UNIT 5 - FOREIGN EXCHANGE

foreign exchange

money or currency of a foreign country

foreign exchange market

the market in which currency are bought and sold and in which currency prices are determined

exchange rate

the rate at which one currency is exchanged for another

spot rate

an exchange rate requiring delivery of the traded currencywithin two business days

forward rate

an exchange rate at which two parties agree to exchange currencies on a specific future date

hedging

the practice of insuring against potential losses that result from adverse changes in exchange rate - making contracts to buy or sell… at a pre-arranged price in the future as a protection or “insurance” against price changes

arbitrage

the instaneous purchase and sale of a currency in different markets for profit

speculation

the purchase or sale of a currency with the expectation that its value will change and generate a profit

forward contract

a contract requiring the exchange of agreed-upon amount of currency on an agreed-upon date at a specific exchange rate

currency option

a right, or option, to exchange a specific amount of currency on a specific date at a specific rate

a currency swap

the simultaneous purchase and sale of foreign exchange for 2 different dates

central bank

a country’s chief bank, which is government owned. It regulates the commercial banks and holds gold and foreign currency reserves. It actively intervenes by buying and selling its own currency in the foreign exchange markets so that the currency will keep a certain value

fixed exchange rate

a system whereby central banks are required by international agreements to maintain their currency at a relatively fixed value. This is achieved by buying the currency when it reaches its low point and by selling when it reaches the high point

floating exchange rate

a system in which currencies have no specific par value; value is normally determined by supply and demand. Central banks are not required to intervene, but they often do to avoid wild fluctuations.

futures

contract to buy or sell fixed quantities of a commodity, currecy, or financial asset at a future date, at a price fixed at the time of making the contract

options

contract giving the right, but not the obligation, to buy or sell a security, a currency, or a commodity at a fixed price during a certain period of time

commodities

raw materials or primary products (metals, cereals, coffee, etc.) that are traded on special markets

derivatives

a general name for all financial instruments whose prices depend on the movement of another price

speculation

buying securities or other assets in the hope of making a capital gain by selling them at higher price (or selling them in the hope of buying them back at a lower price)

the bid quote

the price in which the bank will buy

the ask quote

the price at which the bank will pay

the bid-ask spread

the difference btw the bid quote and the ask quote

the quoted currency

the currency with which another currency is to be purchased; is always the numerator

the base currency

the currency that is to be purchased with another currency; is the denominator

the spot market

the market for currency transaction on the spot

a buy rate

the exchange rate at which bank will buy a currency

ask rate

tha rate at which the bank will sell a currency

the forward market

the market for currency transaction at forward rates

premium

situation in which currency is trading with forward rate > spot rate

discount

situation in which currency is trading with forward rate < spot rate

currency futures contract

a contract requiring exchange of a specific amount of currency on a specific date at a specific exchange rate