Exchange Rates 1 (Lecture #8) Flashcards
def. direct quote
Home currency price per unit of foreign currency
def. indirect quote
Foreign currency price of the home currency
def. “bid rate”
The price at which an FX dealer is willing to
buy currency
def. “ask rate”
The price at which an FX dealer is willing to
sell currency
def. the spread
The difference between the bid and ask rates as
quoted by an FX dealer
What is an arbitrage opportunity?
an opportunity to make a
riskless profit by exploiting price differences
When can an arbitrage opportunity occur?
When exchange rates in 2 locations are different
def. spot exchange rate
The price of foreign exchange to be delivered immediately (where “immediate” usually means within 2 business days)
the rate at a specific tume
def. forward exchange rate
Negotiated today for delivery at a pre-specified FUTURE date
Why do forward rates matter?
they can reduce business risk related to currency, uncertainty
What is a forward exchange rate?
best estimate as to what the spot rate would be at that specific time
What does a forward premium/discount measure?
the annualized % difference between spot and forward rates
