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49 Cards in this Set
- Front
- Back
Any currency that is used primarily for domestic transactions and is not
openly traded on a forex market. This usually is a result of government restrictions, which prevent it from being exchanged for foreign currencies. Also known as a "blocked currency". As the name implies, it is virtually impossible to convert a --------------------- into other legal tender, except in limited amounts on the black market. When a nation's currency is nonconvertible it tends to limit the country's participation in international trade as well as distort its balance of trade. |
Nonconvertible Currency
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A term used by the Bank of Canada to describe the foreign exchange
rate between the U.S. dollar and the Canadian dollar. The rate is released by 12:45pm EST by the Bank of Canada on any given day, and is based on the trading that takes place from 11:59am to 12:01pm on that day. The ------------is often used by companies as a benchmark for translating financial statements. For example, if a Canadian company has operations in the U.S., it can use the -------- as the benchmark exchange rate for translation purposes. When accountants consolidate a company's financial statements, they will need to convert the U.S. dollars from U.S. operations into Canadian dollars which, in this particular example, will be done by using the ------------- quoted on the balance sheet date. Some companies believe that the ----------is a better measure of currency translation, because all of the trades they make in the FX market take place during the business day, and not at the end of the day. |
Noon Rate
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An account that a bank holds with a foreign bank.
---------------are usually in the currency of the foreign country. This allows for easy cash management because currency doesn't need to be converted. Nostro is derived from the latin term "ours." |
Nostro Account
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In the currency market, this is the abbreviation for the New Zealand
dollar. |
NZD
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A type of exotic option that gives an investor a payout once the price of
the underlying asset reaches or surpasses a predetermined barrier. This type of option allows the investor to set the position of the barrier, the time to expiration and the payout to be received once the barrier is broken. Only two outcomes are possible with this type of option: 1) the barrier is breached and the trader collects the full payout agreed upon at the outset of the contract, OR 2) the barrier is not breached and the trader loses the full premium paid to the broker. This type of option is useful for traders who believe that the price of an underlying asset will exceed a certain level in the future, but who are not sure that the higher price level is sustainable. Because a ----------------- only has one barrier level, it is generally slightly less expensive than a double -------------. These types of options are becoming more popular with traders in the commodity and forex markets. |
One-Touch Option
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A form of arbitrage involving the rearrangement of a bank's cash by
taking its local currency and depositing it into eurobanks. The interest rate will be higher in the interbank market, which will enable the bank to earn more on the interest it receives for the use of its cash. --------------- works because it allows the bank to lend for more abroad then it could in the local market. For example, assume an American bank goes to the interbank market to lend at the higher eurodollar rate. Money will be shifted from an American bank's branch within the U.S. to a branch located outside of the U.S. The bank will earn revenues on the spread between the two interest rates. The larger the spread, the more will be made. |
Outward Arbitrage
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The buying or selling of currencies between 9pm and 8am local time.
This type of transaction occurs when an investor takes a position at the end of the trading day in a foreign market that will be open while the local market is closed. The trade will be executed sometime that evening or early morning. For example, the forex market trades 24 hours a day in exchanges around the world. The overlap of trading hours between North American, Australia, Asia and European currency exchanges makes this possible. However, investors must be aware of the significant level of risk involved with trading overnight, which includes foreign-exchange risk and overnight delivery risk. |
Overnight Trading
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The name given to the group of banks contributing to the EURIBOR.
