Question

True or false?

1) Currency trading lacks profitability for large commercial and investment banks but is maintained as a service for corporate and institutional customers.

2) The primary motive of foreign exchange activities by most central banks is profit.

3) Most transactions in the interbank foreign exchange trading are primarily conducted via telecommunication techniques and little is conducted face-to-face.

4) Nondeliverable Forwards were originally envisioned as a method of currency speculation, but it is now estimated that 70% of NDFs are trading for hedging purposes.

5) A contract to deliver dollars for euros in six months is both "buying euros forward for dollars" and "selling dollars forward for euros."

Answer 1

1.False.Speculative currency trades are executed to profit on currency fluctuations.

2.False.Central banks may be involved in foreign exchange markets for reasons that aren’t related to their own countries but are related to the common concerns at the international level. For example, several central banks may come together in a joint action in foreign exchange markets to provide liquidity and credit across the world.

3.True

4.False.Currently, estimates vary but many major market participants estimate as much as 60 to 80 percent of NDF volume is generated by speculative interest, noting growing participation from international hedge funds.

5.True