Unit 5: Foreign Exchange

The market in which currencies are bought and sold and in which currency prices are determined is called the

Foreign exchange market.

The practice of insuring against potential losses that result from adverse changes in exchange rates is called

currency hedging.

Currency arbitrage

is the instantaneous purchase and sale of a currency in different markets for profit.

Currency speculation

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

In a quoted exchange rate, the currency with which another currency is to be purchased is called

the Quoted currency.

In a quoted exchange rate, the currency that is to be purchased with another currency is called

the Base currency.

The exchange rate requiring delivery of the traded currency within two business days is called

the spot rate.

The exchange rate at which two parties agree to exchange currencies on a specified future date is called

the Forward rate

Forward contract

is a contract requiring the exchange of an agreed

A currency swap

is the simultaneous purchase and sale of foreign exchange for two different dates.

Currency that trades freely in the foreign exchange market, with its price determined by the forces of supply and demand is called

a convertible currency/ hard currency

An international monetary system in which nations linked the value of their paper currencies to specific values of gold was called

the Gold standard.

A system in which the exchange rate for converting one currency to another is fixed by international agreement is called

a Fixed exchange rate system

The Bretton Woods Agreement

was an accord among nations to create a new international monetary system based on the value of the US dollar

The agency created by the Bretton Woods Agreement to provide funding for national economic development efforts is called

the World Bank

The IMF

was the agency created by the Bretton Woods Agreement to regulate fixed exchange rates and enforce the rules of the international monetary system.

An exchange

rate system in which currencies float against one another with governments intervening to stabilize currencies at a particular target exchange rate is known as

Free float system

is an exchange rate system in which currencies float freely against one another, without governments intervening in currency markets.

The exchange rate at which the bank will buy a currency is called

a Buy rate

A ask rate

is called the exchange rate at which the bank will sell a currency.

A currency option

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

A Currency future contract

is a contract requiring exchange of a specific amount of currency on a specific date at a specific exchange rate with all of these conditions fixed and not adjustable

Foreign Exchange:

money or currency of a foreign country.

Exchange rate:

the rate at which one currency is exchanged for another.

Hedging:

the practice of insuring against potential losses that result from adverse changes in exchange rates.

Arbitrage:

the instantaneous 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.

Currency option:

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

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 its 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.