This group is made up of the largest participants within the Euro money market. ----------- institutions transact the largest volumes within the Euro market and provide stability and liquidity. Furthermore, these banks are located both inside and outside of Europe, and aren't always associated with regions recognizing the EU. |
Panel Bank
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A type of foreign exchange loan agreement that was a precursor to
currency swaps. A ------------ involves two parent companies taking loans from their respective national financial institutions and then lending the resulting funds to the other company's subsidiary. For example, ABC, a Canadian company, would borrow Canadian dollars from a Canadian bank and XYZ, a French company, would borrow euros from a French bank. Then ABC would lend the Canadian funds to XYZ's Canadian subsidiary and XYZ would lend the euros to ABC's French subsidiary. The first parallel loans were implemented in the 1970s in the United Kingdom in order to bypass taxes that were imposed to make foreign investments more expensive. |
Parallel Loan
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A method of stabilizing a country's currency by fixing its exchange rate
to that of another country. Most countries peg their exchange rate to that of the United States. |
Pegging
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The smallest price change that a given exchange rate can make. Since
most major currency pairs are priced to four decimal places, the smallest change is that of the last decimal point - for most pairs this is the equivalent of 1/100th of one percent, or one basis point. For example, the smallest move the USD/CAD currency pair can make is $0.0001, or one basis point. The smallest move in a currency does not always need to be equal to one basis point, but this is generally the case with most currency pairs. |
Pip
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The risk that one party of a contract will fail to meet the terms of the
contract and default before the contract's settlement date, prematurely ending the contract. This type of risk can lead to replacement-cost risk. For example, let's say ABC company forms a contract on the foreignexchange market with XYZ company to swap U.S. dollars for Japanese yen in two years. If prior to settlement XYZ company goes bankrupt, it will be unable to complete the exchange and must default on the contract. ABC company will have to form a new contract with another party which leads to ---------------. |
Pre-Settlement Risk
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An economic theory that estimates the amount of adjustment
needed on the exchange rate between countries in order for the exchange to be equivalent to each currency's purchasing power. The relative version of PPP is calculated as: Where: "S" represents exchange rate of currency 1 to currency 2 "P1" represents the cost of good "x" in currency 1 "P2" represents the cost of good "x" in currency 2 In other words, the exchange rate adjusts so that an identical good in two different countries has the same price when expressed in the same currency. For example, a chocolate bar that sells for C$1.50 in a Canadian city should cost US$1.00 in a U.S. city when the exchange rate between Canada and the U.S. is 1.50 USD/CDN. (Both chocolate bars cost US$1.00.) |
Purchasing Power Parity (PPP)
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A swap with varying combinations of interest rate, currency and equity
swap features, where payments are based on the movement of two different countries' interest rates. This is also referred to as a differential or "diff" swap. Though they deal with two different currencies, payments are settled in the same currency. For example, a typical -------------would involve a U.S. investor paying six-month LIBOR in U.S. dollars (for a US$1 million loan), and receive payments in U.S. dollars at the sixmonth EURIBOR + 75 basis points. Fixed-for-floating ------------- allow an investor to minimize foreign exchange risk. This is achieved by fixing both the exchange rate and interest rate at the same time. Floating-for-floating swaps have slightly higher risk, since each party is exposed to the spread between each country's currency interest rate. |
Quanto Swap
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The second currency quoted in a currency pair in forex. In a direct
quote, the ------------- is the foreign currency. In an indirect quote, the ---------------- is the domestic currency. Also known as the "secondary currency" or "counter currency". Understanding the quotation and pricing structure of currencies is essential for anyone wanting to trade currencies in the forex market. If you were looking at the CAD/USD currency pair, the U.S. dollar would be the --------------, and the Canadian dollar would be the base currency. Major currencies that are usually shown as the ---------- include the U.S. dollar, the British pound, the euro, the Japanese yen, the Swiss franc and the Canadian dollar. |
Quote Currency
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The weighted average of a country's currency relative to an index or
basket of other major currencies adjusted for the effects of inflation. The weights are determined by comparing the relative trade balances, in terms of one country's currency, with each other country within the index. This exchange rate is used to determine an individual country's currency value relative to the other major currencies in the index, as adjusted for the effects of inflation. All currencies within the said index are the major currencies being traded today: U.S. dollar, Japanese yen, euro, etc. This is also the value that an individual consumer will pay for an imported good at the consumer level. This price will include any tariffs and transactions costs associated with importing the good. |
Real Effective Exchange Rate (REER)
