1.

What is an International Bank?

Answer:
An international bank is a financial entity that offers financial
services, such as payment accounts and lending opportunities, to foreign
clients. These foreign clients can be individuals and companies, though every
international bank has its own policies outlining with whom they do business.
An international bank is an organization that matches people and companies
to international banking -- international banks tend to offer their services to
companies and to fairly wealthy individuals that is people with $100,000 and
counting. But plenty of international banks, particularly Swiss banks, open
their doors to customers of any income bracket.

2.

What are the reasons to bank internationally?

Answer:
Theres a wealth of reasons for individuals and companies to
bank internationally.
Low Marginal Costs:
Managerial and marketing knowledge developed at
home can be used abroad with low marginal costs.
Knowledge Advantage: The foreign bank subsidiary can draw on the parent
banks knowledge of personal contacts and credit investigations for use in
that foreign market.
Home Nation Information Services: Local firms in a foreign market may be
able to obtain more complete information on trade and financial markets in
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the multinational banks home nation than is obtainable from foreign

domestic banks.
Prestige: Very large multinational banks have high perceived prestige,
which can be attractive to new clients.
Regulatory Advantage: Multinational banks are often not subject to the
same regulations as domestic banks.
Wholesale Defensive Strategy:
Banks follow their multinational
customers abroad to avoid losing their business at home and abroad.
Retail Defensive Strategy:
Multinational banks also compete for retail
services such as travelers checks, tourist and foreign business market.
Transactions Costs:
Multinational banks may be able to circumvent
government currency controls.
Growth:
Foreign markets may offer opportunities to growth not found
domestically.
Risk Reduction:

Greater stability of earnings due to diversification.

3. What is the process of establishing an account at a

reputable international bank?
Answer:
The process of establishing an account at a reputable
international bank will probably include the following:
The bank will confirm your identity and the identities of anyone who
has an ownership interest in your money.
The bank will ask you about your intentions. Why do you need an
international bank account? What does your business do?
The bank will inquire about the origin of your deposits, especially very
large ones. Where'd you get that $756 million, son? Hopefully not from that
big heist in downtown Rome.
The bank will ask for references. Are you a reputable individual or
company?
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 The bank will analyze how risky a customer you would be. Can you or
your company pay back loans?

4.

What are the hazards of international banking?

Answer:

There are some hazards in international banking:

Is the bank in a country on the verge of civil war or economic collapse?

Is the bank in a country notorious for its corruption? Keep your money
away from fire.
Is the bank known for efficiency and smart investments or for poor
customer service and federal bailouts? Again, do your homework.
Just as domestic currency can change value, so can foreign currency. If
you invest your money in a foreign bank, and then the value of the
foreign currency plummets, you lose money. Furthermore, if you make
a bunch of money through an international investment, your profit may
be greatly reduced when you convert the money to your less-thanbooming home currency.
The Federal Deposit Insurance Corporation (FDIC) does not insure
foreign banks, though it can insure U.S. divisions of foreign-based
banks. If you're planning on banking internationally, inquire about
depositor insurance provided by the bank's home government or other
entity.
Because of rising international concern about money laundering,
terrorism and tax evasion, many international banks will keep an eye on
your account activity. If you're moving massive amounts of money
around quickly, you will raise a red flag. Criminals and terrorists love to
launder money through international banks, passing their questionable
funds through foreign accounts, many of them anonymously held, until
the legal trail is lost.
Tax evaders often use international banks to set up companies and
trusts whose sole purpose is to hide money and erase its relationship
to the owner. If a tax collector, such as the Internal Revenue Service,
can't prove you own the money, it can't collect taxes on it. If these
companies and trusts arent legitimate money-making entities, youre
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participating in an abusive tax shelter (by U.S. law, at least). The IRS
charges very stiff penalties for participating in abusive shelters. In the
settlement offered by the IRS in the Son of Boss abusive tax shelter,
participants paid penalties of as much as 20 percent of their unpaid tax
on top of their outstanding tax liability.
Be careful with the offshore banks you do business with -- don't be
collateral damage in the wars against tax evasion, money laundering
and terrorism.
Anonymous Banking: In the past, many international banks offered
relative anonymity and secrecy to their customers. Since the terror
attacks of September 11, 2001, however, the United States has worked
with countries around the world to eliminate anonymous banking, the
purpose being to uncover the identities of account-holders suspected
of criminal activity. The completely anonymous, numbered Swiss
account is also a myth. There is always a record of who opened the
account.

