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29 Cards in this Set
- Front
- Back
Foreign Exchange Market
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a market for converting the currency of one country into the currency of another
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Foreign Exchange Market
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a market for converting the currency of one country into the currency of another
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Exchange Rate
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the rate at which one currency is converted into another
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Foreign Exchange Risk
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the risk of an investment’s value changing due to changes in currency exchange rates
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Arbitrage
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the purchase of a product in one market for immediate resale in a second market in order to profit from a price discrepancy
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Currency Speculation
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short-term movement of funds from one currency to another in hopes of profiting from shifts in exchange rates
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Spot Exchange Rate
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the exchange rate at which a foreign exchange dealer would convert one currency into another currency on that day
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Forward Exchange Rate
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the exchange rate at which a foreign exchange dealer will agree to convert one currency into another currency on a specific date in the future
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Economic Exposure
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the extent to which a firm’s future international earning power is affected by changes in exchange rates
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Hedging
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a position established in one market in an attempt to offset exposure to the price risk of an equal but opposite obligation or position in another market — usually, but not always, in the context of one's commercial activity.
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Forward Contract
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contracts to buy or sell at a specific date in the future at a price specified today. The future date is called the delivery date or final settlement date. The official price of the futures contract at the end of a day's trading session on the exchange is called the settlement price for that day of business on the exchange.
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Option
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a contract between a buyer and a seller that gives the buyer the right—but not the obligation—to buy or to sell a particular asset (the underlying asset) at a later day at an agreed price. In return for granting the option, the seller collects a payment (the premium) from the buyer
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Currency Swaps
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a foreign exchange agreement between two parties to exchange principal and fixed rate interest payments on a loan in one currency for principal and fixed rate interest payments on an equal (regarding net present value) loan in another currency. Currency swaps are motivated by comparative advantage.
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What are the Two Drivers of Exchange Rate Determination?
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Price Inflation and Interest Rates
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Price Inflation Theory states that A country with high inflation should expect its currency to __________ against the currency of a country with a lower inflation rate
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depreciate
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Increasing the money supply usually _______ inflation
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triggers
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Interest Rates Theory states that when interest rates rise, it is because inflation is expected to _______
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increase
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Any differences in “real” interest rates will be equalized through ________ and therefore any difference in “nominal” interest rates are due to expectations about inflation
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arbitrage
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Law of One Price states that in _________ markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for ______ price(s) when their price is expressed in the same currency
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competitive, the same
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Purchasing Power Parity
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the difference in amount of identical goods that one currency can buy when spent in two different countries
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Big Mac Index
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an informal way of measuring the purchasing power parity (PPP) between two currencies and provides a test of the extent to which market exchange rates result in goods costing the same in different countries.
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How Increasing the Money Supply Impacts Exchange Rates
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When Velocity and Number of Goods and Services in the market are held constant, increasing the money supply will cause inflation because it causes prices to rise
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Price Discrimination
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the practice of charging different prices for the same product in different markets
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With the International Fisher Effect, the difference in the nominal interest rates between two countries determines the movement of the nominal exchange rate between their currencies, with the value of the currency of the country with the _______ nominal interest rate increasing
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lower
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Bandwagon Effect
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when one person does something, everyone else follows if it seems like a good idea
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The Efficient Market School
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a market where prices reflect all available information
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Inefficient Market School
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one in which prices do not reflect all available information
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Fundamental Analysis
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markets may misprice a security in the short run but that the "correct" price will eventually be reached. Profits can be made by trading the mispriced security and then waiting for the market to recognize its "mistake" and reprice the security.
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Technical Analysis
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information is reflected already in the stock price, so fundamental analysis is a waste of time. Technical analysis does not care what the 'value' of a stock is. Their price predictions are only extrapolations from historical price patterns.
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