Ch 3 Flashcards
foreign exchange dealers
serve as intermediaries in the foreign exchange market
spot rate
the exchange rate at which one currency is traded for another in the spot market is known as the spot rate
interbank market
market of banks buying and selling currency between each other
bid
buy quote, is always less than the ask price
ask
sell quote
bid/ask spread
(ask rate - bid rate)/ask rate
direct quote
number of dollars per unit of other currency
indirect quote
1/direct quote
cross exchange rate
dollar value of currency1/dollar value of currency 2
forward contract
agreement to buy currency in the future
forward rate
rate in the future to buy currency at
forward market
market with forward contracts
currency futures contract
specifies a standard volume of a currency to be exchanged on a settlement date
futures rate
rate for the futures contract
currency call option
provides the right to buy a specific currency at a specific price(strike price or exercise prices)
currency put option
right to sell a specific currency at a specific time
eurodollars
US dollars deposited in European banks
petrodollars
dollar denominated deposits in europe from OPEC
OPEC
Organization of the Petroleum Exporting Countries
London Interbank Offer Rate (LIBOR)
rate most often charged for every short term loan between banks, sometimes for one day loans
Asian money market
US dollars deposited in Asian banks
international money market securities
when MNC’s and government agencies issue short term debt 1 year or less its this
Eurocredit loans
loans of one year or longer that are extended to MNC’s or gov agencies in Europe are called this
Eurocredit market
market for long term loans in Europe
syndicate
group of banks working together to provide a loan
Single European Act
gave rights to bank throughout Europe and determined common regulations
Basel Accord
deal made by twelve banks promising to keep capital of at least 4 percent of their assets
foreign bond
issued by a borrower foreign to the country where the bond is placed
parallel bonds
currency denominated in the country where it is sold
eurobonds
bonds that are sold in countries other than the country whose currency is used to denominate the bond
floating rate notes
have a variable rate provision that adjusts the coupon rate over time according to prevailing market rates
Yankee stock offereings
non US countries issue bonds in the US and call them these
American Depository Receipts (ADR’s)
certificates representing bundles of the firm’s stock, Foreign currency * spot rate
SOX effects
it drove many foreign companies out of the stock exchange
Ch 4
do it
depreciation
decline in a currency’s value
appreciation
increase in currency value
percent change in foreign currency value
(current spot rate - old spot rate)/old spot rate
equilibrium exchange rate
idea that tells us how to forecast effects of currency changes
demand for currency
countries buy more foreign goods when the foreign currency is worth less
supply of currency
countries buy more of a currency when it’s worth less so there is less supply, when the currency is worth more there is more supply
increase in demand
price of a foreign currency goes up, supply will increase
decrease in demand
price of a foreign currency goes down, supply will drecrease
increase in supply
price of a foreign currency goes down, supply will decrease
decrease in supply
price increases, supply will increase
increase in inflation of a foreign currency in relation to the US dollar
demand decreases, supply increases, equilibrium value will decrease
increase in US interest rates
US investors will reduce their demand for foreign currency, supply of foreign currency will increase, equilibrium rate will decrease
real interest rate
nominal interest - inflation rate
income level increases
demand for the foreign currency increases, supply stays the same, equilibrium increases
government controls
can change exchange rates by imposing foreign exchange barriers, trade barriers, intervening, affecting other variables like inflation etc
expectations
if expectations are favorable people will invest and stay where they are, if they are unfavorable they will get out and take their money somewhere else this can cause negative pressure to be put on that currency
carry trade
when people try to capitalize on a difference between interest rates of two countries
