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25 Cards in this Set
- Front
- Back
Foreign exchange market |
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. |
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exchange rate |
An exchange rate is nothing more than a price at which one currency can be converted to another currency. |
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Independent exchange rate system |
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 |
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managed floating exchange rate system |
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 |
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fixed exchange rate system |
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. |
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Components of the foreign exchange market |
the forex market consists of spot, forward, and future markets |
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the spot market |
trades currencies on a real time basis for immediate delivery. |
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forward market |
exchange that enables purchases and sales of currencies in the future with prices (or the forward rate) established at a previous time. |
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Future market |
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. |
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Balance of payments (bop) |
a statement of account that shows all transactions between one country and the rest of the world for a given period of time |
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direct quote |
prices of foreign currency in dollars example yen=>$ |
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indirect quote |
the reciprocal of the direct quote example $===>yen |
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bid-ask spread |
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 |
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special drawing right (SDR) |
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 |
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dirty float |
currency monetary system with varying degrees of government intervention to maintain a range of acceptable values against other currencies |
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clean float |
currency monetary system with minimal government intervention largely market determined |
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dollarization |
the practice of using dollar or some other foreign currency together with or instead of a domestic currency in a country |
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hard currencies |
leading world currencies of developed industrialized countries including the dollar euro yen and pound |
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soft currencies |
emerging market countries currencies that are less stable in value than hard currencies and are sometimes pegged to hard currency values |
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purchasing power parity (pop) |
theory stating that basket of goods should have approximately the same prices across different countries |
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law of one price |
principle stating that identical goods should sell for the same price in different countries according to local currencies2 |
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the big mac index |
a calculation using the cost of a big mac sandwhich to assess the relative values of currencies |
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interest rate parity (irp) |
states that the bond interest rate in different countries will become the same as investors buy and sell bonds to make arbitrage profits |
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covered interest rate parity principle |
implies that forward exchange rates and spot exchange rates set interest rates on bonds in different countries equal to one another |
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uncovered interest rate parity principle |
implies that expected future spot exchange rates and spot exchange rates set interest rates on bonds in different countries equal to one another |