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88 Cards in this Set
- Front
- Back
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Foreign exchange market |
Market for converting currency of one country into that of another country |
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Exchange rate |
Rate at which one currency is converted into another |
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Foreign exchange risk |
The risk that changes in exchange rates will hurt the profitability of a business deal |
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Functions of the foreign exchange market |
Convert the currency of one country into the currency of another |
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Currency speculation |
Typically involves the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates |
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Carry rate |
Kind of speculation that involves borrowing in one currency where interest rates are low and then using the proceeds to invest in another country where interests are high |
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Spot exchange rate |
Rate at which a foreign exchange dealer converts one currency into another currency on a particular day |
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Forward exchange |
Occurs when two parties agree to exchange currency and execute the deal at some specific date in the future |
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Forward exchange rates |
The exchange rate governing a foreign exchange transaction |
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How long are foreign exchange rates usually quoted for? |
30 days, 90 days, and 180 days into the future |
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Currency swap |
The simultaneous purchase and sale of a given amount of foreign exchange for two different value dates |
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Common type of currency swap: |
Spot against forward |
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Abritrage |
Refers to the purchase of securities in one market for immediate resale in another to profit from a price discrepancy |
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Law of one price |
States 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 in expressed in terms of the same currency |
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Efficient market |
Has no impediments to the free flow of goods and services, such as trade barriers. It is a market where prices reflect all available information |
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What does the growth rate a country's money supply determine? |
It's likely future inflation rate |
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Money supply increases faster than output increases |
Inflation |
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An increase in the money supply makes it easier to borrow. What happens? |
It increases demand for goods and services |
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A country with a high inflation rate will see depreciation in what? |
It's currency exchange rate |
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What does government policy determine? |
Growth rates |
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Purchasing power parity puzzle |
The failure to find a strong link between relative exchange rates and exchange movements |
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What do interest rates reflect? |
Expectations about likely future inflation rates |
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Fisher effect |
Nominal interest rates in each country equal the required real rate of interest and the expected rate of inflation over the period of time for which the funds are to be lent. |
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International fisher effect |
For any two countries, the spot exchange rate should change in a equal amount but in the opposite direction to the difference in nominal interest rates between countries |
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Bandwagon effect |
Movement of traders like a herd, all in the same direction and at the same time, in response to each other's perceived actions |
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Summary of exchange rate theories |
Relative monetary growth, relative inflation rates, and nominal interest rate differentials are all moderately good predictors of long-run changes in exchange rates. But they are poor predictors of short run changes. |
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Efficient market school |
Prices reflect all available public information. Forward exchange rates should be unbiased predictors of future spot rates |
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Inefficient market school |
Prices do not reflect all available information. Forward exchange rates will not be the best possible predictors of future spot exchange rates |
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Fundamental analysis |
Draws on economic theory to construct sophisticated econometric models for predicting exchange rate movements |
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Technical analysis |
Used price and volume days to determine past trends, which are expected to continue into the future. |
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Technical analysis |
Used price and volume days to determine past trends, which are expected to continue into the future. |
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Freely convertible |
A country's currency is freely convertible when the government of that country allows both residents and non residents to purchase unlimited amounts of foreign currency with domestic currency |
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Externally convertible |
Limitations on the ability of residents to covert domestic currency, though nonresidents can covert their holdings of domestic currency into foreign currency |
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Non convertible |
A currency is not convertible when both residents and nonresidents are prohibited from converting their holdings of that currency into another currency |
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Non convertible |
A currency is not convertible when both residents and nonresidents are prohibited from converting their holdings of that currency into another currency |
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Capital flight |
Converting domestic currency into foreign currency |
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Countertrade |
No currency involved. Trade of goods and services for other goods and services |
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Transaction exposure |
Extent to which the income from individual transactions is affected by fluctuations in foreign exchange values |
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Translation exposure |
The impact of currency exchange rate changes on the reported financial statements of a company |
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Economic exposure |
The extent to which a firm's future international earning power is affected by changes in exchange rates |
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Lead strategy |
Collecting 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 appreciate. |
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Lead strategy |
Collecting 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 appreciate. |
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Lag strategy |
Delaying the collection of foreign currency receivables if that currency is expected to appreciate and delaying payables if that currency is expected to depreciate. |
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International monetary system |
Institutional arrangements countries adopt to govern exchange rates |
