Foreign Exchange Market and Trade Implications

These flashcards include key terms and definitions from the lecture on foreign exchange markets and trade implications, designed to help in understanding critical economic concepts.

Foreign Exchange Market

A market for converting one currency into another, characterized by substantial daily trading volume.

Spot Exchange Rate

The current market price for exchanging one currency for another immediately.

Forward Exchange Rate

The exchange rate for a currency transaction that will occur at a future date.

Currency Appreciation

An increase in the value of one currency relative to another currency.

Currency Depreciation

A decrease in the value of one currency relative to another currency.

Arbitrage

The practice of taking advantage of price differences in different markets to make a risk-free profit.

Purchasing Power Parity (PPP)

A theory stating that exchange rates adjust so that identical goods cost the same in different countries.

Big Mac Index

An informal measure of purchasing power parity that compares the price of a Big Mac in various countries.

Interest Rate Differential

The difference between interest rates in two different countries, influencing currency values.

Transaction Exposure

The risk of changes in currency exchange rates affecting cash flows from transactions.

Translation Exposure

The risk that a company's financial results will be affected by exchange rate fluctuations.

Economic Exposure

The risk that a firm's market value will be affected by unexpected changes in exchange rates.

Hedging

The practice of reducing risk by taking an offsetting position in a related security.

Currency Speculation

The short-term movement of funds between currencies to profit from changes in exchange rates.

Forward Premium

A situation where the forward exchange rate is higher than the spot rate, indicating expected appreciation.

Forward Discount

A situation where the forward exchange rate is lower than the spot rate, indicating expected depreciation.

Currency Swap

Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.

Exchange Rate Forecasting

Methods to predict future currency exchange rates based on market factors.

Trade Balance

The difference between a country's exports and imports, influencing currency strength.

Market Efficiency

The concept that asset prices reflect all available information, impacting currency trading.