exchange rates Flashcards
what is the foreign currency exchange rate?
the price of any one country currency in terms of another country currency
what is a direct quote
amount of the domestic currency required to buy one unit of the foreign currency, domestic currency is on the top
what is an indirect quote?
amount of the foreign currency that can be obtained with one unit of the domestic currency, foreign currency is on the top
what is the bid rate?
the maximum price that a buyer is willing to pay for the asset.
what is the ask rate?
minimum price at which a seller is willing to sell the asset.
what is the spread?
difference between the bid rate and ask rate
what is the mid rate?
average or midpoint between the bid and ask rates
what is arbitrage?
a financial strategy where you profit by exploiting price differences for the same asset in different markets. ex: Imagine you’re in a mall, and you notice that a popular toy, let’s call it “ToyX,” is on sale for $20 in one store, but in another store just a few steps away, it’s being sold for $30. You realize that you can buy ToyX for $20 in the first store and then immediately sell it for $30 in the second store.
In this scenario:
You buy low (at $20) in one market (first store).
You sell high (at $30) in another market (second store).
make 10$ profit
- diskless profit so go as fast as you can, dont stop, make sure rates are stable
how di you measure a change in exchange rate?
(ending rate- beginning rate)/ beginning rate–> denominator
what is the spot exchange rate?
It’s the rate you would typically get if you wanted to exchange one currency for another right now, without any delay or future settlement date.
what is the forward exchange rate?
is the rate at which two parties agree to exchange currencies on a future date, but the agreement is made today
why are spot and forward rates important?
Reduces business risk related to currency, uncertainty
what is the forward premium/ discount formula
forward- spot/ spot (360/ number days to settlement)
what are cross rates?
The exchange rate between two
currencies calculated using a third currency
