CPT Forex & Currency Markets 2 — Questions and Answers
Question 1: What does the 'spread' represent in a forex quote?
- The daily price range of a currency pair
- The difference between the bid and ask price (Correct answer)
- The overnight interest rate charged by a broker
- The margin required to open a position
Correct answer: The difference between the bid and ask price
The spread is the difference between the bid (selling) price and the ask (buying) price, representing the broker's transaction cost.
Question 2: Which of the following best describes a 'carry trade' in forex?
- Buying a currency pair at a low price and selling at a higher price intraday
- Borrowing in a low-interest-rate currency to invest in a high-interest-rate currency (Correct answer)
- Hedging a position by opening an equal and opposite trade
- Trading based on technical chart patterns
Correct answer: Borrowing in a low-interest-rate currency to invest in a high-interest-rate currency
A carry trade involves borrowing in a low-yielding currency and investing in a higher-yielding one to profit from the interest rate differential.
Question 3: What is the role of the Bank for International Settlements (BIS) in forex markets?
- It sets global currency exchange rates daily
- It acts as a central bank for central banks and publishes forex market surveys (Correct answer)
- It regulates retail forex brokers worldwide
- It manages the US dollar reserve currency status
Correct answer: It acts as a central bank for central banks and publishes forex market surveys
The BIS serves as a bank for central banks, fosters monetary cooperation, and publishes the authoritative triennial survey of global forex market turnover.
Question 4: If EUR/USD is quoted at 1.1050/1.1052, what is the cost to buy €100,000?
- $110,500
- $110,520 (Correct answer)
- $110,510
- $110,480
Correct answer: $110,520
To buy euros you pay the ask price of 1.1052, so €100,000 × 1.1052 = $110,520.
Question 5: In forex terminology, what is a 'cross pair'?
- A currency pair involving the US dollar on one side
- A currency pair that does not include the US dollar (Correct answer)
- Two currency pairs that are positively correlated
- A pair traded only on regulated exchanges
Correct answer: A currency pair that does not include the US dollar
A cross pair (or cross rate) is any currency pair that does not involve the US dollar, such as EUR/GBP or AUD/JPY.
Question 6: What triggers a 'margin call' in a leveraged forex account?
- A trader's profits exceed the margin requirement
- The account equity falls below the required margin level (Correct answer)
- A currency pair reaches a new 52-week high
- The broker's interest rate is raised
Correct answer: The account equity falls below the required margin level
A margin call occurs when account equity drops below the broker's required margin threshold, requiring the trader to deposit funds or close positions.
Question 7: Which session overlap is historically associated with the highest forex trading volume?
- Sydney–Tokyo overlap
- Tokyo–London overlap
- London–New York overlap (Correct answer)
- New York–Sydney overlap
Correct answer: London–New York overlap
The London–New York overlap (approximately 8 AM–12 PM EST) accounts for the largest share of daily forex volume due to simultaneous activity in the two biggest trading centers.
CPT Forex & Currency Markets 2
What does the 'spread' represent in a forex quote?