Chapter 12 Flashcards
The real sector
Where we trade goods and services
The financial sector
Global financial markets
Foreign exchange market
A market where currencies are bought and sold
The different foreign exchange trading centers
Decentralized units of a single global foreign exchange market
Worlds largest currency exchange center
London
Commercial banks
Engang in foreign exchange transactions on behalf of their clients
Interbank trading
A bank buy and sell currencies to other banks
Nonbank Financial Institutions
Play a substantial role in the foreign exchange market
- hedgefunds, mutual funds, insurance companies and pension funds
The bid-ask spread
The difference between the buying price and the selling price
Nonfinancial Businesses
Primarily include corporations that operate in several countries.
Example: General Motors
Central Banks
Often carry out foreign exchange market interventions in order to prevent unwanted fluctuations in the value of the country’s currency relative to other currencies
Direct or American terms
Exchange rates written in terms of US dollars per unit of the other currency
indirect or European terms
Exchange rates are written in terms of units of a foreign currency per US dollar
Exchange rates
Prices of currencies
Demand for a currency
Comes from residents or other countries who desire to buy a country’s goods or services or to invest in a country’s assets
Supply for a currency
Comes from a country’s residents desire to buy goods and services or investments in other countries
Depreciation of a currency
Occurs when the amount of another currency required to purchase one unit of the currency decreases.
Example: Japanese Yens price of the US dollar falls
Appreciation of a currency
Occurs when the amount of another currency required to purchase one unit of the currency increases
Example: When the yen price of the US dollar increases
Spot transaction
One where parties agree to an exchange of currencies and delivery of currencies “immediately”.- up to two days
Spot rates
Exchange rate in spot transactions
A forward contract
specifies a future date for delivery of foreign exchange
Forward exchange rate
The exchange rate that apply to forward contracts
The value date
The future date of a foreign exchange delivery
