Foreign Exchange and International Financial Markets

Flashcards covering vocabulary from the chapter on Foreign Exchange and International Financial Markets.

Foreign exchange

A commodity that consists of currencies issued by countries other than one’s own.

Price of foreign exchange

Set by demand and supply in the marketplace (given a flexible exchange rate system).

Direct Exchange Rate (or Direct Quote)

The price of one country's currency expressed in terms of another country's currency.

Indirect Exchange Rate (or Indirect Quote)

The amount of foreign currency it takes to buy one unit of the home currency.

Spot Market

Market in which currencies are bought and sold for immediate delivery.

Forward Market

Market in which currencies are bought and sold for future delivery.

Swap Transaction

A transaction in which one currency is simultaneously bought and sold for future delivery against another currency.

Currency Options

A contract that gives the holder the right, but not the obligation, to buy or sell a specified amount of currency at a specified price on or before a specified date.

Call Option

An option to buy a currency at a specified price within a specified period of time.

Put Option

An option to sell a currency at a specified price within a specified period of time.

Arbitrage

The purchase and sale of an asset or commodity in order to profit from price differences in different markets.

Purchasing Power Parity (PPP)

The theory that prices of goods should equalize across countries if exchange rates are allowed to adjust.

Eurocurrency

Capital that is held outside its country of origin.

Euroloan

Loans denominated in a currency other than the home currency of the lending bank.

London Interbank Offer Rate (LIBOR)

The interest rate that international banks charge one another for overnight Eurocurrency loans.

International Banking Facilities (IBFs)

A special zone that is not subject to domestic regulations or taxes.

Foreign Bonds

Bonds that are sold outside the borrower's country and are denominated in the currency of the country in which they are sold.

Eurobonds

Bonds that are sold outside the borrower's country and are denominated in a currency other than the currency of the country in which they are sold.

Correspondent Relationship

A bank in a foreign country that provides services to a bank in another country.

Subsidiary Bank

A locally incorporated bank that is either wholly owned or majority-owned by a foreign bank.

Branch Bank

An office of a bank that is located in a foreign country.

Affiliated Bank

A bank in which a foreign bank holds a minority interest.