CAED102: FINANCIAL MARKETS

ACTIVITY #6: FOREIGN EXCHANGE

Name: ___Xytus Anne Cortero______ Section: ___AC24______

INSTRUCTIONS:
Answer the following questions and cite your corresponding source/s.

1. What is forex? (1 pts)

Answer: The Foreign Exchange (Forex) market is one in which a nation’s currency is
traded for that of another at a mutually agreed rate. It is run electronically within a network of
banks, 24 hours, 5 days a week. It is the largest market in the world.
Source/s:
Khoo, A. (2017, October 7). Professional Forex Trading Course Lesson 1 By Adam Khoo [Video
file]. Retrieved from https://www.youtube.com/watch?time_continue=1605&v=GprwlQ-
5OC4&feature=emb_logo

2. What are the 2 key purposes of forex? (2 pts)

Answer: The whole purpose of trading forex online, for most people, is to make money.
Corporations sometimes use it to offset a contract or future purchase that they plan to make.
Retail traders trade in the forex markets to make money on changes in the values of currencies
over time.
Source/s:
Russel, J. (2019, June 25). Understanding Foreign Exchange Trading. Retrieved from
https://www.thebalance.com/understanding-foreign-exchange-trading-1345160#:~:text=The
%20whole%20purpose%20of%20trading,values%20of%20currencies%20over%20time.

3. Differentiate spot, forward and future market? (3 pts)

Answer:
 A spot market or cash market is where the exchange of financial instruments settle
immediately. Stocks and currencies are the most well-known spot market instruments.
A futures market is where participants buy and sell contracts for delivery on a
specified date in the future. The main difference between spot and futures prices is
that spot prices are for immediate buying and selling, while futures contracts delay
payment and delivery to predetermined future dates.
 If the operation is of daily nature, it is called spot market or current market. It handles
only spot transactions or current transactions in foreign exchange while a market in
which foreign exchange is bought and sold for future delivery is known as Forward
Market. It deals with transactions (sale and purchase of foreign exchange) which are
contracted today but implemented sometimes in future.
Source/s:
[Difference between Spot Market and Forward Market |Foreign Exchange]. (n.d.). Retrieved
from https://www.economicsdiscussion.net/difference-between/difference-between-spot-
market-and-forward-market-foreign-exchange/615
[Spot Price]. (2020). Retrieved from
https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/spot-
price/#:~:text=The%20main%20difference%20between%20spot,situation%20is%20known%20as
%20contango.
[Spot Market vs Futures Market – 6 Key Differences]. (n.d.). Retrieved from
https://tradingsim.com/blog/6-key-differences-spot-market-futures-market/

4. Who trade forex (name atleast 5)? Note: Not individual name of persons. (5 pts)
Answer:
 Commercial & Investment Banks
 Investment Managers and Hedge Funds
  Financial institutions also hedge or simply invest
 Businesses use the forex market to facilitate international trade
 Government use the forex market to implement policies
 Central banks, which represent their nation's government, are extremely
important players in the forex market.
 Multinational Corporations
Source/s:
Seb, S. (2018, September 5). What Is Forex Trading? SIMPLIFIED Explanation Easy To Learn
For Beginners [Video file]. Retrieved from https://www.youtube.com/watch?v=ZTZ-X5cf-
6Q&feature=emb_logo
Troy, S. (2019, October 24). Forex Market: Who Trades Currency and Why. Retrieved from
https://www.investopedia.com/articles/forex/11/who-trades-forex-and-why.asp
TD Ameritrade. (2018, January 11). Investing Basics: Forex [Video file]. Retrieved from
https://www.youtube.com/watch?v=ZTZ-X5cf-6Q&feature=emb_logo

5. How much is the volume of currencies traded in a single day? (1 pts)

Answer: 3 trillion per day in 2017 but in 2019 Global currency trading surges to 6.6
trillion per day.
Source/s:
Khoo, A. (2017, October 7). Professional Forex Trading Course Lesson 1 By Adam Khoo [Video
file]. Retrieved from https://www.youtube.com/watch?time_continue=1605&v=GprwlQ-
5OC4&feature=emb_logo
Debnath, A. & Barton, S. (2019, September 17). Global Currency Trading Surges to $6.6
Trillion-A-Day Market. Retrieved from https://www.bloomberg.com/news/articles/2019-
09-16/global-currency-trading-surges-to-6-6-trillion-a-day-market

