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Global Economics
Ch. 9-10 Definitions
38
Economics
Undergraduate 4
09/22/2007

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Term
international monetary system
Definition
institutional arrangements countries adopt to govern exchange rates
Term
floating exchange rate
Definition
a system under which the exchange rate for converting one currency into another is continuously adjusted depending on the laws of supply and demand
Term
pegged exchanged rate
Definition
currency value is fixed relative to a reference currency (i.e. Chinese yuan fixed to USD)
Term
dirty-float system (aka managed-float system)
Definition
a system under which a country's currency is nominally allowed to float freely against other currencies, but in which the government will intervene, buying and selling currency, if it believes that the currency has deviated too far from its fair value.
Term
fixed exchange rate
Definition
a system under which the exchange rate for converting one currency into another is fixed.
Term
The Bretton Woods conference
Definition
1944-New Hampshire w/ 44 countries; created two major international institutions: IMF and World Bank; created fixed exchange rates; failed in 1973.
Term
gold standard
Definition
the practice of pegging currencies to gold and guaranteeing convertibility
Term
gold par value
Definition
the amount of currency needed to purchase one ounce of gold
Term
balance of trade equilibrium
Definition
reached when the income a country's residents earn from exports equals the money residents paid for imports
Term
The Jamaica Agreement
Definition
Jan. 1976 meeting of IMF members to revise Articles of Agreement to reflect new floating exchange rates.

1. Floating rates were declared acceptable

2. Gold was abandoned as a reserve asset

3. Total annual IMF quotas were increased to $41B

Term
currency board
Definition
means of controlling a countries currency; board decides on exchange rate and some have "peg-adjusted" where exchange rate is pegged but currency board has power to adjust
Term
moral hazard
Definition
arises when people behave recklessly because they know they will be saved if things go wrong (i.e. countrywide, 2007)
Term
currency speculation
Definition
involves short-term movement of funds from one currency to another in hopes of profiting from shifts in exchange rates.
Term
spot exchange rate
Definition
the exchange rate at which a foreign exchange dealer will convert one currency into another that particular day
Term
direct and indirect exchange rate quotations
Definition
direct: 1USD = 1.41EUR

indirect: 1EUR = 0.705USD

Term
hedge fund
Definition
investment fund that not only buys financial assets but also sells them short
Term
short selling
Definition
occurs when an investor places a speculative bet that the value of a financial asset will decline and profits from that decline
Term
forward exchange
Definition
when two parties agree to exchange currency and execute a deal at some specific date in the future
Term
arbitrage
Definition
the purchase of securities in one market for immediate resale in another to profit from a price discrepancy
Term
Fisher effect
Definition
nominal interest rates (i) in each country equal the required real rate of interest (r) and the expected rate of inflation (I) over the time period for which the funds are to be lent.

i = r + I

Term
capital flight
Definition
residents convert domestic currency into a foreign currency
Term
countertrade
Definition
the trade of goods and services for other goods and services
Term
freely convertible currency
Definition
residents and nonresidents allowed to purchase unlimited amounts of foreign currency w/ domestic currency
Term
externally convertible currency
Definition
nonresidents can convert their holdings of domestic currency into foreign currency, but the ability of residents to convert the currency is limited in some way
Term
nonconvertible currency
Definition
residents and nonresidents are prohibited from converting their holdings of that currency into another currency (cuba)
Term
transaction exposure
Definition
the extent to which income from individual transactions is affected by fluctuations in the FX market
Term
translation exposure
Definition
the extent to which the reported consolidated results and balance sheets of a corporation are affected by fluctuations in FX values.
Term
economic exposure
Definition
the extent to which a firm's future international earning power is affected by changes in exchange rates
Term
banking crisis
Definition
a loss of confidence in the banking system that leads to a run on banks, as individuals and companies withdraw their deposits
Term
currency swap
Definition
simultaneous purchase and sale of a given amount of foreign exchange for two different dates
Term
law of one price
Definition
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 the same currency
Term
efficient market
Definition
a market where prices reflect all available information
Term
inefficient market
Definition
a market in which prices do not reflect all available information
Term
fundamental analysis
Definition

draws on economic theory to construct sophisticated econometric models for predicting exchange rate movements; variables include:

money supply growth; inflation rates; nominal interest rates; balance-of-payments positions

Term
technical analysis
Definition
uses prices and volume data to determine past trends which are expected to continue
Term
lead strategy
Definition
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 appreciate (FROM THE STANDPOINT OF THE COMPANY'S BEST INTEREST)
Term
lag strategy
Definition
delaying the collection of foreign currency receivables if that currency is expected to appreciate, and delaying the payables if that currency is expected to depreciate (FROM THE STANDPOINT OF THE COMPANY'S BEST INTEREST)
Term
relatively efficient market
Definition
a market where few impediments to international trade and investment exist
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