Foreign Exchange Market, Financial Intermediaries, and Regulators

60 vocabulary flashcards covering key terms from the lecture on foreign exchange markets, transaction types, risks, financial intermediaries, and Philippine regulatory agencies.

Foreign Exchange Market

A global marketplace where currencies and bank deposits denominated in particular currencies are traded.

Exchange Rate

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

Appreciation (currency)

An increase in the value of a currency relative to other currencies, making domestic goods more expensive abroad.

Depreciation (currency)

A decrease in the value of a currency relative to other currencies, making domestic goods cheaper abroad.

Inflation (effect on exchange rate)

Rising price levels that reduce purchasing power and tend to deflate the value of a currency.

Interest Rates (effect on exchange rate)

Higher returns attract investors, increasing demand and value for that country’s currency.

Balance of Payments

A summary of a country’s economic transactions with the rest of the world for a specific period.

Government Intervention (in FX)

Restrictions or incentives imposed by a government that influence a currency’s value.

Political Stability

A country’s political and economic steadiness, which affects investor confidence and currency demand.

Purchasing Power Parity (PPP)

Theory stating that exchange rates adjust to equalize the price levels of identical goods in two countries.

Overvalued Currency

A currency whose PPP-computed value is higher than the actual rate, making its goods relatively expensive.

Undervalued Currency

A currency whose PPP-computed value is lower than the actual rate, making its goods relatively cheap.

Spot Transaction

An immediate exchange of bank deposits or currencies in the foreign exchange market.

Direct Quote

The number of units of the home currency required to buy one unit of a foreign currency.

Indirect Quote

The number of units of a foreign currency that can be bought with one unit of the home currency.

Cross Rate

An exchange rate between two currencies computed indirectly through two other currencies.

Forward Transaction

An agreement to exchange currencies at a future date at a predetermined rate.

Premium Forward Transaction

A forward contract where the forward rate is higher than the current spot rate.

Discount Forward Transaction

A forward contract where the forward rate is lower than the current spot rate.

Arbitrage

The process of buying and selling in more than one market to earn a risk-free profit.

Arbitrageur

An individual or entity that engages in arbitrage to earn riskless profits.

Foreign Exchange Risk

The possibility of revenue loss or cost increase due to fluctuations in exchange rates.

Hedging

Using financial instruments to offset potential losses from foreign exchange movements.

Trigger Pricing

Setting specific rate thresholds to automatically execute currency transactions and limit risk.

Diversification (currency)

Holding multiple currency positions to spread and reduce foreign exchange risk.

Depository Institution

A financial intermediary that accepts deposits from the public.

Commercial Bank

The most common depository institution, taking deposits and making loans to households and firms.

Savings and Loans Association

A depository institution specializing in accepting savings deposits and making mortgage loans.

Mutual Savings Bank

A depositor-owned institution offering savings accounts and originating loans.

Credit Union

A member-owned cooperative depository institution providing credit and savings services.

Contractual Savings Institution

A financial intermediary that receives funds on a contractual basis, such as premiums or contributions.

Insurance Company

A contractual savings institution collecting premiums and paying benefits to policyholders.

Pension Fund

A fund that invests contributions to provide retirement benefits for employees.

Investment Intermediary

An institution that channels funds from savers to investors through capital‐market activities.

Investment Bank

A firm advising on securities issuance, mergers, and engaging in proprietary trading without taking deposits.

Mutual Fund

An investment intermediary allowing savers to buy diversified portfolios through pooled funds.

Hedge Fund

A private investment fund employing sophisticated strategies, often for accredited investors.

Finance Company

A non-bank intermediary that makes loans funded by issuing debt or equity, not by deposits.

Money Market Mutual Fund

A mutual fund investing in short-term, high-quality money-market instruments.

Bangko Sentral ng Pilipinas (BSP)

The central bank of the Philippines supervising all depository institutions and setting reserve requirements.

Philippine Deposit Insurance Corporation (PDIC)

Agency providing up to ₱500,000 insurance per depositor and examining insured banks.

Securities and Exchange Commission (SEC)

Regulator overseeing organized exchanges, requiring disclosures, and restricting insider trading.

Insurance Commission (Philippines)

Regulates insurance companies and brokers, imposing asset and branching restrictions.

Financial Regulation

Government rules aimed at ensuring system soundness, information availability, and control over finance.

Restriction on Entry

Limiting the establishment of new financial institutions to protect market stability.

Reporting Requirement

Mandated disclosure of financial information by institutions for transparency and oversight.

Restriction on Assets and Activities

Rules limiting the types of assets held and services offered by financial firms.

Deposit Insurance

Government guarantee protecting depositors against bank failure losses.

Limits on Competition

Regulatory caps on branching or activities to reduce excessive rivalry among financial firms.

Interest Rate Restriction

Regulations capping or guiding the interest rates financial institutions may charge or pay.

Soundness of the Financial System

Overall stability and reliability of financial institutions and markets.

Information Disclosure (to investors)

Providing accurate data so investors can make informed decisions and reduce asymmetry.

Control of the Financial System

Government oversight to prevent crises and ensure orderly market functioning.

Spot Rate

The current exchange rate for immediate currency delivery.

Forward Rate

The agreed-upon exchange rate for a currency to be delivered at a future date.

Proprietary Trading

An investment bank’s practice of trading securities using its own funds for profit.

Asset and Wealth Management

Bank service that manages clients’ investments and portfolios for growth and preservation.

Extension of Credit

Granting loans or credit lines to individuals or businesses by financial institutions.

Organized Exchange

A formal marketplace where securities, commodities, or currencies are traded under regulation.

Riskless Profit

Earnings obtained without exposure to market risk, typically through successful arbitrage.