Foreign Currency Derivatives and Exchange Rate Dynamics

Flashcards covering key terms and concepts related to foreign currency derivatives and exchange rate dynamics.

Speculation

Use of derivative instruments to take a position in the expectation of a profit.

Hedging

Use of derivative instruments to reduce the risks associated with the everyday management of corporate cash flow.

Foreign Currency Futures Contract

An alternative to a forward contract that calls for future delivery of a standard amount of foreign exchange at a fixed time, place, and price.

International Monetary Market (IMM)

The most important market for foreign currency futures in the United States.

Open Interest

The number of contracts outstanding in the futures market.

Marked-to-Market

The process of revaluing the value of the contract using the closing price for the day.

Short Position

Selling a futures contract with the expectation that the price will decrease.

Long Position

Buying a futures contract with the expectation that the price will increase.

Call Option

An option to buy foreign currency at a fixed price.

Put Option

An option to sell foreign currency at a fixed price.

American Option

An option that can be exercised at any time between the date of writing and the expiration date.

European Option

An option that can be exercised only on its expiration date.

At-the-Money (ATM)

An option whose exercise price is the same as the spot price of the underlying currency.

In-the-Money (ITM)

An option that would be profitable if exercised immediately.

Out-of-the-Money (OTM)

An option that would not be profitable if exercised immediately.

Exchange Rate Determination

Theoretical approaches such as the Parity Conditions Approach (PPP) that analyze factors influencing the exchange rate between currencies.

Transaction Exposure

Measures changes in the value of financial obligations incurred prior to changes in exchange rates.

Translation Exposure

Accounting-derived changes in owner's equity due to the need to translate foreign currency financial statements.

Operating Exposure

Measures changes in the present value of a firm due to unexpected changes in future operating cash flows.

Accounts Receivable

Cash flow proceeds from sale

Account Payable

All ongoing operating costs associated with purchased of labour, material, and other input

Operating Cash Flows

Arise from intercompany and intracompany loans and stock holder

Expected change

in the value of a currency due to market factors and events, such as interest rate changes or economic indicators.

Unexpected change

in the value of a currency that occurs due to unforeseen market developments or sudden economic shifts.