UNIT 3: FOREIGN EXCHANGE MARKET

Foreign Exchange

money or currency of a foreign country

Gold Standard

A monetary system used in the nineteenth and early twentieth centuries whereby the value of currencies could, on request of the owner (holder), be converted in to gold at a country’s central bank. As all currencies had a gold value, they also had a certain value in relation to each other. This was the beginning of a foreign exchange system

Central Bank

A country’s chief bank, which is government owned. It regulates the commercial banks and holds gold and foreign currency reserves. It actively intervenes by buying and selling its own currency in the foreign exchange markets so that the currency will keep a certain value

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 point

Floating Exchange Rate

A system in which currencies have no specific par value; value is normally determined by supply and demand. Central banks are not required to intervene, buy they often to avoid wild fluctuations

Spot Transaction

Currency bought or sold today with delivery two business days later

Forward Transaction

To buy or sell a currency in the future, with payment and delivery at that future date

Hedging

To offset a “buy” contract with a “sell” contract and vice versa, matching the amounts and the time span exactly

Speculation

When dealers do not offset a “buy” contract with a “sell” contract. This means that their position is left open

Premium

The additional amount it will cost to buy or sell a currency at a given future date (relative to the spot or today’s price)

Discount

The lesser amount it will cost to buy or to sell a currency at a given future date (relative to the spot or today’s price)

Arbitrage

The transfer of funds from one currency to another to benefit from currency differentials or disparities in interest rates. In arbitraging, at least two markets are entered