Exchange Rate Concepts and Currency Movements

A set of flashcards covering key definitions and concepts related to exchange rates, currency markets, and valuation changes.

Exchange Rate

The price of one currency in terms of another currency (e.g., $1.15/€ means 1 Euro costs $1.15).

Foreign Exchange (FX) Market

The global marketplace where currencies are exchanged for one another. It facilitates international trade, investment, and financial flows.

Direct Quote

The amount of domestic currency needed to buy one unit of foreign currency. Often stated as '$/FC' (e.g., $1.60/£).

Indirect Quote

The amount of foreign currency that can be bought with one unit of domestic currency. Often stated as 'FC/$' (e.g., £0.625/$).

Spot Exchange Rate

The exchange rate for immediate currency transactions (typically within two business days).

Cross Rate

The implied exchange rate between two non-USD currencies, derived from their individual exchange rates against the USD (or another third currency).

Triangular Arbitrage

The process of profiting from a discrepancy among three foreign currency exchange rates by sequentially trading one currency for a second, the second for a third, and the third back into the first.

Appreciation

An increase in the value of one currency relative to another (e.g., if the exchange rate changes from $1.60/£ to $1.80/£, the pound has appreciated).

Depreciation

A decrease in the value of one currency relative to another (e.g., if the exchange rate changes from $1.80/£ to $1.60/£, the pound has depreciated).

Factor Shifting Demand for a Currency

Increased U.S. income, lower prices of U.K. goods, higher U.K. interest rates, or reduced U.K. political risk, causing the demand curve for pounds to shift right.

Factor Shifting Supply of a Currency

Increased U.K. income, lower prices of U.S. goods, higher U.S. interest rates, or reduced U.S. political risk, causing the supply curve of pounds to shift right.

Central Bank Intervention (to 'Raise' Currency Value)

The central bank buys its own currency and sells international reserves to increase demand for its currency.

Central Bank Intervention (to 'Lower' Currency Value)

The central bank sells its own currency and buys international reserves to increase the supply of its currency.