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12 Cards in this Set
- Front
- Back
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Foreign exchange
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- Checks and other instruments for making payments in another country's currency
- Foreign exchange market |
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Exchange rate
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- Price of one currency in terms of another currency
- How to quote |
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Spot rate
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an exchange rate quoted for immediate delivery of foreign currency
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Forward rate
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rate quoted for transactions that call for delivery after two business days
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Spread
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The difference between the buy and sell rate quoted by foreign exchange trader
Usually sell high and buy low |
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How to quote: Direct quote
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U.S. terms
the number of units of the domestic currency needed to acquire one unit of the foreign currency |
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How to quote: Indirect quote
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European terms
The number of units of foreign currency needed to acquire one unit of the domestic currency |
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Cross rate
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- Exchange rate computed from two other exchange rates
- Example: -Italian lira is selling for L 1250 per dollar -Swiss franc is selling for SwF 1.5 per dollar -Then, the cross rate would be.... |
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Forward Discount or Premium
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Discount: forward rate < spot rate
Premium: forward rate > spot rate |
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Option
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The right but not the obligation to buy or sell a foreign currency within a certain time period or on a specific date at a specific exchange rate
Example: - purchases an option to sell German marks at 1.7007 marks per dollar - At the time the company wants to sell the marks, the spot rate is 1.7000 marks per dollar - Then, exercise the option? |
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Future contract
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- A contract that specifies an exchange rate in advance of the actual exchange of currency
- Less flexible than a forward contract in terms of amount of currency and maturity dates |
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Covertibility
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Hard currencies: Stable against inflation, easy to convert into other currencies
Soft currencies |
