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12 Cards in this Set

  • Front
  • Back
What is a direct quote?
the number of units of a local currency exchangeable for one unit of a foreign currency; appreciation means a decline in the direct quotation
What is an indirect quote?
the number of units of a foreign currency that can be exchanged for one unit of a local currency
What is the spot exchange rate market?
market for settlement of a foreign exchange transaction within 2 business days
What is purchasing power parity?
the exchange rate- the domestic price of the foreign currency- is proportional to the domestic inflation rate and inversely proportional to foreign inflation
What are cross rates?
the exchange rate between 2 countries other than the US; quote in American terms of currency X/quote in American terms of currency Y
What is triangular arbitrage?
arbitraging to take advantage of cross-rate mispricing; involves taking positions in three currencies
What are the 4 instruments that borrowers and investors can use to hedge adverse foreign exchange rate movements?
1. currency forward contracts- underlying is foreign exchange
2. currency futures contracts
3. currency options
4. currency swaps
What is interest rate parity?
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
What is covered interest arbitrage?
the arbitrage process that forces interest rate parity to hold
What is the Eurocurrency market?
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
What is a currency swap?
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
What are currency coupon swaps?
currency swaps in which one of the parties pays a fixed rate and the counterparty a floating rate