5.

What are the Services offered by International Banks?

Answer:
Trade Financing: Facilitate imports and exports of their clients.
Foreign exchange:
Arrange for foreign exchange such as crossborder transactions and foreign investments.
Hedging: Assist in hedging exchange rate risk.
Product exchanging: Trade foreign exchange products for their
own account.
Borrow & Lend: Borrow and lend in the Eurocurrency market.
International Loan:
Participate in international loan syndicate
lending to MNCs- project financing and to sovereign governments
economic development.
Underwriting:
Participate in underwriting of Eurobonds and foreign
bonds issues.

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 Consultancy & advice: Provide consultancy and advice on hedging

strategies, interest rate and currency swap financing and international
cash management services.

6.

What is a Universal Bank or Full service banks?

Answer:
Banks providing all the above services which are trade financing,
foreign exchange, hedging, product exchanging, borrow & lend, international
loan and underwriting, are commonly known as universal banks or full service
banks.

7. What are the difference between international

banking and domestic banking?
Answer:
Normally all the International Banks do everything that a
domestic banks do but international banks do these functions in an
international level. International banks, like domestic banks, act as financial
intermediaries, but they operate in a different legal environment. The law
regulating domestic banking in each nation are typically very restrictive, yet
many nations allow international banking to operate largely unregulated.
Because they are not hampered by regulations, international banks typically
can offer depositors and borrowers better terms than could be negotiated at
a domestic bank.

8.

What are the different types of International Banking?

Answer:

Correspondent bank: A correspondent is a bank that handles the

local leg of a business transaction and the associated documents, as an agent
of a bank in another city or country. Also called agent bank.
Banks located in different countries establish accounts in other bank.
Provides a means for a banks MNC clients to conduct business
worldwide through his local bank or its contacts.
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 Provides income for large banks.

Smaller foreign banks that want to do business, say in the U.S., will
enter into a correspondent relationship with a large U.S. bank for a fee.

Representative office: Representative office means any office of a

foreign bank which is located in any State and is not a Federal branch, Federal
agency, State branch, or State agency.
A small service facility staffed by parent bank personnel that is
designed to assist MNC clients of the parent bank in dealings with the
banks correspondents.
No traditional credit services provided.
Looks for foreign market opportunities and serves as a liaison between
parent and clients.
Useful in newly emerging markets.
Representative offices also assist with information about local business
customs, and credit evaluation of the MNCs local customers.
It is useful when the bank has many MNC clients in a country.

Foreign Branch: A type of foreign bank that is obligated to follow the

regulations of both the home and host countries.
A foreign branch bank operates like a local bank, but is legally part of
the parent, not a separate entity.
Subject to both the banking regulations of home country and foreign
country.
Reasons for establishing a foreign branch.
More extensive range of services (faster check clearing, larger loans).
Foreign branches are not subject to Canadian reserve requirements or
deposit insurance.
Compete with host country banks at the local level.
Most popular means of internationalizing bank operations.

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Subsidiary and Affiliate Bank: A type of foreign bank that is
incorporated in the host country but is considered to be owned by a foreign
parent bank.
And an affiliate bank means a type of inter-company relationship in which one
of the companies owns less than a majority of the other company's stock, or
a type of inter-company relationship in which at least two different
companies are subsidiaries of a larger company.
In the banking industry, affiliate and subsidiary banks are the most
popular setups for foreign market entry.
A subsidiary bank is a locally incorporated bank that is either wholly
owned or owned in major part by a foreign parents.
An affiliate bank is one that is only partially owned, but not controlled
by its foreign parent.
Both subsidiary and affiliate banks operate under the banking laws of
the country in which they are incorporated.
They are allowed to underwrite securities.

