Chap 8 The International Monetary System and Financial Forces Flashcards
Bretton Woods system
The internal monetary system I. Place from 1945 to 1971, with par value based on gold and US dollar
Gold standard
The use of gold at an established number of units per currency
Fixed exchange rate
Specific currency exchange equivalent upheld by government
Par value
Stated value
Reserve
Assets held by the central bank, used to back up government liabilities
Triffin paradox
A national currency that is also a reserve currency will eventually run a deficit, which leads to lack of confidence in the reserve currency and a financial crisis
Special drawing rights (SDRS)
An international reserve asset established by the IMF; the unit of account for the IMF and other international organizations
Floating currency exchange rates
Rates that are allowed to float against other currencies and are determined by market forces
Jamaica Agreement
The 1976 IMF agreement that allows flexible exchange rates among members
Bank for International Settlements (BIS)
Institution for central bankers; operates as their banks
Vehicle currency
A currency used as a vehicle for international trade or investment
Intervention currency
A currency used by a country to intervene in the gorge in currency exchange markets, often to buy (strengthen) it’s own currency
Reciprocal currency
In FX, using the dollar as the base currency, a currency that is quoted as dollars per unit of currency per dollar; also known as direct quote
Spot rates
The exchange rates between two currencies for delivery within two business days
Forward rate
The exchange rate between two currencies for delivery in the future, usually 30, 60, 90, or 180 days.
Forward currency market
Trading market for the currency contracts deliverable 30, 60, 90, or 180 days in the future
Bid price
Highest priced buy order that is currently in the market
Ask price
Lowest priced sell order that is currently in the market
Monetary polices
Government policies that control the amount of money in circulation and its growth rate
Fiscal policies
Policies that address the collecting and spending if money by the government
Law of one price
Concept that on an efficient market, like products with have like prices
Arbitrage
The process of buying and selling instantaneously to make profit with no risk
Fisher effect
The relationship between real and nominal interest rates. The real interest rate will be the nominal interest rate minus the expected rate of inflation
International Fisher effect
Concept that the interest rate differentials for any two currencies will reflect the expected change in their exchange rates.
purchasing power parity (PPP)
PPP shows the number of units of a currency required to buy the same basket of goods and services in the foreign market that one dollar would but in the United States or other home market
Efficient market approach
Assumption that current market prices fully reflect all available relevant information
Random walk hypothesis
Assumption that the unpredictability of factors suggests that the best predictor of tomorrow’s prices is today’s prices.
Fundamental approach
Exchange rate prediction bases in econometrics models that attempt to capture the variables and their correct relationship
Technical analysis
An approach that analyzes data for trends and then projects these trends forward
Balance of payments (BOP)
Record of a county’s transactions with the rest of the world