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The process whereby a country's currency is recalibrated due to
significant inflation and currency devaluation. Certain currencies have been ------------ a number of times over the last century for various reasons. For example, the Bulgarian lev was -------------- due to inflation arising at the end of the Second World War. After the -------------------, one "new" lev was equal to 100 "old" levs. The lev was ----------- three times in the twentieth century. |
Redenomination
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The process of converting a foreign currency into the currency of one's
own country. The amount that the investor will receive depends on the exchange rate between the two currencies being traded at the settlement time. For example, if you are American, converting British pounds back to U.S. dollars is an example of ------------------. If the pound were held by a British financial institution, the dollars would be called eurodollars, therefore, when converting those eurodollars back to dollars, the investor would be exposed to foreign exchange risk. |
Repatriation
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A foreign currency held by central banks and other major financial
institutions as a means to pay off international debt obligations, or to influence their domestic exchange rate. Currently, the U.S. dollar is the primary ------------- used by other countries. A very large percentage of commodities such as gold and oil are usually priced in U.S dollars, causing other countries to hold this currency to pay for these goods. A large debate still continues about whether or not the U.S. dollar will stay the main ----------------- or if it will shift over to the euro. |
Reserve Currency
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A calculated adjustment to a country's official exchange rate relative
to a chosen baseline. The baseline can be anything from wage rates to the price of gold to a foreign currency. In a fixed exchange rate regime, only a decision by a country's government (i.e. central bank) can alter the official value of the currency. Contrast to "devaluation". For example, suppose a government has set 10 units of its currency equal to one U.S. dollar. To -------, the government might change the rate to five units per dollar. This would result in that currency being twice as expensive to people buying that currency with U.S. dollars than previously and the U.S. dollar costing half as much to those buying it with foreign currency. Before the Chinese government -------- the yuan, it was pegged to the U.S. dollar. It is now pegged to a basket of world currencies. |
Revaluation
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Market currency rates from a specific point in time that are used as a
base value by currency traders to assess whether a profit or a loss has been realized for the day. In most cases, the -------------- is the closing rate for the previous trading day. For example, in order to assess how much profit a currency trader made today, he or she would use yesterday's closing rate (today's -------------) of 1.15 USD/CAD as a baseline for comparing today's closing rate of 1.145 USD/CAD. If the trader shorts the U.S. dollar in early trading and then buys it back at the end of the day, he or she will make $0.005 for every U.S. dollar traded. |
Revaluation Rates
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The difference between the value of money and the cost to produce it -
in other words, the economic cost of producing a currency within a given economy or country. If the ---------- is positive, then the government will make an economic profit; a negative --------------- will result in an economic loss. -------------- may be counted as revenue for a government when the money that is created is worth more than it costs to produce it. This revenue is often used by governments to finance a portion of their expenditures without having to collect taxes. If, for example, it costs the U.S. government $0.05 to produce a $1 bill, the -------------- is $0.95, or the difference between the two amounts. |
Seigniorage
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In currencies, this is the abbreviation for the Swedish Krona.
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SEK
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The period of time between the settlement date and the transaction
date that is allotted to the parties of a transaction to satisfy the transaction's obligations. The buyer must make payment within the ------------, while the seller must deliver the purchased security within this period. Depending on the type of security traded, the exact length of the -------------- will differ. The ---------- is often quoted as T+1, T+2 or T+3; which means the transaction date plus one, two or three days. For stocks, the settlement period is three days (T+3) after the transaction. This means that the buyer must transfer cash to the seller, and the seller must transfer ownership of the stock to the buyer within three days after the trade was made. For certificates of deposit and commercial paper, the transaction must be settled on the same day. For U.S. treasuries, it is the next day (T+1), and forex transactions are settled two days after (T+2). |
Settlement Period
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The risk that one party will fail to deliver the terms of a contract with
another party at the time of settlement. ------------------ can be the risk associated with default at settlement and any timing differences in settlement between the two parties. This type of risk can lead to principal risk. ----------------- is the possibility your counter party will never pay you. -------------------- was a problem in the forex market up until the creation of continuously linked settlement (CLS), which is facilitated by CLS Bank International, which eliminates time differences in settlement, providing a safer forex market. --------------- is sometimes called "Herstatt risk", named after the well-known failure of the German bank Herstatt. On Jun 26, 1974, the bank had taken in its foreign-currency receipts in Europe, but had not made any of its U.S. dollar payments when German banking regulators closed the bank down, leaving counter parties to incur the substantial losses. |
