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21 Cards in this Set

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  • Back
Foreign Exchange Market
The framework for the exchange of one national currency for another
Exchange Rate
The domestic currency price of the foreign currency
Depreciation
An increase in the domestic currency price of the foreign currency.
Appreciation
A decrease in the domestic currency price of the foreign currency
Cross Exchange Rates
The exchange rate betweeen currency A and Currency B, given the exchange rate of currency A and currency B with respect to currency C
Effective Exchange Rate
A weighted average of the exchange rates betweeen the domestic currency and the nation's most important trade partners, with weights given by the relative importance of the nation's trade with each of the trade partners.
Arbitrage
The purchase of a currency in the monetary center where it is cheaper for immediate resale in the monetary center where it is more expensive in order to make a profit (flip currency).
Spot rate
The exchange rate in foreign exchage transactions that calls for the payment and receipt of the foreign exchange within two business days from the date when the transaction is agreed upon.
Forward Rate
The exchange rate in foreign exchange transactions involving delivery of the foreign exchange one, three, or six months after the contract is agreed upon.
Forward discount
The percentage per year by which the forward rate on the foreign currency is below the spot rate.
Forward Premium
the percentage per year by which the forward rate on the foreign currency is above its spot value.
Foreign Exchange Futures
A forward contract for standardized currency amounts and selected calendar dates traded on an organized market (exchange).
Foreign Exchange options
A contract specifying the right to buy or sell a standard amount of a traded currency on a stated date (European option) or at any time before the stated date (American option) and at a stated price.
Foreign exchange risk
The risk resulting from changes in exchange rates over time and faced by anyone who expects to make or to receive a payment in a foreign currency at a future date; also called an open position.
Hedging
The avoidance of a foreign exchange risk (or the covering of an open position).
Speculation
The acceptance of a foreign exchange risk, or open position, in the hope of making a profit.
Stabilizing speculation
The purchase of a foreign currency when the domestic currency price of the currency (the exchange rate)is low/high, in the expectation that it will rise/fall back to normal.
Destabilizing speculation
the sale of foreign currency when it is low/high, in the expectaion that it will get even lower/higher.
Interest Arbitrage
the transfer of short-term liquid funds abroad to earn a higher return.
Uncovered Interest Arbitrage
The transfer of short term liquid funds to the international monetary center with higher interest rates without the foreign exchange risk.
Covered Interest Arbitrage
The Transfer of short-term liquid funds abroad to earn higher returns with the foreign exchange risk covered by the spot purchase of the foreign currency and a simultaneous offsetting forward sale.