Unit 5: Foreign Exchange Market

Foreign exchange

Money or currency of a foreign country.

Foreign Exchange Market

The market in which currencies are bought and sold and in which currency prices are determined.

exchange rate

the rate at which one currency is exchanged for another.

Spot rate

the exchange rate requiring delivery of the traded currency within two business days.

Forward rate

the exchange rate at which two parties agree to exchange currencies on a specified future date.

Currency hedging

the practice of insuring against potential losses that result from adverse changes in exchange rates.

Currency arbitrage

the instantaneous purchase and sale of a currency in different markets for profit.

Currency speculation

the purchase or sale of a currency with the expectation that its value will change and generate a profit.

Forward contract

a contract requiring the exchange of an agreed-upon amount of a currency on an agreed-upon date at a specific exchange rate.

currency option

a right or an option to exchange a specific amount of a currency on a specific date at a specific rate.

currency swap

Simultaneous purchase and sale of foreign exchange for 2 different dates.

fixed exchange rate

A system whereby central banks are required by international agreements to maintain their currency at a relatively fixed value. This is achieved by buying the currency when it reaches its low point and by selling when it reaches its high points

floating exchange rate

no specific par value, value is normally determined by supply and demand.

quoted currency

In a quoted exchange rate, the currency with which another currency is to be purchased is called the

base currency

In a quoted exchange rate, the currency that is to be purchased with another currency is called the

convertible/hard currency

Currency that trades freely in the foreign exchange market, with its price determined by the forces of demand and supply is called a

gold standard

an international monetary system, in which nations link their paper currencies to a specific value of gold was called a

Free float system

an exchange rate system in which currencies float freely against one another, without the government intervening in the currencies market.

Managed float system

An exchange rate system in which currencies float against one another with the government intervening to stabilize currencies at a particular target exchange rate is known as

World Bank

The agency created by the Bretton Woods Agreement to provide funding for national economic development effort is called the

The IMF

The agency created by the Bretton Woods Agreement to regulate fixed exchange rate and enforce the rule of the international monetary system.

The Bretton Woods Agreement

was an accord among nations to create a new international monetary system based on the value of US dollars.

fixed exchange rate system

is a system in which exchange rate for converting one currency into another is fixed by international agreement is called a

buy rate

The exchange rate at which the bank will buy a currency.

ask rate

The exchange rate at which the bank will sell a currency.

currency futures contract

is a contract requiring exchange of a specific amount of currency on a specific date with a specific exchange rate with all of these conditions fixed and not adjustable.