Settlement Risk
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A type of option product that allows an investor to set not only the
conditions that need to be met in order to receive a desired payout, but also the size of the payout he or she wishes to receive if the conditions are met. The broker that provides this product will determine the likelihood that the conditions will be met and, in turn, will charge what it feels is an appropriate commission. This type of arrangement is often referred to as a "binary option" because only two types of payouts are possible for the investor: 1. The conditions set out by both parties occur, and the investor collects the agreed-upon payout amount. 2. The event does not occur and the investor loses the full premium paid to the broker. This type of option product is often found in the forex market. For example, if a trader believes that the EUR/USD will not break below 1.20 in 14 days, he or she would pay a certain premium to a broker and then collect the agreed upon payout in 14 days if this scenario turns out to be |
Single Payment Options Trading (SPOT)
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Another name for "weak currency". The values of soft currencies
fluctuate often, and other countries do not want to hold these currencies due to political or economic uncertainty within the country with the -------------. Currencies from most developing countries are considered to be -------------. Often, governments from these developing countries will set unrealistically high exchange rates, pegging their currency to a currency such as the U.S. dollar. |
Soft Currency
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The risk that a foreign central bank will alter its foreign-exchange
regulations thereby significantly reducing or completely nulling the value of foreign-exchange contracts. This is one of the many risks that an investor faces when holding forex contracts. Additionally an investor is exposed to interest-rate risk, price risk and liquidity risk amongst others. |
Sovereign Risk
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An international type of monetary reserve currency, created by the
International Monetary Fund (IMF) in 1969, which operates as a supplement to the existing reserves of member countries. Created in response to concerns about the limitations of gold and dollars as the sole means of settling international accounts, SDRs are designed to augment international liquidity by supplementing the standard reserve currencies. You can think of SDRs as an artificial currency used by the IMF and defined as a "basket of national currencies". The IMF uses SDRs for internal accounting purposes. SDRs are allocated by the IMF to its member countries and are backed by the full faith and credit of the member countries' governments. |
Special Drawing Rights (SDR)
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A person who trades derivatives, commodities, bonds, equities or
currencies with a higher-than-average risk in return for a higher-thanaverage profit potential. -------------take large risks, especially with respect to anticipating future price movements, in the hope of making quick, large gains. ---------------are typically sophisticated, risk-taking investors with expertise in the market(s) in which they are trading and will usually use highly leveraged investments such as futures and options. |
Speculator
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The rate of a foreign-exchange contract for immediate delivery. Also
known as "benchmark rates", "straightforward rates" or "outright rates", spot rates represent the price that a buyer expects to pay for a foreign currency in another currency. Though the --------------- is said to be settled immediately, the globally accepted settlement cycle for foreign-exchange contracts is two days. Foreign-exchange contracts are therefore settled on the second day after the day the deal is made. |
Spot Exchange Rate
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The purchase or sale of a foreign currency or commodity for immediate
delivery. ------------ are settled "on the spot", as opposed to at a set date in the future. Also known as "cash trades". Futures transactions that expire in the current month are also known as ----------- because in the case that goods are actually delivered, delivery time is reasonably expected to take one month. ----------- are the opposite of futures contracts, which usually expire well before any physical delivery. Foreign-exchange contracts are the most common kinds of --------------. If these kinds of contracts are not settled immediately, traders would expect to be compensated for the time value of their money for the duration of the delivery. Because these contracts are settled electronically, the forex market is essentially instantaneous. |
Spot Trade
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A form of monetary action in which a central bank or federal reserve
attempts to insulate itself from the foreign exchange market to counteract the effects of a changing monetary base. The ----------------- process is used to manipulate the value of one domestic currency relative to another, and is initiated in the forex market. For example, to weaken the U.S. dollar against another currency, the Fed would sell more U.S. dollars and buy the foreign currency. The increased supply of the U.S. dollar would lower the value of the currency. The Fed would do the opposite if it wanted to strengthen the U.S. dollar. |
Sterilization
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A method used by monetary authorities to equalize the effects of
