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12 Cards in this Set
- Front
- Back
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What is a direct quote?
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the number of units of a local currency exchangeable for one unit of a foreign currency; appreciation means a decline in the direct quotation
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What is an indirect quote?
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the number of units of a foreign currency that can be exchanged for one unit of a local currency
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What is the spot exchange rate market?
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market for settlement of a foreign exchange transaction within 2 business days
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What is purchasing power parity?
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the exchange rate- the domestic price of the foreign currency- is proportional to the domestic inflation rate and inversely proportional to foreign inflation
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What are cross rates?
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the exchange rate between 2 countries other than the US; quote in American terms of currency X/quote in American terms of currency Y
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What is triangular arbitrage?
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arbitraging to take advantage of cross-rate mispricing; involves taking positions in three currencies
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What are the 4 instruments that borrowers and investors can use to hedge adverse foreign exchange rate movements?
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1. currency forward contracts- underlying is foreign exchange
2. currency futures contracts 3. currency options 4. currency swaps |
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What is interest rate parity?
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the relationship among the spot exchange rate, the interest rates in two countries, and the forward rate; anyone who hedges in the forward exchange rate market will realize the same domestic borrowing rate whether borrowing domestically or in a foreign country
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What is covered interest arbitrage?
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the arbitrage process that forces interest rate parity to hold
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What is the Eurocurrency market?
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the name of the unregulated and informal market for bank deposits and bank loans denominated in a currency other than that of the country where the bank initiating the transaction is located; e.g. a British bank in London that lends US dollars to a French corporation
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What is a currency swap?
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exchange of both interest and principal; US and Swiss company; US company issues in Swiss Francs but gives proceeds and principal to Swiss company; Swiss company does the opposite
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What are currency coupon swaps?
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currency swaps in which one of the parties pays a fixed rate and the counterparty a floating rate
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