creates a synthetic CHF/JPY position without directly trading that cross.

Forex Trading Practice Test