concepts Flashcards

(50 cards)

1
Q

Market for converting the currency of one country into that of another country

A

foreign exchange market

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2
Q

the rate at which one currency is converted into another

A

exchange rate

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3
Q

the adverse consequences of unpredictable changes in exchange rates.

A

foreign exchange risk

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4
Q

short-term movement of funds from one currency to another in hopes of profiting from shifts in exchange rates.

A

currency speculation

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5
Q

borrows one currency where interest rates are low and invests these in another currency where interest rates are high.

A

carry trade

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6
Q

Rate at which a foreign exchange dealer converts one currency into another currency on a particular day.
Determined by the interaction between supply and demand.
Changes continually.

A

spot exchange rates

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7
Q

two parties agree to exchange currency and execute the deal at some specific date in the future.

A

forward exchange

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8
Q

typically quoted for 30, 90, or 180 days into the future.

A

forward exchange rate

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9
Q

Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.

A

currency swaps

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10
Q

Global network of banks, brokers, and foreign exchange dealers connected by electronic communications systems.

A

foreign exchange market

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11
Q

process of buying a currency low and selling it high

A

arbitrage

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12
Q

which currency is a vehicle currency

A

US DOLLAR

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13
Q

most important trading centers

A

london, new york, zurich, etc

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14
Q

Important Factors Impacting Future Exchange Rate Movements

A

A country’s price inflation.
A country’s interest rate.
Market psychology.

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15
Q

In competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when price is in the same currency.

A

the law of one price

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16
Q

markets in which few impediments to international trade and investment exist—the price of a “basket of goods” should be roughly equivalent in each country.

A

efficient markets

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17
Q

predicts that changes in relative prices result in changes in exchange rates.

A

purchasing power parity

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18
Q

When inflation is relatively high, a currency should

A

depreciate

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19
Q

when does inflation occur

A

When the growth in the money supply is greater than the growth in output

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20
Q

Indicates it is not completely accurate in estimating exchange rate changes in the short run but relatively accurate in the long run.

A

empirical tests of ppp theory

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21
Q

Assumes away transportation costs and barriers to trade.
Governments routinely intervene in trade and foreign exchange market.
Investor psychology plays a role on exchange rate movements.

A

purchasing power parity puzzle

22
Q

i = r + I
a country’s nominal interest rate (i) is the sum of the required real rate of interest (r) and the expected rate of inflation over the period for which the funds are to be lent (I).

A

fisher effect

23
Q

for any two countries, the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between the two countries.
(s1-s2 blahblahblah)

A

International Fisher effect (IFE):

24
Q

occurs when expectations on the part of traders turn into self-fulfilling prophecies, and traders join and move exchange rates based on group expectations.

A

bandwagon effect

25
Investor psychology is influenced by
political factors and microeconomic events.
26
moderately good predictors of long-run changes in exchange rates, poor predictors of short-run changes
Relative monetary growth, relative inflation rates, and nominal interest rate differentials
27
prices do not reflect all available information.
inefficient market
28
Draws upon economic factors like interest rates, monetary policy, inflation rates, or balance of payments information to predict exchange rates.
fundamental analysis
29
Uses price and volume data to determine past trends that are expected to continue. economists are skeptical.
technical analysis
30
both residents and nonresidents can purchase unlimited amounts of foreign currency with the domestic currency.
freely convertible
31
only nonresidents can convert their holdings of domestic currency into a foreign currency.
externally convertible
32
both residents and nonresidents are prohibited from converting their holdings of domestic currency into a foreign currency.
nonconvertible
33
when residents and nonresidents rush to convert their holdings of domestic currency into a foreign currency.
capital flight
34
barter-like agreements by which goods and services can be traded for other goods and services—to facilitate international trade.
counter trade
35
extent to which the income from individual transactions is affected by fluctuations in foreign exchange values. Mainly concerned with short-term transactions.
transaction exposure
36
impact of currency exchange rate changes on the reported financial statements of a company. Deals with the present measurement of past events.
translation exposure
37
extent to which a firm’s future international earning power is affected by changes in exchange rates. Concerned with the long-run effect of exchange rates on future prices, sales, and costs.
economic exposure
38
collecting foreign currency receivables early when a foreign currency is expected to depreciate and paying foreign currency payables before they are due when a currency is expected to appreciate.
lead strategy
39
delaying collecting foreign currency receivables if the currency is expected to appreciate and delaying payables if the currency is expected to depreciate
lag strategy
40
The institutional arrangement that governs exchange rates.
International Monetary System
41
where the foreign exchange market determines the relative value of a currency.
floating exchange rate system
42
when the value of a currency is fixed to a reference country and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate.
pegged exchange rate system
43
when the value of a currency is determined by market forces, but with central bank intervention if it depreciates too rapidly against an important reference currency.
managed float or dirty float system
44
countries fix their currencies against each other at a mutually agreed upon value
Fixed exchange rate system
45
a country abandons its own currency and adopts another
typically us dollar- dollarization
46
the practice of pegging currencies to gold and guaranteeing convertibility.
gold standard
47
the amount of a currency needed to purchase one ounce of gold.
gold per value
48
When the income a country’s residents earn from its exports is equal to the money its residents pay for imports.
balance-of-trade equilibrium.
49
The Bretton Woods Agreement established two multinational institutions:
imf, world bank
50