Chapters 10 and 11-Foreign Exchange and International Monetary Theory Flashcards
ways to hedge against currency exposure/risk
forwards, options, limit orders, and currency swaps
when you negotiate with a bank the exchange rate and promise to exchange on a certain date in the future
forward contracts
when you negotiate with a bank the exchange rate but have the option of not exchanging the money on that date
option contracts
the currency in which you do business
functional currency
any other currency other than your functional currency
foreign currency
the currency that is used when a company is reporting their financials
reporting currency
impact of currency exchange rates on the reporting accounting sheets; present value of past events
translation exposure
the exchange rate that you would get at a certain moment
spot exchange rate
what goes on with people who work with the exchange rates; the people work both sides of the exchange rate and profit off of the difference
arbitrage
what you think the exchange rate will be in the future
forward exchange rate
foreign currency is the variable and the domestic is fixed
indirect quote
foreign currency is fixed and the domestic is vairable
direct quote
what impacts currency movements
inflation, unemployment, and interest rates
the effect if any of interest rates on currency
international Fisher effect
if experiencing a high inflation the banks still need you to deposit money so since there is a higher inflation rate they offer a
higher interest rate
what costs more and why? an option or a forward
an option because the bank is taking on the currency risk
like having a higher deductible; like forward contracts but not triggered immediately; bear some of the risk but at a certain point the bank will step in
limit order contracts
for major companies that are in and out of currencies all the time; simultaneous purchase and sale of currency at triggered dates in the future; sometimes banks and governments do this too
currency swaps
looking at unemployment in an economy; if unemployment gets too low then _____ will start creeping into the economy
Phillips curve; inflation
the international foreign exchange market place affects the rate
floating exchange rate; free floating
when a country pegs its currency to another’s; typically happens with smaller countries
pegged exchange rate
where two countries agree to fix their exchange rates agains one another; both sides have to agree
fixed exchange rate
like floating but government tries to hold the value of their currency within a certain range
dirty float system
the official currency of the people’s republic of China
renminbi; RNB