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International monetary system |
Institutional arrangements countries adopt to govern exchange rates |
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Floating exchange rate |
A system under which the exchange rate for converting one currency into another is continuously adjusted depending on the laws of supply and demand. |
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Pegged exchange rate |
Currency value that is fixed relative to a reference currency |
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Managed float system (dirty-float system) |
The value of currency is determined by market forces, but managed by the government |
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Fixed exchange rate |
A system under which the exchange rate for converting one currency to another is fixed |
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Fixed exchange rate |
A system under which the exchange rate for converting one currency to another is fixed |
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European monetary system |
Refers to the EU system designed to create a zone of monetary stability in Europe, control inflation, and coordinate exchange rate policies of EU countries |
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Fixed exchange rate |
A system under which the exchange rate for converting one currency to another is fixed |
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European monetary system |
Refers to the EU system designed to create a zone of monetary stability in Europe, control inflation, and coordinate exchange rate policies of EU countries |
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Gold standard |
Practice of pegging currencies to gold and guaranteeing convertibility |
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Gold par value |
Amount of currency needed to purchase one ounce of gold |
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Balance-of-trade equilibrium |
Reached when the income a nation's residents earn from exports equals the money paid for imports |
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International Monetary Fund (IMF) |
Tasked with maintaining order in the international monetary system |
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World bank |
To promote general economic development |
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Role of the world bank |
Initially established to help reconstruct the war-torn economies of Europe. Later, moved to lending to third-world nations for development. Lends money by raising money through bond sales and through subscriptions from wealthy members |
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The Jamaica agreement |
Floating rates were declared unacceptable. Gold was abandoned as a reserve asset. |
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Exchange rates since 1973 |
They have become much more volatile and less predictable |
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What has determined the value of the dollar? |
Market forces and government intervention |
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Pegged exchange rates |
Popular among many of the world's smaller nations. Imposes monetary discipline on country and leads to low inflation |
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Currency board |
A means of controlling a country's currency. Holds reserves of foreign currency equal at fixed exchange rate to at least 100% of domestic currency used |
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After the collapse of Bretton Woods |
Most industrialized countries tended to let the foreign exchange market determine exchange rates in response to demand and supply. Developed countries generally finance their deficits by borrowing private money as opposed to drawing on IMF funds |
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After the collapse of Bretton Woods |
Most industrialized countries tended to let the foreign exchange market determine exchange rates in response to demand and supply. Developed countries generally finance their deficits by borrowing private money as opposed to drawing on IMF funds. IMF activities have expanded |
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Currency crisis |
Occurs when a speculative attack on the exchange value of a currency results in a sharp depreciation in the value 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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Currency crisis |
Occurs when a speculative attack on the exchange value of a currency results in a sharp depreciation in the value 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 |
A loss of confidence in the banking system that leads to a run on banks, as individuals and companies withdraw their deposits |
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Foreign debt crisis |
A situation in which a country cannot service its foreign debt obligations, whether private-sector or government debt |
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Moral hazard |
Arises when people behave recklessly because they know they will be saved if things go wrong |
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Currency management |
Combo of government intervention and speculative activity can drive the foreign exchange market. |
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Currency management |
Combo of government intervention and speculative activity can drive the foreign exchange market. |
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Business strategy |
Companies should pursue strategies that will increase their strategic flexibility in the face of unpredictable exchange rate movements |
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Corporate government regulations |
Businesses can influence government policy toward the international monetary system. International business should promote an international monetary system that minimizes volatile exchange rate movements, particularly when those movements are unrelated to long-run economic fundamentals |
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Market makers |
The financial service companies that connect investors to borrowers, either directly or indirectly |
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Equity loans |
Made when a corporation sells stock to investors |
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Debt loans |
Requires corporation to repay a predetermined portion of the loan amount at regular intervals regardless of how much profit it is making |
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Domestic VS global capital market |
Domestic is high cost of capital. Global is low |
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Hedge funds |
Private investment funds that position themselves to make "long bets" on assets that they think will increase in value and "short bets" on assets that will decline |
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Hot money VS patient money |
Martin feldstein |
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Eurocurrency |
Any currency banked outside its country of origin |
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Attractions of the Eurocurrency market |
Lack of government regulation |
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Drawbacks of Eurocurrency market |
Borrowing funds internationally can expose a company to foreign exchange risk |
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Most common in global bond market |
Fixed-rate bond |
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Foreign bonds |
Sold outside the borrower's country and are dominated in the currency of the country in which they are issued |
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Eurobonds |
Bonds placed in countries other than the one in whose currency the bonds are denominated |
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The global market is |
Not regulated |