foreign exchange transactions on the domestic monetary base by offsetting the purchase or sale of domestic assets within the domestic markets. The process limits the amount of domestic currency available for foreign exchange. -------------- is a way for a country to alter its debt composition without affecting its monetary base. It is used to counter undesirable exchange-rate movements. For example, a decrease in the value of a country's domestic currency would cause a debt instrument issued in a foreign country and denominated in that foreign country's currency to be made more expensive. |
Sterilized Intervention
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A slang term for the Swiss franc. The Swiss franc, or --------, has often
been considered a safe-haven currency during times of geopolitical unrest. This is mainly due to the country's neutral stance in global conflicts. For example, one may hear in a news report that the ----------- was down in today's trading. This is similar to the U.S., where the dollar is referred to as the "greenback", Canada, where the dollar is called a "loonie" and New Zealand, where the dollar is called a "kiwi". |
Swissie
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An order used by currency traders specifying the exact rate or number
of pips from the current price point where to close out their current position for a profit. The rate deemed to be the level where the trader wants to take a profit is sometimes referred to as the "take-profit point". As the name suggests, take-profit orders are used to lock in profits in the event the rate moves in a favorable direction. For example, if you are long a currency pair position and believe the price will rise to a certain level, but are unsure what it will do beyond that level, placing a ------------- at that point will automatically close out your position allowing you to lock in profit. Example: Buy $100 worth of yen at 107.4 yen per dollar = 100*107.40 = 10,740 yen Place a --------------- at 108.80. Price then rises from 107.40 to 108.80 -------------- automatically executed to sell $100 and buy 10,880 yen Profit of 140 yen realized. |
Take-Profit Order (T/P)
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A method of foreign currency translation that uses exchange rates
based on the time assets and liabilities are acquired or incurred. The exchange rate used also depends on the method of valuation that is used. Assets and liabilities valued at current costs use the current exchange rate and those that use historical exchange rates are valued at historical costs. By using the ------------, any income-generating assets like inventory, property, plant and equipment are regularly updated to reflect their market values. The gains and losses that result from translation are placed directly into the current consolidated income. This causes the consolidate earnings to be rather volatile. |
Temporal Method
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A market with a low number of buyers and sellers. Since few
transactions take place in a ---------, prices are often more volatile and assets are less liquid. The low number of bids and asks will also typically result in a larger spread between the two quotes. Also known as a "narrow market". A ---------- has high price volatility and low liquidity. If supply or demand changes abruptly, resulting in more buyers than sellers or vice versa, there will typically be a material impact on prices. Since few bids and asks are quoted, potential buyers and sellers may find it difficult to transact in a thin market. |
Thin Market
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In currency transactions, the purchase and sale of a currency made to
avoid taking actual delivery of the currency. The current position is closed out at the daily close rate and re-entered at the new opening rate the next trading day. Also referred to as "---------------". In most currency trades, delivery is two days after the transaction date. ----------------- trades arise because most currency traders are speculators and have no intention of taking delivery of the currency. If a trader buys and closes out his or her currency position the same business day, there isn't a problem with delivery. But traders who wish to hold their position over the current business day and have no intention of accepting delivery of the currency would use --------------- procedures: the position is closed out that business day at a closing rate, and then the position is re-established the following day. This allows the trader to hold the position for that day without worrying about delivery. |
Tomorrow Next (Tom Next)
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In currency transactions, the purchase and sale of a currency made to
avoid taking actual delivery of the currency. The current position is closed out at the daily close rate and re-entered at the new opening rate the next trading day. Also referred to as "--------------". In most currency trades, delivery is two days after the transaction date. --------------arise because most currency traders are speculators and have no intention of taking delivery of the currency. If a trader buys and closes out his or her currency position the same business day, there isn't a problem with delivery. But traders who wish to hold their position over the current business day and have no intention of accepting delivery of the currency would use ---------- procedures: the position is closed out that business day at a closing rate, and then the position is re-established the following day. This allows the trader to hold the position for that day without worrying about delivery. |
Tomorrow Next (Tom Next)
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The risk, faced by companies involved in international trade, that