5. Using the video as reference, what are the types of currency pairs? (3 pts)
Answer:
 Major currency pairs – traded most often
 Minor or emerging currency pairs
Source/s:
Seb, S. (2018, September 5). What Is Forex Trading? SIMPLIFIED Explanation Easy To Learn
For Beginners [Video file]. Retrieved from https://www.youtube.com/watch?v=ZTZ-X5cf-
6Q&feature=emb_logo

6. Name the 7 Majors? (7 pts)

Answer:
1. EUR/USD
2. GBP/USD
3. USD/JPY
4. USD/CHF
5. AUD/USD
6. NZD/USD
7. USD/CAD
Source/s:
Khoo, A. (2017, October 7). Professional Forex Trading Course Lesson 1 By Adam Khoo [Video
file]. Retrieved from https://www.youtube.com/watch?time_continue=1605&v=GprwlQ-
5OC4&feature=emb_logo

7. What is spread? How it is being measured? (2 points)

Answer: The difference between the buy price and the sale price is called the Spread. The
spread is measure not in whole dollars or pounds but in so called PIPs(Price Interest Points). This
the smallest possible price change on most trading platforms. For most currency pairs this is the
fourth number after the decimal point.
Source/s:
Seb, S. (2018, September 5). What Is Forex Trading? SIMPLIFIED Explanation Easy To Learn
For Beginners [Video file]. Retrieved from https://www.youtube.com/watch?v=ZTZ-X5cf-
6Q&feature=emb_logo

8. Enumerate and discuss atleast three (3) key factors that affect forex markets? (6 points)
Answer:
1. Inflation Rates
Changes in market inflation cause changes in currency exchange rates. A country
with a lower inflation rate than another's will see an appreciation in the value of its
currency. The prices of goods and services increase at a slower rate where the
inflation is low. A country with a consistently lower inflation rate exhibits a rising
currency value while a country with higher inflation typically sees depreciation in its
currency and is usually accompanied by higher interest rates
2. Interest Rates
Changes in interest rate affect currency value and dollar exchange rate. Forex rates,
interest rates, and inflation are all correlated. Increases in interest rates cause a
country's currency to appreciate because higher interest rates provide higher rates to
lenders, thereby attracting more foreign capital, which causes a rise in exchange rates
3. Recession
When a country experiences a recession, its interest rates are likely to fall, decreasing
its chances to acquire foreign capital. As a result, its currency weakens in comparison
to that of other countries, therefore lowering the exchange rate.
Source/s:
[8 Key Factors that Affect Foreign Exchange Rates]. (2020, April 9). Retrieved from
https://www.compareremit.com/money-transfer-guide/key-factors-affecting-currency-
exchange-rates/

9. Enumerate and discuss the two (2) components of a currency pair? (4 points)
Answer: The two components of the currency pair are the base currency and the
quote currency. The base currency is what you buy or sell and the quote currency shows
how much you will pay or receive
Source/s:
Seb, S. (2018, September 5). What Is Forex Trading? SIMPLIFIED Explanation Easy To Learn
For Beginners [Video file]. Retrieved from https://www.youtube.com/watch?v=ZTZ-X5cf-
6Q&feature=emb_logo

10. Differentiate margin and leverage? (2 point)

Answer: Although interconnected—since both involve borrowing—leverage and
margin are not the same. Leverage refers to taking on debt, while margin is debt or
borrowed money a firm uses to invest in other financial instruments. A margin account
allows you to borrow money from a broker for a fixed interest rate to purchase securities,
options, or futures contracts in the anticipation of receiving substantially high returns.
You can use margin to create leverage.

Margin trading is the practice of using assets owned by an individual as collateral for
soliciting a loan from a broker. The loan received is used carrying out trades while
leverage is the practice of using borrowed capital to carry out an endeavor in order to
amplify its potential returns.
Source/s:
Hayes, A. (2020, July 2). Leverage. Retrieved from
https://www.investopedia.com/terms/l/leverage.asp
Broking, A. (2020, July 8). DIFFERENCE BETWEEN MARGIN TRADING AND
LEVERAGE. Retrieved from https://www.angelbroking.com/knowledge-center/online-
share-trading/difference-between-margin-and-leverage