Offshore Banking Center:

An Offshore Banking Center (OBC) or
Offshore Financial Center (OFC) is a place where offshore banks and financial
institutions are established that do not participate in the domestic banking
system.
A country whose banking system is organized to permit external
accounts beyond the normal scope of local economic activity.
The host country usually grants complete freedom from host-country
governmental banking regulations.
Banks operate as branches or subsidiaries of the parent bank.
Primary credit services provided in currency other than host country
currency.

Edge Act Banks: A US banking entity, owned by a state or nationally

chartered BANK, with an international business scope. Edge Act banks are

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authorized to operate interstate branches, accept deposits from offshore

sources, invest in foreign securities and projects, and grant foreign LOANS.
Edge Act banks are federally chartered subsidiaries of U.S. banks that
are physically located in the U.S. that are allowed to engage in a full
range of international banking activities.
The Edge Act was a 1919 amendment to Section 25 of the 1914 Federal
Reserve Act.

9. What is offshore banking center and what is the

reason behind this?
Answer:
An Offshore Banking Center (OBC) or Offshore Financial Center
(OFC) is a place where offshore banks and financial institutions are
established that do not participate in the domestic banking system.
A country whose banking system is organized to permit external
accounts beyond the normal scope of local economic activity.
The host country usually grants complete freedom from host-country
governmental banking regulations.
Banks operate as branches or subsidiaries of the parent bank.
Primary credit services provided in currency other than host country
currency.
The IMF recognizes the Bahamas, Bahrain, the Cayman Islands, Hong
Kong, the Netherlands Antilles, Panama, and Singapore as major
offshore banking centers.
Reasons for offshore banks:
Privacy:
To protect the free flow of your personal information and
dealings. An offshore entity has no obligation to release your personal
or business information, affording you with a great deal of privacy &
confidentiality.
Tax Efficiency:
Your savings, investments, assets or business profits
can grow almost free of any form of taxation. This does not mean tax
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avoidance, it simply means whilst your assets are held offshore they will
benefit from very favorable tax advantages.
Asset Protection: There are many methods in which to protect your
assets using an offshore structure, in the form of an investment
product, an IBC (International Business Company) or an offshore trust,
or even a simple offshore bank account.
These will protect your assets from:
Protection from invasive bureaucracy
Protection against lawsuits
Protect your assets from seizure
Regulatory Advantages:
The regulations in force within most
high tax countries, are there to protect investors, and rightly so.
However, due to the very strict nature of these regulations, fund
managers feel as if they are wearing a financial straight Jacket. It is
difficult for them to compete with the returns of their offshore-based
partners who enjoy less restrictive regulation.

10. What are the advantages and disadvantages of

offshore banking?
Answer:
An Offshore Banking Center (OBC) or Offshore Financial Center
(OFC) is a place where offshore banks and financial institutions are
established that do not participate in the domestic banking system.
Advantages:

Greater security and privacy of capital: Offshore Banks offer their

clients the utmost security and privacy while banking. Confidentiality is the
first priority.

Centralized account management: It allows you to set-up a personal

or corporate bank account, offshore trusts and the Incorporation of Business
Companies in one place with access worldwide rather than having accounts
in more than one country.

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Real savings: Benefiting from higher interest rates on your savings
account, having access to personal and business loans with lower rates or
simply by having access to funds worldwide via a credit card.

Tax Benefits: Lower tax rate or no taxes especially for those who aim
to secure and protect their money and assets.

Lower bank fees: As compared to your local or domestic banks, an

offshore bank operates with lesser cost due to low overhead expenses and
government incentives thus providing higher interest rates on savings
accounts and lesser bank fees.

Access to Global Market: Having an offshore bank account gives many

investors the opportunity to enter the global market. It opens the doors for
new investors with a wider range of currency flow.

