Financial Markets: Key Concepts in FX, Futures, and Options

What is not strictly foreign currency?

b) Bills of exchange, promissory notes, and bank notes in foreign currency.

How can a foreign currency market maker orient quotes?

a) Orient USD/EUR quotes towards selling EUR, buying them and selling them cheaper than competitors.

In the formula i F = (T F - T 0 / T 0 ) * (360 / t):

b) T 0 = cash exchange rate, T F = forward exchange rate, t = time in days.

What does Interest Rate Parity Theory establish?

c) Equality between the appreciation or depreciation of a currency's future exchange rate relative to a reference currency, and the interest rate differences between those currencies.

Currency SWAP operations:

b) Principal amounts are exchanged at the beginning and end, or only at the end of the swap.

Differences between Forward and Futures markets:

d) The Forward market is banking in nature with non-standardized contract amounts, while the Futures market is negotiated through an Exchange/Clearinghouse with standardized amounts.

FRA purchase: Guaranteed rate lower than reference rate?

d) The buyer receives a settlement payment from the seller at the beginning of the contract period.

Characteristics of a forward-forward operation:

• An indebtedness and an investment simultaneously.
• An amount of money that is effectively borrowed and invested.
• Term greater than one year.

d) All the above are correct.

To perform an investment forward-forward operation:

a) Invest at a fixed rate for a long period and borrow simultaneously for a short period.

Forward-forward debt vs. FRA purchase:

b) This statement is false because both operations aim to protect against potential increases in interest rates.

IBEX-35 Futures: Bought 3, Sold 4. New position?

a) You would be short in 1 contract due in March.

IBEX-35 Futures: Short position in Dec, due March. Liquidate?

b) Buy a futures contract on the IBEX-35 due March.

Investor with a short futures position:

b) Expects prices to decrease.

Investor who sells futures contracts:

b) Expects prices to decrease.

A CALL option:

• a) Gives the buyer the right, but not the obligation, to buy the underlying asset at a certain price.
• c) Obliges the seller, if the buyer exercises the right, to sell the underlying asset at a certain price.

e) Only a) and c) are correct.

A PUT option:

• b) It gives the seller the right, not the obligation, to sell the underlying asset at a certain price.
• d) It gives the buyer the right, not the obligation, to sell the underlying asset at a certain price.

Option d) correctly describes the right of a PUT option buyer.