This is the capstone. Six lessons carried you from “a currency has no price of its own — only a price against another currency” all the way to managing currency exposure inside a real portfolio. You learned to read a quote and count pips, to separate spot from forwards and see the FX swap that dominates the whole $7.5-trillion-a-day market, to pin the forward with covered interest parity and watch uncovered parity fail in the forward-premium puzzle, to understand why the carry trade pays until it suddenly doesn’t, to map the impossible trinity onto Black Wednesday and the Asian crisis, and to decide what to hedge and what that hedge costs. No formula sheet, no hints, no take-backs: every answer locks the instant you submit, the wrong options are the exact traps that catch real FX traders, and your score stays hidden until the end.
How this exam works
This is a graded exam. Questions arrive one at a time. Once you submit an answer it is final — there is no going back, no second try, and a wrong answer simply fails that question. Your score stays hidden until the very end, where you need 70% to pass. Read every option before you commit.
A new trader asks 'what is the dollar worth?' and expects a single number. Why is the question malformed?
Select an answer to continue.
Course Recap
Big picture
FX & Currency Markets — the whole map
- FX & Currency Markets
- Quoting
- Price is always a pair
- Base vs quote (EUR/USD = 1.10)
- Pips: 0.0001 (0.01 for JPY)
- Bid/ask spread = dealer margin
- Cross rate = EUR/USD × USD/JPY
- Spot & Forward
- Spot settles T+2 (T+1 USD/CAD)
- Forward outright: locked future rate
- Forward points (+ or −)
- FX swap = spot + opposite forward
- NDF: cash-settled, non-convertible
- Covered parity (CIP)
- Arbitrage identity
- F = S(1+r_d)/(1+r_f)
- Low-rate currency: forward premium
- Cross-currency basis post-2008
- Uncovered parity & carry
- UIP: expected spot, not arbitrage
- Forward-premium puzzle: UIP fails
- Carry: short low-yield, long high-yield
- Negative skew: crash risk
- Risk-off unwind: JPY/CHF spike
- Central banks, pegs, crises
- Price = supply & demand (capital flows win)
- Defending a peg is limited (reserves)
- Impossible trinity: pick two of three
- Black Wednesday 1992 / Asia 1997
- Crisis types: fundamentals / self-fulfilling / balance sheets
- FX in a portfolio
- Foreign asset = local return + FX return
- Bonds hedged / equities often unhedged
- Hedging sells forward: costs the rate gap
- Safe havens (USD/JPY/CHF) hedge equities
- Rolling hedges: cash-flow risk
- Quoting
Key Takeaways
What you now own
- A currency has no price of its own — only against another. Read the pair (base vs quote), count moves in pips, and remember you buy the base at the ask, sell at the bid, with the spread as the dealer’s cut.
- Spot settles T+2; everything later is a forward. Forward points sit on top of spot, the FX swap (spot + opposite forward) is the market’s workhorse for funding and rolling hedges, and NDFs cash-settle the un-deliverable.
- Covered interest parity is an arbitrage identity, F = S(1+r_d)/(1+r_f): the low-rate currency always trades at a forward premium. The post-2008 cross-currency basis is a limits-to-arbitrage wedge, not a broken formula.
- Uncovered parity is only a hypothesis — and it fails. The forward-premium puzzle means high-yielders don’t depreciate as predicted, so the carry trade earns a real premium that is compensation for crash risk: small steady gains, fat left tail, violent risk-off unwinds where JPY and CHF spike.
- Central banks face the impossible trinity — fixed rate, free capital, independent policy: pick two. Defending a peg burns finite reserves, which is why Black Wednesday and the Asian crisis ended the way they did.
- A foreign asset bundles asset risk and currency risk. Total ≈ local + FX return. Hedge by selling the currency forward — which costs the interest differential — but remember safe havens (USD, JPY, CHF) can hedge equity risk all on their own.