Easy access to International Funds: An offshore account is an essential

tool for business persons who travel extensively since it gives you the
opportunity to have access and services from anywhere in the world whether
offline or online. It gives you international access to funds in local currencies
via ATMs.

Greater investment Opportunities: Banking offshore provides you

with the resources necessary to invest. One of the greatest offshore banking
benefits is the fact that you can take advantage of the low interest rate loans
and Lines of credit that will give you the funds necessary to accomplish your
dreams which is either owning a piece of paradise or creating a business.

Early Retirement: You can enjoy the freedom of living in paradise, such
as Belize who has a very low cost of living, while enjoying higher interest rates
on your savings accounts with an offshore / international bank account.

Overall, an offshore bank account can offer you a starting point, a paved road
towards freedom, privacy and new investments. It is all about doing your
research and choosing the right offshore bank that best fits your needs.

Disadvantages:

Offshore bank accounts are sometimes less financially secure. In a

banking crisis which swept the world in 2008, some savers lost funds that
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were not insured by the country in which they were deposited. Those who
had deposited with the same banks onshore received all of their money back.

Offshore banking has been associated in the past with the

underground economy and organized crime, through money laundering.
Following September 11, 2001, offshore banks and tax havens, along with
clearing houses, have been accused of helping various organized crime gangs,
terrorist groups, and other state or non-state actors.

Offshore jurisdictions are often remote, and therefore costly to visit, so

physical access and access to information can be difficult. This problem has
been alleviated to a considerable extent with the advent and realization of
online banking as a practical system.

Offshore private banking is usually more accessible to those on higher

incomes, because of the costs of establishing and maintaining offshore
accounts. However, simple savings accounts can be opened by anyone and
maintained with scale fees equivalent to their onshore counterparts.

Offshore bank accounts are sometimes touted as the solution to every

legal, financial and asset protection strategy but this is often much more
exaggeration.

11.

What is the concept behind International bank?

Answer:
Banking system came along with the development of money as
an institution. The transaction of commodities across countries required
financial intermediation in the international level and thus international level
and thus international banking business was born. International banking
operations are essentially to facilitate the movement of goods across the
political boundary of countries.
In this way the emergence and the growth of international banking is closely
interwoven with the development international trade and international
capital movement.
Before World War (1) when European banks dominated the world capital
market, during the period 1940-1960, regulatory control of capital flow and
convertibility of the currencies reduced the importance of international
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banking. From 1960 onwards globalization of capital market started and it

helps in expansion of international banking in todays scenario.
The major business of international banks is based on international trade,
international transfer of capital and money and derivatives.

12. What are the main financing activities of International

Banking?
Answer:

Main financing activities:

Key feature is nationality of issuer and investor differs

(1) Syndicated lending Credit facility offered simultaneously by a number of
banks from more than one country who sign same loan agreement and stand
equally in right of repayment.
Lead manager does credit assessment and monitoring.
Unsecured but extensive covenants Use in finance of projects and mergers.
(2) Eurobond issuance and trading Bearer bonds issued in markets other
than the country of issue. Unsecured and few covenants except negative
pledge (no future borrowing at higher seniority), and usually call provisions.
(3) Euro notes, international equity, international interbank market
Information asymmetry (e.g. on overall indebtedness and susceptibility to
penalties) and hence adverse selection. Moral hazard and rationing
sovereign forces borrower to extend more credit than is optimal.
Possible international rescues and further moral hazard.
Free rider problems in resolution of crises never in individual banks
interests to forgive debt. Issue of holdouts in restructuring a particular
problem when debts are securitized.

