Ch 3

Question 1

foreign exchange dealers

Answer 1

serve as intermediaries in the foreign exchange market

Question 2

spot rate

Answer 2

the exchange rate at which one currency is traded for another in the spot market is known as the spot rate

Question 3

interbank market

Answer 3

market of banks buying and selling currency between each other

Question 4

bid

Answer 4

buy quote, is always less than the ask price

Question 5

ask

Answer 5

sell quote

Question 6

bid/ask spread

Answer 6

(ask rate - bid rate)/ask rate

Question 7

direct quote

Answer 7

number of dollars per unit of other currency

Question 8

indirect quote

Answer 8

1/direct quote

Question 9

cross exchange rate

Answer 9

dollar value of currency1/dollar value of currency 2

Question 10

forward contract

Answer 10

agreement to buy currency in the future

Question 11

forward rate

Answer 11

rate in the future to buy currency at

Question 12

forward market

Answer 12

market with forward contracts

Question 13

currency futures contract

Answer 13

specifies a standard volume of a currency to be exchanged on a settlement date

Question 14

futures rate

Answer 14

rate for the futures contract

Question 15

currency call option

Answer 15

provides the right to buy a specific currency at a specific price(strike price or exercise prices)

Question 16

currency put option

Answer 16

right to sell a specific currency at a specific time

Question 17

eurodollars

Answer 17

US dollars deposited in European banks

Question 18

petrodollars

Answer 18

dollar denominated deposits in europe from OPEC

Question 19

OPEC

Answer 19

Organization of the Petroleum Exporting Countries

Question 20

London Interbank Offer Rate (LIBOR)

Answer 20

rate most often charged for every short term loan between banks, sometimes for one day loans

Question 21

Asian money market

Answer 21

US dollars deposited in Asian banks

Question 22

international money market securities

Answer 22

when MNC’s and government agencies issue short term debt 1 year or less its this

Question 23

Eurocredit loans

Answer 23

loans of one year or longer that are extended to MNC’s or gov agencies in Europe are called this

Question 24

Eurocredit market

Answer 24

market for long term loans in Europe

Question 25

syndicate

Answer 25

group of banks working together to provide a loan

Question 26

Single European Act

Answer 26

gave rights to bank throughout Europe and determined common regulations

Question 27

Basel Accord

Answer 27

deal made by twelve banks promising to keep capital of at least 4 percent of their assets

Question 28

foreign bond

Answer 28

issued by a borrower foreign to the country where the bond is placed

Question 29

parallel bonds

Answer 29

currency denominated in the country where it is sold

Question 30

eurobonds

Answer 30

bonds that are sold in countries other than the country whose currency is used to denominate the bond

Question 31

floating rate notes

Answer 31

have a variable rate provision that adjusts the coupon rate over time according to prevailing market rates

Question 32

Yankee stock offereings

Answer 32

non US countries issue bonds in the US and call them these

Question 33

American Depository Receipts (ADR's)

Answer 33

certificates representing bundles of the firm's stock, Foreign currency * spot rate

Question 34

SOX effects

Answer 34

it drove many foreign companies out of the stock exchange

Question 35

Ch 4

Answer 35

do it

Question 36

depreciation

Answer 36

decline in a currency's value

Question 37

appreciation

Answer 37

increase in currency value

Question 38

percent change in foreign currency value

Answer 38

(current spot rate - old spot rate)/old spot rate

Question 39

equilibrium exchange rate

Answer 39

idea that tells us how to forecast effects of currency changes

Question 40

demand for currency

Answer 40

countries buy more foreign goods when the foreign currency is worth less

Question 41

supply of currency

Answer 41

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

Question 42

increase in demand

Answer 42

price of a foreign currency goes up, supply will increase

Question 43

decrease in demand

Answer 43

price of a foreign currency goes down, supply will drecrease

Question 44

increase in supply

Answer 44

price of a foreign currency goes down, supply will decrease

Question 45

decrease in supply

Answer 45

price increases, supply will increase

Question 46

increase in inflation of a foreign currency in relation to the US dollar

Answer 46

demand decreases, supply increases, equilibrium value will decrease

Question 47

increase in US interest rates

Answer 47

US investors will reduce their demand for foreign currency, supply of foreign currency will increase, equilibrium rate will decrease

Question 48

real interest rate

Answer 48

nominal interest - inflation rate

Question 49

income level increases

Answer 49

demand for the foreign currency increases, supply stays the same, equilibrium increases

Question 50

government controls

Answer 50

can change exchange rates by imposing foreign exchange barriers, trade barriers, intervening, affecting other variables like inflation etc

Question 51

expectations

Answer 51

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

Question 52

carry trade

Answer 52

when people try to capitalize on a difference between interest rates of two countries