currency exchange rates will change after the companies have already entered into financial obligations. Such exposure to fluctuating exchange rates can lead to major losses for firms. Often, when a company identifies such exposure to changing exchange rates, it will choose to implement a hedging strategy, using forward rates to lock in an exchange rate and thus eliminate the exposure to the risk. |
Transaction Exposure
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The exchange rate risk associated with the time delay between
entering into a contract and settling it. The greater the time differential between the entrance and settlement of the contract, the greater the -----------, because there is more time for the two exchange rates to fluctuate. ----------------- creates difficulties for individuals and corporations dealing in different currencies, as exchange rates can fluctuate significantly over a short period of time. This volatility is usually reduced, or hedged, by entering into currency swaps and other similar securities. |
Transaction Risk
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A type of quote that gives both the bid and the ask price of a security,
informing would-be traders of the current price at which they could buy or sell the security. The two-way quote also shows the spread between the bid and the ask, giving traders an idea of the current liquidity in the security (a smaller spread indicates more liquidity).-This type of quote provides more information to users than a last-trade quote, which quotes only the price at which the security last traded. An example of a ------------- would be: Citigroup quote of $52.50/$53.30. This tells traders they can currently purchase Citigroup shares for $53.30 or sell them for $52.50. The spread between the bid and the ask is $0.80 ($53.30-$52.50). |
Two-Way Quote
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A type of quote that gives both the bid and the ask price of a security,
informing would-be traders of the current price at which they could buy or sell the security. ----------- also shows the spread between the bid and the ask, giving traders an idea of the current liquidity in the security (a smaller spread indicates more liquidity).-This ------------ provides more information to users than a last-trade quote, which quotes only the price at which the security last traded. An example of a --------------- would be: Citigroup quote of $52.50/$53.30. This tells traders they can currently purchase Citigroup shares for $53.30 or sell them for $52.50. The spread between the bid and the ask is $0.80 ($53.30-$52.50). |
Two-Way Quote
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A measure of the value of the U.S. dollar relative to majority of its most
significant trading partners. This index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies. Currently, this index is calculated by factoring in the exchange rates of six major world currencies: the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc. This index started in 1973 with a base of 100 and is relative to this base. This means that a value of 120 would suggest that the U.S. dollar experienced a 20% increase in value over the time period. It is possible to incorporate futures or options strategies on the USDX. These financial products currently trade on the New York Board Of Trade. |
U.S. Dollar Index (USDX)
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A parity condition stating that the difference in interest rates between
two countries is equal to the expected change in exchange rates between the countries’ currencies. If this parity does not exist, there is an opportunity to make a profit. "i1" represents the interest rate of country 1 "i2" represents the interest rate of country 2 "E(e)" represents the expected rate of change in the exchange rate For example, assume that the interest rate in America is 10% and the interest rate in Canada is 15%. According to the uncovered interest rate parity, the Canadian dollar is expected to depreciate against the American dollar by approximately 5%. Put another way, to convince an investor to invest in Canada when its currency depreciates, the Canadian dollar interest rate would have to be about 5% higher than the American dollar interest rate. |
Uncovered Interest Rate Parity (UIP)
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An attempt by a country's monetary authorities to influence exchange
rates and its money supply by not buying or selling domestic or foreign currencies or assets. This is a passive approach to exchange rate fluctuations, and allows for fluctuations in the monetary base. If the central bank purchases domestic currency by selling foreign assets, the money supply will shrink because it has removed domestic currency from the market; this is an example of a sterilized policy. An unsterilized policy allows for the foreign-exchange markets to function without manipulation of the supply of the domestic currency; therefore, the monetary base is allowed to change. |
Unsterilized Foreign Exchange Intervention
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A currency that trades in markets outside of its domestic borders.
"Xeno" is a prefix meaning foreign or strange. An example of a -------------is the Chinese yuan when it is traded in the United States. When currency is deposited by national governments or corporations in banks outside their home market, it is sometimes referred to as a "eurocurrency" (this applies to any currency and to banks in any country). |
Xenocurrency
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Slang for one billion units in currency.
The term also refers to "milliard," which is a European term for 1,000 million (a billion). If a person wanted to buy one billion U.S. dollars, he or she might say, "I would like to buy a ---- of U.S. dollars." By using the word "----" in place of "billion," the person ensures that the counter-party will not misunderstand billion for "million" or "trillion." |
Yard
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