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13. What is Euro Money/Currency and Euro Credits and

Euro Deposits? How Euro money is created?
Answer:
Eurocurrency is the Currency that deposited by national
governments or corporations in banks outside their home market. This
applies to any currency and to banks in any country. Also known as euro
money. Having "euro" doesn't mean that the transaction has to involve
European countries. However, in practice, European countries are often
involved. For example, South Korean won deposited at a bank in South Africa,
is considered Eurocurrency.
The market which consists of such banks and financial institutions is called
Euro-money market or Euro-currency market. Such institutions have grown
worldwide, such as London, New York, Luxembourg, Hong Kong, Singapore
etc. They are also called as offshore markets.
Most Eurocurrency transactions are interbank transactions in the amount of
$1,000,000 and up. Common reference rates include:
LIBOR the London Interbank Offered Rate
PIBOR the Paris Interbank Offered Rate
SIBOR the Singapore Interbank Offered Rate
A new reference rate for the new euro currency is EURIBOR which is the rate
at which interbank time deposits of are offered by one prime bank to
another.
Euro Credits:
Euro credits are short- to medium-term loans of
Eurocurrency. The loans are denominated in currencies other than the home
currency of the Euro bank. Often the loans are too large for one bank to
underwrite; a number of banks form a syndicate to share the risk of the loan.
Euro credits feature an adjustable rate. On Euro credits originating in London
the base rate is LIBOR.
Euro-Deposits:
The deposits denominated in currencies made outside the domestic
banking systems operation are called Euro-deposits.
They are more risky.
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 They are conventional short term non-negotiable-deposits (30 days or

90 days).
A large part is of CDs (certificate of deposits) negotiable traded in
secondary market.
Euro Money Creation:
A national currency becomes part of offshore currency market when it
is transferred to a bank outside its own monetary system.
Which also means the deposit is made in that segment of banking
structure which is not regulated by the central bank of the country
which has issued the currency.
International banking relates to financial intermediaries that bid for
time deposits and make loans in the offshore market.
It is an unregulated market involving greater risk.
It is a wholesale segment of lending and deposit activity.
International banking brings together borrowers and lenders from
same country or different countries.
They are substitutes for the domestic banking system.
Growth of Euro-money Market:
The rapid growth of these markets is due to:
Depositors receive better interest rate on deposits.
Borrowers can borrow more, possibly at lower interest rate than they
can at home.

14. Short notes on Credit Crunch (2007-2008).

Answer:
The credit crunch, or the inability of borrowers to easily obtain credit,
began in the United States in the fall of 2007 and it continues into 2008.
The origin of the credit crunch can be traced back to the low interest
rate environment created by the Federal Reserve Bank in the early part of
this century.
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 Many banks and mortgage lenders lowered their credit standards to

attract customers who could afford to make mortgage payments at current
low interest rates, or at even-lower teaser rates that were temporarily
set at a low level during the early years of an adjustable-rate mortgage, but
would reset to a higher rate later on.
Many of these home buyers would not have qualified for mortgage
financing under more stringent credit standards, nor would they have been
able to afford mortgage payments at more conventional rates of interest.
These so-called subprime mortgages were typically not held by the
originating bank making the loan, but instead were resold for packaging
into mortgage-backed securities (MBS).
Conceptually, mortgage-backed securities make sense. Each MBS
represents a portfolio of mortgages, thus diversifying the credit risk that
the investor holds.
Structured Investment Vehicles (SIVs) have been one large investor in
MBS. An SIV is a virtual bank, frequently operated by a commercial bank or
an investment bank, but which operates off balance sheet.
Since yield curves are typically upward sloping, the SIV might earn .25
percent by doing this. Obviously, SIVs are subject to the interest rate risk of
the yield curve inverting, that is, short-term rates rising above long-term
rates, thus necessitating the SIV to refinance the MBS investment at shortterm rates in excess of the rate being earned on the MBS.
Default risk is another risk with which SIVs must contend. If the
underlying mortgage borrowers default on their home loans, the SIV will
lose investment value.
Collateralized Debt Obligations (CDOs) have been another big investor
in MBS.
A CDO is a corporate entity constructed to hold a portfolio of fixedincome assets as collateral. The portfolio of fixed-income assets is divided
into different tranches, each representing a different risk class: AAA, AABB, or unrated.
CDOs serve as an important funding source for fixed-income securities.
An investor in a CDO is taking a position in the cash flows of a particular
tranche, not in the fixed-income securities directly.
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 To cool the growth of the economy, the Fed steadily increased the Fed
Funds target rate at meetings of the Federal Open Market Committee, from
a low of 1.00 percent on June 25, 2003, to 5 percent on June 29, 2006.
In turn, mortgage rates increased. Many subprime borrowers found it
difficult, if not impossible, to make mortgage payments in a cooling
economy, especially when their adjustable-rate mortgages were reset at
higher rates.
When subprime debtors began defaulting on their mortgages,
commercial paper investors were unwilling to finance SIVs. Liquidity
worldwide essentially dried up.
The spread between the three-month Eurodollar rate and three-month
U.S. Treasury-bills (the TED spread), frequently used as a measure of credit
risk, increased from about 30 basis points in March 2007 to 200 basis points
in November 2007, as investors became fearful of placing funds in even the
strongest international banks.
Additionally, many CDOs found themselves stuck with the highest risk
tranches of MBS debt, which they had not yet placed or were unable to
place as subprime foreclosure rates around the country escalated.
Commercial and investment banks have been forced to write down
over $170 billion of subprime debt to date, with as much as $285 billion
expected.
At this point, the story of the credit crunch is still unfolding. Many
lessons should be learned from it.
One lesson is that credit rating agencies need to refine their models for
evaluating esoteric credit risk created in MBS and CDOs and borrowers
must be more wary of putting complete faith in credit ratings.
Another lesson is that bankers seem not to scrutinize credit risk as
closely when they serve only as mortgage originators rather than hold the
paper themselves.

