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44 Cards in this Set
- Front
- Back
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Appreciation
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It takes fewer units of a nation's currency to purchase a unit of some foreign currency
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bid rate
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the price the bank is willing to pay for a unit of foreign currency
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call option
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gives the holder the right to buy foreign currency at a specified price
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covered interest arbitrage
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First, an investor exchanges domestic currency for ofreign currency, at the current spot rate, and uses the foreign currency to finance a foreign investment
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cross exchange rate
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The resulting rate derived when the exchange rate between any two currencies can be derived from the rates of these two currencies in terms of a third currency
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currency swap
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the conversion of one currency to another currency at one point in time, with an agreement to reconvert it to the original currency at a specified time in the future
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depreciation
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when, over time, it takes more units of a nation's currency to purchase a unit of some foreign currency
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destablizing speculation
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speculation that occurs when speculators expect a current trend in exchange rates to continue and their transactions accelerate the rise or fall of the target currency's value
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discount
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the valuation of a currency when it is worth less in the forward market than in the spot market
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effective exchange rate
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a weighted average of the exchange rates between a domestic currency and that nation's most important trading partners, with weights given by relative importance of the nation's trade with each trade partner
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exchange arbitrage
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the simultaneous purchase and sale of a currency in different foreign exchange markets in order to profit from exchange rate differentials in the two locations
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exchange rate
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the price of one currency in terms of another
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exchange rate index
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a weighted average of the exchange rates between a domestic currency and that nation's most important trading partners, with weights given by relative importance of the nation's trade with each trade partner
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foreign currency options
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provide an options holder the right to buy or sell a fixed amount of foreign currency at a prearranged price, within a few days or several years
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foreign exchange market
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the organizational setting within which individuals, businesses, governments, and banks buy and sell foreign currencies and other debt instruments
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forward market
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where foreign exchange can be traded for future delivery
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forward rate
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the rate of exchange used in the settlement of forward transactions
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forward transaction
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an outright purchase and sale of foreign currency at a fixed exchange rate but with payment or delivery of the foreign currency at a future date
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futures market
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a market in which contracting parties agree to future exchanges of currencies and set applicable exchange rates in advance; distinguished from the forward market in that only a limited number of leading currencies are traded; trading takes place in stadardized contract amounts and in a specific geographic location
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hedging
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the process of avoiding or covering a foreign exchange risk
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interbank market
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bank transactions with other banks
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interest arbitrage
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the process of moving funds into foreign currencies to take advantage of higher investment yields abroad
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international monetary market
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an extension of the commodity futures markets in which specific quantities of wheat, corn, and other commodities are bought and sold for future delivery at specific dates; the IMM provides trading facilities for the purchase and sale for future delivery of financial instruments and precious metals
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long position
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the position speculators take when they purchase foreign currency on the spot or forward market with the anticipation of selling it at a higher future spot price
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maturity months
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the months of a given year when the futures contract matures
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nominal exchange rates
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exchange rate quotes published in newspapers that are not adjusted inflation rates in trading partners
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nominal exchange rate index
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the average value of a currency, not adjusted for changes in price levels of that country and its trading partners
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offer rate
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the price at which the bank is willing to sell a unit of foreign currency
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option
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an agreement between a holder (buyer) and a writer (seller) that gives the holder the right, but not the obligation, to buy or sell financial instruments at any time through a specified date
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premium
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the valuation of a currency when it is worth more in the forward market than in the spot market
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put option
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gives the holder the right to sell foreign currency at a specified price
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real exchange rate
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the nominal exchange rate adjusted for changes in relative price levels
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real exchange rate index
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the average value of a currency based on real exchange rates
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short position
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the position speculators take when they borrow or sell forward a foreign currency with the anticipation of purchasing it at a future lower price to repay the foreign exchange loan or fulfill the forward sale contract
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speculation
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the attempt to profit by trading on expectations about prices in the future
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spot market
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where foreign exchange can be traded for immediate delivery
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spot transaction
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an outright purchase and sale of foreign currency for cash settlement not more than two business days after the date of the transaction
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spread
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the difference between the bid rate and the offer rate
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stabilizing speculation
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occurs when speculators expect a current trend in an exchange rate's movement to change and their purchase or sale of the currency moderates movements of the exchange rate
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strike price
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the price at which an option can be exercised
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three point arbitrage
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a more intricate form of arbitrage, involving three currencies and three financial centers; aka triangular arbitrage
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trade weighted dollar
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a weighted average of the exchange rates between a domestic currency and the currencies of the nation's most important trading partners, with weights given by relative importance of the nation's trade with each trade partner
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two point arbitrage
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the simultaneous purchase and sale of a currency in two foreign exchange markets in order to profit from exchange rate differentials in different locations
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uncovered interest arbitrage
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when an investor does not obtain exchange market cover to protect investment proceeds from foreign currency fluctuations
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