Forex Trading Advanced Topics 5

Question 1

What is the 'efficient market hypothesis' (EMH) and how does it challenge technical analysis in forex?

Accepted Answer

EMH states prices already reflect all available information, making consistent chart-based profits theoretically impossible

Answer

EMH argues that only fundamental analysis produces alpha

Answer

EMH guarantees that algorithmic strategies always outperform manual trading

Answer

EMH holds that central bank interventions have no effect on exchange rates

Question 2

What is 'purchasing power parity' (PPP) and its limitation as a forex trading tool?

Accepted Answer

PPP predicts short-term rate movements based on inflation, but markets routinely deviate for years

Answer

PPP measures the cost of carry between two currencies

Answer

PPP only applies to commodity-linked currencies like AUD and CAD

Answer

PPP is used exclusively by central banks to set interest rates

Question 3

A forex trader uses a 'grid trading' strategy. What does this involve?

Accepted Answer

Placing orders at fixed price intervals above and below the current price

Answer

Using a grid of technical indicators to confirm signals

Answer

Copying trades from multiple signal providers simultaneously

Answer

Dividing capital equally among 10 currency pairs

Question 4

What does 'quantitative easing' (QE) typically do to a country's currency?

Accepted Answer

Weakens the currency by expanding money supply and lowering yields

Answer

Strengthens the currency by increasing bond yields

Answer

Has no effect on currency value

Answer

Immediately causes hyperinflation

Question 5

In forex, what is 'basis risk' when hedging with currency futures?

Accepted Answer

The risk that the futures price and spot price diverge unexpectedly, leaving a hedge imperfect

Answer

The credit risk of the futures clearinghouse defaulting

Answer

The leverage risk inherent in futures contracts

Answer

The risk that futures expire before the hedge period ends

Question 6

What characterizes a 'black swan' event in forex markets?

Accepted Answer

An extremely rare, high-impact event outside normal expectations that causes massive price dislocations

Answer

A predictable seasonal trend in currency markets

Answer

A broker insolvency event triggered by overleveraged clients

Answer

A coordinated G7 central bank intervention

Question 7

What does 'theta' represent in a forex options position, and why does it matter for option sellers?

Accepted Answer

Theta measures time decay of option premium, which benefits sellers who collect premium as it erodes

Answer

Theta measures the sensitivity of delta to underlying price changes

Answer

Theta tracks changes in implied volatility over time

Answer

Theta represents the overnight financing cost of the option