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15. Define the foreign exchange market.

Answer:
The Foreign Exchange Market can be defined in terms of specific
functions, or the institutional structure that:
(1) Facilitates the conversion of one countrys currency into another.
Through the buying and selling of currencies.
Allows global firms to move in and out of foreign currency as needed.
(2) Sets and quotes exchange rates.
This is the ratio of one currency to another.
These rates determine costs and returns to global businesses.
(3) Offers contracts to manage foreign exchange exposure.
These hedging contracts allow global firms to offset their foreign
currency exposures and manage foreign exchange risk.
Thus, they can concentrate on their core business.
Simply we can say that, the foreign exchange market (forex, FX, or currency
market) is a global decentralized market for the trading of currencies. In
terms of volume of trading, it is by far the largest market in the world. The
main participants in this market are the larger international banks.

16. Characteristics of Forex Market.

Answer:
(1) Worlds largest financial market.
Estimated at $3.2 trillion dollars per day in trades.
NYSE-Euronext currently running about $40 billion per day.
(2) Market is a 24/7 over-the-counter market.
There is no central trading location.
Trades take place through a network of computer and telephone
connections all over the world.

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(3) Major trading center is London, England.

34% of all trades take place through London (New York second at 17%).
(4) Most popular traded currency is the U.S. dollar.
Accounts for 86% of all trades (euro second at 27%).
(5) Most popular traded currency pair is the U.S. dollar/Euro.
Represents 27% of all trades (dollar yen second at 13%)
(6) Currencies are either traded for immediate delivery (spot) or some
specified future delivery (forward).

17. How does the FX market quote currencies?

Answer:
(1) American Terms:
Expresses the exchange rate as the number of U.S. dollars per one unit of
some foreign currency.
For example, $2.00 per (1) British pound.
(2) European Terms:
Expresses the exchange rate as the number of foreign currency units per one
U.S. dollar.
For example, 120 yen per (1) U.S. dollar.
Most of the worlds currencies are quoted for trade purposes on the basis of
European terms.
Exceptions include: British pound, Euro, Australian dollar.
Newspapers, like the Wall Street Journal, however, usually quote both.
Quotes are given by time of settlement:
Spot Exchange Rate:
Quotes for immediate transactions (actually within 1 or 2 business days)
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Forward Exchange Rate:

Quotes for future transactions in a currency (3 business days and out).
Forward markets are used by businesses to protect against unexpected
future changes in exchange rates.
Forward rate allows businesses to lock in an exchange rate for some future
period of time.

