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36 Cards in this Set
- Front
- Back
foreign exchange market
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a market for converting the currency of one country into that of another country
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exchange rate
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the rate at which one currency is converted into another
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foreign exchange risk
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the risk that changes in exchange rates will hurt the profitability of a business deal
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currency speculation
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moving funds from one currency to another over the short term in hopes of profiting from shifts in exchange rates
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hedging
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the process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps
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spot exchange rate
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the rate at which a foreign exchange dealer converts currency on any particular day
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forward exchange
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when two parties agree to exchange currency and execute a deal at some specific date in the future
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forward exchange rate
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the exchange rate governing forward exchange transactions, calculated at the time of the exchange, but based on future expectations
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currency swap
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the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
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arbitrage
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the purchase of securities in one market for immediate resale in another market to profit from a price discrepancy
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law of one price
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the principle that in competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in the same currency
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international monetary system
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the institutional arrangements countries adopt that govern exchange rates
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floating exchange rate
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a system under which the exchange rate for converting one currency into another is continuously adjusted depending on the law of supply and demand
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pegged exchange system
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a system under which the value of a country's currency is fixed relative to a reference currency, and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate
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dirty float
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a system under which a country's currency is nominally allowed to float freely against other currencies, but in which the government will intervene if it believes the currency has deviated too far from its fair value
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fixed exchange rate
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a system under which the exchange rate for converting one currency into another is set at a constant rate
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european monetary system
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system for managing exchange rates of EU currencies against each other. now replaced by the euro
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gold standard
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the practice of pegging currencies to gold guaranteeing convertibility
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gold par value
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the amount of currency needed to purchase one ounce of gold
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balance-of-trade equilibrium
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reached when the income a country's residents earned from exports equals the money they pay for imports
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managed-float system
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system under which some currencies are allowed to float freely, but the majority are either managed by government intervention or pegged to another currency
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currency board
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a country's currency authority that holds reserves of foreign currency equal at the fixed exchange rate to at least 100 percent of the domestic currency issued in order to keep inflation down
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currency crisis
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when a speculative attack on the exchange value of a currency results in a sharp depreciation of the currency or forces authorities to expend large volumes of international currency reserves and sharply increase interest rates to defend the prevailing exchange rate
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banking crisis
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when individuals and companies lose confidence in the banking system and withdraw their deposits in what is called a run on banks
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foreign debt crisis
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a situation in which a country cannot service its foreign-debt obligations, whether private-sector or government debt
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moral hazard
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when people behave recklessly because they know they will be saved if things go wrong
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two main functions of the foreign exchange market
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1. convert currency of one country into the currency of another
2. provide some insurance against foreign exchange risk |
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four main uses of foreign exchange markets for an international business
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1. payments for exports, income from foreign investments, income from licensing agreements with foreign firms
2. used whey a company must pay a foreign company for its products or services in its country's currency 3. when they have spare cash and wish to invest for short terms in money markets 4. currency speculation |
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three factors that impact future exchange rate movements in a country's currency
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1. the country's price inflation
2. the country's interest rate 3. market psychology |
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categories of foreign exchange risk
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1. transaction exposure
2. translation exposure 3. economic exposure |
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two main functions of the foreign exchange market
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1. convert currency of one country into the currency of another
2. provide some insurance against foreign exchange risk |
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four main uses of foreign exchange markets for an international business
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1. payments for exports, income from foreign investments, income from licensing agreements with foreign firms
2. used whey a company must pay a foreign company for its products or services in its country's currency 3. when they have spare cash and wish to invest for short terms in money markets 4. currency speculation |
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three factors that impact future exchange rate movements in a country's currency
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1. the country's price inflation
2. the country's interest rate 3. market psychology |
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categories of foreign exchange risk
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1. transaction exposure
2. translation exposure 3. economic exposure |
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two main elements of the case for floating exchange rates
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1. monetary policy autonomy
2. automatic trade balance adjustments |
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the case for fixed exchange rates
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1. monetary discipline
2. speculation 3. uncertainty 4. trade balance adjustments |