UNIT 5: FOREIGN EXCHANGE

Foreign exchange market

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

Currency hedging

The practice of Insuring against potential losses that result from adverse changes in exchange rates

 Currency arbitrage

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

Currency speculation

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

Quoted currency

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

Base currency

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

Spot rate

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

Forward rate

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

Forward contract

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

Currency swap

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

 convertible/hard currency

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

Gold standard

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

Fixed exchange rate system

 A system in which the exchange rate for converting one currency into another is fixed by International agreement

Bretton Woods Agreement

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

World Bank

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

IMF

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

Managed float system

An exchange-rate system in which currencies float against one another with governments Intervening to stabilize currencies at a particular target exchange rate

 Free float system

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