Econ 11 Vocab

Front 1

Foreign Exchange Market

Back 1

The framework for the exchange of one national currency for another

Front 2

Exchange Rate

Back 2

The domestic currency price of the foreign currency

Front 3

Depreciation

Back 3

An increase in the domestic currency price of the foreign currency.

Front 4

Appreciation

Back 4

A decrease in the domestic currency price of the foreign currency

Front 5

Cross Exchange Rates

Back 5

The exchange rate betweeen currency A and Currency B, given the exchange rate of currency A and currency B with respect to currency C

Front 6

Effective Exchange Rate

Back 6

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.

Front 7

Arbitrage

Back 7

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).

Front 8

Spot rate

Back 8

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.

Front 9

Forward Rate

Back 9

The exchange rate in foreign exchange transactions involving delivery of the foreign exchange one, three, or six months after the contract is agreed upon.

Front 10

Forward discount

Back 10

The percentage per year by which the forward rate on the foreign currency is below the spot rate.

Front 11

Forward Premium

Back 11

the percentage per year by which the forward rate on the foreign currency is above its spot value.

Front 12

Foreign Exchange Futures

Back 12

A forward contract for standardized currency amounts and selected calendar dates traded on an organized market (exchange).

Front 13

Foreign Exchange options

Back 13

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.

Front 14

Foreign exchange risk

Back 14

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.

Front 15

Hedging

Back 15

The avoidance of a foreign exchange risk (or the covering of an open position).

Front 16

Speculation

Back 16

The acceptance of a foreign exchange risk, or open position, in the hope of making a profit.

Front 17

Stabilizing speculation

Back 17

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.

Front 18

Destabilizing speculation

Back 18

the sale of foreign currency when it is low/high, in the expectaion that it will get even lower/higher.

Front 19

Interest Arbitrage

Back 19

the transfer of short-term liquid funds abroad to earn a higher return.

Front 20

Uncovered Interest Arbitrage

Back 20

The transfer of short term liquid funds to the international monetary center with higher interest rates without the foreign exchange risk.

Front 21

Covered Interest Arbitrage

Back 21

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.