Global Business Today Chapter 9

Front 1

Foreign Exchange Market

Back 1

A market for converting the currency of one country into that of another country.

Front 2

Exchange Rate

Back 2

The rate at which one currency is converted into another.

Front 3

Foreign Exchange Risk

Back 3

The risk that changes in exchange rates will hurt the profitability of a business deal.

Front 4

Currency Speculation

Back 4

Involves the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates.

Front 5

Carry Trade

Back 5

Involves borrowing in one currency where interest rates are low, and then using the proceeds to invest in another currency where the interest rates are high.

Front 6

Hedging

Back 6

The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps.

Front 7

Spot Exchange Rate

Back 7

The exchange rate at which a foreign exchange dealer will convert one currency into another currency on a particular day.

Front 8

Forward Exchange

Back 8

When two parties agree to exchange currency and execute the deal at some specific date in the future.

Front 9

Forward Exchange Rate

Back 9

The exchange rate governing forward exchange transactions.

Front 10

Currency Swap

Back 10

Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.

Front 11

Arbitrage

Back 11

The purchase of securities in one market for immediate resale in another to profit from a price discrepancy.

Front 12

Law Of One Price

Back 12

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 terms of the same currency.

Front 13

Efficient Market

Back 13

A market which has no impediments to the free flow of goods and services, such as trade barriers, and prices reflect all available public information.

Front 14

Fisher Effect

Back 14

Nominal interest rates in each country equal the required "real" rate of interest and the expected rate of inflation over the period for which the funds are to be lent.

Front 15

International Fisher Effect

Back 15

For any two countries, the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between the two countries.

Front 16

Bandwagon Effect

Back 16

When traders move like a herd, all in the same direction and at the same time, in response to each others' perceived actions.

Front 17

Inefficient Market

Back 17

One in which prices do not reflect all available information.

Front 18

Fundamental Analysis

Back 18

Draws on economic theory to construct sophisticated econometric models for predicting exchange rate movements.

Front 19

Technical Analysis

Back 19

Uses price and volume data to determine past trends, which are expected to continue into the future.

Front 20

Freely Convertible Currency

Back 20

A country's currency is freely convertible when the government of that country allows both residents and nonresidents to purchase unlimited amounts of a foreign currency with it.

Front 21

Externally Convertible Currency

Back 21

Nonresidents can convert their holding of domestic currency into foreign currency, but the ability of residents to convert the currency is limited in some way.

Front 22

Nonconvertible Currency

Back 22

A currency is not convertible when both residents and nonresidents are prohibited from converting their holdings of that currency into another currency.

Front 23

Capital Flight

Back 23

Residents convert domestic currency into a foreign currency.

Front 24

Countertrade

Back 24

The trade of goods and services for other goods and services.

Front 25

Transaction Exposure

Back 25

Extent to which income from individual transactions is affected by fluctuations in foreign exchange values.

Front 26

Translation Exposure

Back 26

The extent to which the reported consolidated results and balance sheets of a corporation are affected by fluctuations in foreign exchange values.

Front 27

Economic Exposure

Back 27

The extent to which a firm's future international earning power is affected by changes in exchange rates.

Front 28

Lead Strategy

Back 28

Attempting to collect foreign currency receivables early when a foreign currency is expected to depreciate and paying foreign currency payables before they are due when a currency is expected to depreciate.

Front 29

Lag Strategy

Back 29

Delaying collection of foreign currency receivables if that currency is expected to appreciate and delaying payables if the currency is expected to depreciate.