Observing Changes in Spot Exchange Rates: What do

they mean?
18.

Answer:
Appreciation (or strengthening) of a currency:
When the currencys spot rate has increased in value in terms of some other
currency.
Depreciation (or weakening) of a currency:
When the currencys spot rate has decreased in value in terms of some other
currency.

19. What is Forward Rate Quotes?

Answer:
As a rule, forward exchange rates are set at either a premium or
discount of their spot rates.
If a currencys forward rate is higher in value than its spot rate, the currency
being quoted at a forward premium.
For example: the Japanese 1 month forward is greater than its spot (0.009034
versus 0.008999)
If a currencys forward rate is lower in value than its spot rate, the currency is
being quoted at a forward discount.

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For example, the British pound 6 month forward is less than its spot (2.0417
versus 2.056).

20. What Institutions are involved in the Foreign Exchange

Market?
Answer:
Large global banks (e.g., Deutsche Bank, HSBC, UBS, Citibank) acting
on behalf of:
(1) their external clients (primarily global firms: exporters, importers,
multinational firms)
Acting in a broker capacity at the request of these clients and
meeting the foreign currency needs of these clients.
(2) Their own banks (trading to generate profits).

Acting in a dealer (i.e., trading) capacity

Taking positions in currencies to make a profit.

In meeting the needs of their clients and their own trading activities,
these global banks establish the tone of the market.
This is through a market maker function.

21. How to make the market in Forex?

Answer:
The market maker function of any global bank involves two
primary foreign exchange activities:
(1) A willingness of the market maker to provide the market with on-going
(i.e., continuous) two way quotes upon request:
Provide a price at which they will buy a currency
Provide a price at which they will sell a currency

This function provides the market with transparency

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(2) A willingness of the market maker to actually buy and/or sell at the prices
they quote:
Thus the market maker offers firm prices into the market!

This function provides the market with liquidity.

22. Base and Quote Currency.

Answer:
Given that a foreign exchange quote is simply the ratio of one
currency to another, a complete market maker quote must have two ISO
designations (e.g., EUR/USD or USD/JPY):
The first ISO currency quoted is called the base currency.
The second ISO currency quoted is called the quote currency.
For examples above:
EUR/USD: EUR is the base currency and USD is the quote currency.
USD/JPY: USD is the base currency and JPY is the quote currency.

23. Bid and Ask Quotes.

Answer:
Recall that a market maker always provides the market with two
prices, both a buy and sell quote (or price) for a currency.
For Example: EUR/USD: 1.2102/1.2106
The first number quoted by the market maker is the market makers buy price
($1.2102).
It is called the market makers bid quote (or buy price)
The second quoted number is the market markers sell price ($1.2106).
It is called the market makers ask quote (or sell price)
Note: The bid quote is always lower than the ask quote.

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24. What Currency is The Market Maker Buying and

Selling?
Answer:
Given the example: EUR/USD: 1.2102/1.2106, which currency is the
market maker selling and which currency is the market maker buying?
Answer: Market makers are always quoting prices at which they will buy or
sell ONE UNIT of the base currency (against the quote currency).
So in the above example:
The market maker will buy euros for $1.2102
This is the bid price for euros.
The market maker will sell euros for $1.2106
This is the ask price for euros.

25. Reading and Understanding Quotes.

Answer:
When viewing a foreign exchange quote, assign a value of 1 to
the base currency (the base currency is the first in the ISO pair). The quotes
you see refer to one unit of this base currency.
For example, if you see a market makers ask price for the EUR/USD of 1.2811,
that means that if you were to buy one Euro (the base currency) you are going
pay $1.2811.
If you see a market makers bid price for the USD/JPY of 120.10 that means if
you were to sell one dollar (the base currency) you are going to get 120.10 for
it.
Also, whenever the bid and ask prices are moving up, that means that the
base currency is getting stronger and the quote currency is getting weaker.

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