Ba 310 Final Chapter 4

Front 1

Foreign exchange market

Back 1

Foreign exchange market is the market in which foreign currencies are bought and sold. The buyers and sellers include individuals, firms, foreign exchange brokers, commercial banks and the central bank.

Front 2

exchange rate

Back 2

An exchange rate is nothing more than a price at which one currency can be converted to another currency.

Front 3

Independent exchange rate system

Back 3

in a free market oriented foreign exchange market, major currency values are determined by the demand for and supply of currencies this is called independent exchange rate system

Front 4

managed floating exchange rate system

Back 4

in this sytem the currencies value depends partly upon demand and supply in the foreign exchange market, and partly on active government intervention in the foreign exchange market

Front 5

fixed exchange rate system

Back 5

this system has a currency set at a fixed rate to a major currency or basket of currencies and the exchange rate fluctuates within a narrow margin around a central rate.

Front 6

Components of the foreign exchange market

Back 6

the forex market consists of spot, forward, and future markets

Front 7

the spot market

Back 7

trades currencies on a real time basis for immediate delivery.

Front 8

forward market

Back 8

exchange that enables purchases and sales of currencies in the future with prices (or the forward rate) established at a previous time.

Front 9

Future market

Back 9

is a central financial exchange where people can trade standardized futures contracts; that is, a contract to buy specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future.

Front 10

Balance of payments (bop)

Back 10

a statement of account that shows all transactions between one country and the rest of the world for a given period of time

Front 11

direct quote

Back 11

prices of foreign currency in dollars example yen=>$

Front 12

indirect quote

Back 12

the reciprocal of the direct quote example $===>yen

Front 13

bid-ask spread

Back 13

the transaction fee earned by the bank the difference between bid (buy) and and ask (sell) prices of a currency

discount selling spot rate< forward rate

premium selling spot rate>forward rate

Front 14

special drawing right (SDR)

Back 14

primary reserve asset of the international monetary system

a basket of currencies used to benchmark to value different currencies

dollar, euro, and yen account for 60% of the world economy

Front 15

dirty float

Back 15

currency monetary system with varying degrees of government intervention to maintain a range of acceptable values against other currencies

Front 16

clean float

Back 16

currency monetary system with minimal government intervention largely market determined

Front 17

dollarization

Back 17

the practice of using dollar or some other foreign currency together with or instead of a domestic currency in a country

Front 18

hard currencies

Back 18

leading world currencies of developed industrialized countries including the dollar euro yen and pound

Front 19

soft currencies

Back 19

emerging market countries currencies that are less stable in value than hard currencies and are sometimes pegged to hard currency values

Front 20

purchasing power parity (pop)

Back 20

theory stating that basket of goods should have approximately the same prices across different countries

Front 21

law of one price

Back 21

principle stating that identical goods should sell for the same price in different countries according to local currencies2

Front 22

the big mac index

Back 22

a calculation using the cost of a big mac sandwhich to assess the relative values of currencies

Front 23

interest rate parity (irp)

Back 23

states that the bond interest rate in different countries will become the same as investors buy and sell bonds to make arbitrage profits

Front 24

covered interest rate parity principle

Back 24

implies that forward exchange rates and spot exchange rates set interest rates on bonds in different countries equal to one another

Front 25

uncovered interest rate parity principle

Back 25

implies that expected future spot exchange rates and spot exchange rates set interest rates on bonds in different countries equal to one another