Term
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Definition
| -represents the price of one currency in terms of another currency. stated in terms of the number of units of a particular currency (price currency) required to purchase a unit of another currency (base currency) |
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Term
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Definition
| -when the value of a currency is stated in terms of units of another currency |
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Term
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Definition
| -measure changes in the relative purchasing power of one currency w another |
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Term
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Definition
-quotes for transactions that call for immediate delivery
T+2 --> transaction is settled 2 days after the trade isa greed upon by the parties |
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Term
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Definition
| -quotes for transactions that are agreed upon today, but settled at a pre-specified date in the future |
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Term
| Functions of Foreign Exchange Market |
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Definition
-facilitate international trade, allowing individuals and companies to purchase items produced in foreign countries
-allow investors to convert between currencies in order to move funds into foreign assets
-enable market participants who face exchange rate risk to hedge their risks
-allow investors to speculate on currency values |
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Term
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Definition
Sell side:
-the very largest dealing banks
-all other regional and local banks (outsource FX services to the larger tier-one banks)
Buy Side:
-Corporate Accounts (enter into FX transactions for cross-border purchases and sales of g&s, cross-border investment flows)
-Real Money Accounts: new investment funds managed by insurance companies, mutual funds, pension funds, endowments, exchange traded funds, and other institutional investors
-Leveraged Accounts: include hedge funds, proprietary trading shops, and all trading accounts that accept and manage FX for profit
-Retail accounts: individuals such as tourists who exchange currencies from retail outlets
-governments: public entities may enter FX markets for transactional purposes or to achieve public policy goals of the govt.. govts. also issue debt in foreign currencies
-Central banks: enter FX markets to influence the level or trend in the domestic exchange rate
-Sovereign Wealth Funds |
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Term
| Calculate and interpret % change in a currency relative to another currency |
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Definition
-if base currency appreciates, the percent amount by which price currency changed by is the percentage increase in the value of the base currency against the price currency
-percentage increase in the value of the base currency against JPY does NOT equal the percentage decrease in the value of JPY against USD |
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Term
| Calculate and Interpret Currency Cross-Rates |
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Definition
-cross rate: an exchange rate between two currencies that is derived from each currency's relationship with a third currency
-given exchange rates should be multiplied such that the third currency disappears
--> may need to insert one of the exchange rate quotes |
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Term
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Definition
-used to quote forward exchange rates
-represent the difference between the forward rate and the spot rate
-scaled so that they can be related to the last digit in the spot quote (multiply by 10,000) |
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Term
| Calculate and Interpret a forward discount/premium |
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Definition
-refer to equation sheet
-forward discount: currency is expected to depreciate
-forward premium: forward rate is higher than spot rate so currency is said to be trading at a forward premium |
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Term
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Definition
-policy framework adopted by a country's central bank to manage its currency's exchange rate is called an exchange rate regime
ideal currency regime:
-exchange rate between any two currencies should be CREDIBLY FIXED in order to eliminate currency-related uncertainty regarding the prices of goods and services and values of real and financial assets
-all currencies should be FULLY CONVERTIBLE to ensure unrestricted flow of capital
-each country should be able to undertake FULLY INDEPENDENT monetary policy in pursuit of domestic objectives such as growth and inflation targets
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Term
| Types of Exchange Rate Regimes (arrangements with no separate legal tender) |
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Definition
-Dollarization: a country uses the currency of another nation as its medium of exchange and unit of account
--> inherits the currency's credibility but not its credit-worthiness
--> interest rates on US dollars in a dollarized economy are usually not the same as those on dollar deposits in the US
Pros: central banks are not able to print their way out of high national debt
-can facilitate growth of trade and international capital flows as it creates an expectation of economic stability
Cons: Countries lose their ability to conduct independent monetary policy
2) Monetary union
member countries share the same legal tender. monetary policy is conducted by the ECB for the entire region
Pros: gives credibility to economies that have a history of fiscal excess and monetary indiscipline
Cons: Members do not gain creditworthiness
members cannot conduct their own independent monetary policy |
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Term
| Exchange Rate Regimes (arrangements where countries have their own currency) |
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Definition
Currency Board System
Fixed Parity
Target Zone
Active and Passive Crawling Pegs
Fixed Parity with Crawling Bands
Managed Float
independently Floating Rates |
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Term
| Impact of exchange rates on countries' international trade and capital flows |
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Definition
| -More elastic the demand for imports and exports, the more likely that a depreciation of the domestic currency will lead the trade balance towards a surplus |
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