Appreciation-

Appreciation

An increase in a currency’s value under a floating exchange rate system.

Covered Interest Arbitrage

Interest rate arbitrage that includes the signing of a forward currency contract to sell the foreign currency when the foreign assets mature.

Depreciation

A decrease in a currency’s value under a floating exchange rate.

Exchange Rate

The price of one currency expressed in terms of a second currency.

Interest Rate Arbitrage

The transfer of funds from one financial asset and currency to another to take advantage of higher interest rates.

Exchange Rate Risk

Risk that occurs when an individual or firm holds assets denominated in a foreign currency, leading to potential unexpected losses or gains.

Forward Exchange Rate

The exchange rate in a forward market.

Forward Market

Market in which buyers and sellers agree on a quantity and price for a foreign exchange transaction to take place in the future.

Spot Market

Market for buying and selling currencies for immediate delivery.

Hedging

Eliminating risk.

Purchasing Power Parity (PPP)

Exchange rates will converge where the same goods can be purchased through different currencies.

Forex

The largest market in the world, for buying and selling currencies.

Spot Exchange Rate

The current price for immediate exchange.

Flexible Exchange Rate

An exchange rate determined by supply and demand in the market.

Fixed Exchange Rate

An exchange rate committed to by the government.

Pegged Exchange Rate

An exchange rate that is maintained within a specific band.

Speculators

Businesses that buy or sell a currency expecting its price to rise or fall.

Arbitrage

The act of buying something where it is cheap and selling it where it is expensive.

Participants in Foreign Currency Markets

Retail customers, commercial banks, foreign exchange brokers, and central banks.

Forward Foreign Exchange Markets

Markets that allow exporters or importers to sign a currency contract for future delivery.