Foreign Exchange and International Financial Markets

Flashcards based on lecture notes about foreign exchange, international banks, arbitrage, and international capital markets.

Foreign Exchange

A commodity that consists of currencies issued by countries other than one’s own.

Direct Exchange Rate (Direct Quote)

The exchange rate quoted directly.

Indirect Exchange Rate (Indirect Quote)

The exchange rate quoted indirectly

International Banks

Major players in the foreign exchange market.

Spread between the Bid and Ask Prices

The difference between the price a bank is willing to buy a currency and the price they are willing to sell it for.

Spot Market

A market for immediate delivery

Forward Market

A market for future delivery

Forward Discount

Forward Price < Spot Price

Forward Premium

Forward Price > Spot Price

Law of One Price

Principle stating that identical goods should sell for the same price in different markets.

Purchasing Power Parity (PPP)

A theory of exchange rates whereby a basket of goods should cost the same in two countries once you account for the exchange rate between those countries.

Two-Point/Geographic Arbitrage

Exploiting price differences in different geographic locations.

Eurocurrency

Domestic currency of one country on deposit in a second country.

Euroloan

Loans denominated in Eurocurrencies

London Interbank Offer Rate (LIBOR)

The interest rate that international banks charge one another for overnight Eurocurrency loans.

Foreign Bonds

Bonds sold in a foreign country and denominated in that country's currency

Eurobonds

Bonds sold in one country and denominated in another currency.

Offshore Financial Centers

Locations with political stability, regulatory climate and communication links