The Investment Advisor Body of Knowledge + Test Bank

CHAPTER 11 Foreign Exchange Market

In a global financial marketplace where transactions take place using many different currencies, currency risk must be understood, measured, and appropriately managed by investment advisors and consultants. This chapter will review the world's largest financial market, the foreign exchange market, and discuss how risk may be managed and how opportunities may be captured.

Part I Handbook of Finance: An Introduction to Spot Foreign Exchange

Learning Objectives

• Describe how the foreign exchange (FX) market works and how transactions take place.
• List and describe the three types of foreign exchange exposures.
• Explain the five basic foreign exchange products including: spot transactions, forward contracts, foreign exchange futures contracts, foreign exchange swaps, and currency options.
• Describe how advisors and investors use these products to manage risk and/or enhance return.

Part II Handbook of Finance: Currency Overlay

Learning Objectives

• Describe and differentiate between full or unitary hedging, partial hedging, overhedging, and cross-hedging.
• Discuss who should invest in a currency overlay.
• Describe common overlay strategies including: currency alpha, carry strategies, momentum strategies, flow strategies, valuation strategies, and quantitative currency overlay.
• Discuss the concept of strategy weighting and portfolio optimization.

Part I An Introduction to Spot Foreign Exchange

The foreign exchange market is by far the largest ...