Unicorn Academy › The currency markets

The currency markets: 45 questions and answers

The questions from the The currency markets course, each with the correct answer and a short explanation. Learn the topic step by step in the Unicorn Academy app.

1. What the foreign exchange market is

What is traded in the foreign exchange market?

Currencies Forex is the market where one currency is exchanged for another.

What does it mean that forex is over the counter?

That trades take place directly between participants, with no central exchange There is no single venue: the market is a network of participants.

According to the Bank for International Settlements, how much was average daily trading in April 2022?

About 7.5 trillion dollars This is the figure from the triennial survey of April 2022.

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2. Currency pairs

In the pair EUR/USD, which is the base currency?

The euro The base currency is the first in the pair.

What does EUR/USD at 1.10 mean?

That one euro is worth 1.10 dollars The price expresses how many units of the quote currency are needed for one of the base.

What do you do when you buy the pair EUR/USD?

You buy euros and sell dollars You buy the base currency and sell the quote currency.

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3. Majors, crosses and exotics

What do the major pairs have in common?

They all have the US dollar on one side The majors are the most traded pairs and always include the dollar.

What is a cross pair?

A pair that does not contain the dollar EUR/GBP and EUR/JPY are examples of crosses.

What characterises exotic pairs?

They have wider price gaps and sharp moves With less trading, costs rise and prices move more.

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4. Who takes part in the market

Where are the reference prices of currencies formed?

In the interbank market The large banks trade currencies among themselves and set the reference prices.

Why does a company use the foreign exchange market?

To pay and collect in foreign currency International business requires converting currency.

How much do private individuals account for in total volumes?

A small part The market is dominated by banks and institutional participants.

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5. A market open 24 hours

Why does the foreign exchange market not close during the week?

Because it follows the time zones from one centre to the next The centres hand over to one another around the clock.

Which centre has the largest volumes?

London London is the world's main centre for currency trading.

When is liquidity highest?

When London and New York are open together The overlap of the two sessions concentrates trading.

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6. Bid, ask and spread

What is the ask price?

The price at which the intermediary sells to the client The client buys at the ask and sells at the bid.

What does someone lose by buying and immediately reselling a pair?

The spread The spread is the implicit cost of the trade.

When does the spread tend to widen?

With thin liquidity and around important data Fewer participants and more uncertainty make trading more expensive.

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7. The pip

What does a pip correspond to in most pairs?

The fourth decimal place For example from 1.1000 to 1.1001.

What is the main exception?

Pairs with the yen, where the pip is the second decimal place Pairs with the yen are quoted with two decimals.

Why is it useful to know how much a pip is worth in money?

To measure the gains, losses and costs of the position The value of the pip depends on the size of the position.

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8. Lots and position size

How many units of the base currency does a standard lot correspond to?

100,000 The mini lot is 10,000 units and the micro lot 1,000.

About how much is a pip worth on EUR/USD for a standard lot?

10 dollars A pip is 0.0001, and 100,000 times 0.0001 is 10 dollars.

What happens with a position ten times larger?

Gains and losses are ten times greater Size multiplies the effect of every move.

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9. Spot, forward and swap

What is a spot transaction?

An exchange at the current price with settlement within a few days Spot is the exchange for immediate delivery.

What is a forward contract for, from a company's point of view?

Fixing today the rate of a future exchange It makes it possible to know in advance how much will be received or paid.

What does a currency swap combine?

An exchange today and the reverse exchange on a future date It is a double exchange, widely used by banks.

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10. Reading a move

If EUR/USD rises from 1.10 to 1.12, what has happened?

The euro has appreciated against the dollar More dollars are needed to buy one euro.

Can a currency rise against one and fall against another on the same day?

Yes, because the move is always relative Every exchange rate compares two currencies.

What effect does a strong euro have for those living in the euro area?

Cheaper imports and travel abroad With a strong euro you can buy more in foreign currency.

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11. Interest rates and central banks

Why does a currency with higher rates tend to attract capital?

Because holding it in deposits or securities pays more The higher yield draws in investors.

Who decides the benchmark interest rates?

Central banks For example the Federal Reserve and the European Central Bank.

What does the market react to above all?

The surprise compared with expectations What is expected is already in the prices.

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12. Inflation and purchasing power

What tends to happen in the long run to the currency of a country with high inflation?

It depreciates Inflation erodes the purchasing power of the currency.

What does purchasing power parity state?

That the same basket should cost the same in different countries at the current exchange rate It is a long-run reference for the value of currencies.

Does purchasing power parity say when the exchange rate will realign?

No, exchange rates can stay away from it for years It is useful for the long run, not for timing.

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13. Macroeconomic data and the calendar

What is the economic calendar?

The list of release dates for data on the economy The dates of the data are known in advance.

When is the monthly US employment report normally published?

On the first Friday of the month It is one of the data releases the market follows most.

What happens around the release of an important figure?

Prices can move a lot and spreads widen Uncertainty makes trading more expensive and moves larger.

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14. Balance of payments and capital flows

What does the current account record?

Trade in goods and services with the rest of the world It is the part of the balance of payments linked to trade.

Why does a trade surplus support the currency?

Because foreign buyers have to obtain that currency in order to pay Exports generate demand for the national currency.

Why can a country in deficit still have a strong currency?

Because foreign investors keep buying its assets Financial flows far exceed trade flows.

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15. Safe haven currencies and risk aversion

What is a safe haven currency?

A currency that tends to appreciate in phases of stress Investors look for it when they want to reduce risk.

Which are the most often cited safe haven currencies?

US dollar, Swiss franc and yen These are the three currencies most associated with the search for safety.

Is safe haven behaviour guaranteed?

No, it depends on the crisis and can change over time No currency behaves the same way in every crisis.

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