Prelim Flashcards
1
Q
A swap designed to allow a floating rate borrower with a pre-set amortization
schedule to swap against fixed rate interest.
A
Amortizing Swap
2
Q
An increase in the market value of a currency with respect to a second currency
or a real asset. The term is used in reference to a market price as opposed to an official price or
par value.
A
Appreciation
3
Q
The simultaneous purchase and sale or lending and borrowing of two assets in order
to profit from a price disparity.
A
Arbitrage
4
Q
A theory of asset pricing in which relative pricing on a set of
assets adheres to a specific return-generating process.
A
Arbitrage Pricing Theory (APT)
5
Q
The price that would prevail between unrelated parties.
A
Arm’s Length Price
6
Q
Specify the powers and responsibilities vested in the International
Monetary Fund by members of that international organization.
A
Articles of Agreement
6
Q
A trading department of a bank in Singapore that has received a license
from the monetary authorities in Singapore to deal in external currency deposits.
A
Asian Currency Unit
7
Q
Determination of the optimal combination of stocks and bonds, domestic and
international, in which to invest.
A
Asset Allocation
7
Q
The price at which a market maker in an asset will sell the asset; the price sought
by any prospective seller.
A
Asked Price
8
Q
The transfer from one bank to another of the right to receive loan principal and
interest from a borrower.
A
Assignment
8
Q
An option with a strike price equal to the current market price of the
underlying asset.
A
At-the-money option
9
Q
Option on foreign exchange or commodity prices that pays off the
difference between the option strike price and the average price of the underlying asset, this average calculated over the life of the option. Also called Asian Option.
A
Average-Rate Option
9
Q
A financial statement prepared for a given country summarizing the flows
of goods, services, and funds between the residents of that country and the residents of the rest of the world during a certain period of time. The balance of payments is prepared using the concept of double-entry bookkeeping, where the total of debits equals the total of credits.
A
Balance of Payments
9
Q
Policy proposed to reduce the exposure of commercial banks to the debt of less
developed countries.
A
Baker Plan
10
Q
A market in which prices are declining.
A
Bear Market
10
Q
A relationship in which spot or cash prices are higher than futures (or forward)
prices.
A
Backwardation
10
Q
A negotiable instrument payable on demand to the individual who holds the
instrument. Title passes by delivery without endorsement.
A
Bearer Instrument
11
Q
The net of imports and exports of goods and services reported in the balance
of payments.
A
Balance of Trade
11
Q
The difference between cash and futures prices for the same commodity. Specifically, the cash price minus the futures price of a specific futures contract.
A
Basis
12
Q
The price at which a market-maker in an asset will buy the asset; the price sought by
any prospective buyer.
A
Bid Price
12
Q
Any private market that operates in contravention of government restrictions. For
example, such a market may involve the exchange of currencies or goods at prices that are
outside government-mandated levels, the trading of prohibited goods, or trading between
individuals and/or institutions that are not approved by the government.
A
Black Market
12
Q
The net of the following accounts in the balance of payments: exports and
imports of goods and services, unilateral transfers, and long-term capital flows.
A
Basic Balance
12
Q
One-hundredth of one percent, or 0.0001.
A
Basis Point
12
Q
A category in the balance of payments of a country that measures the flows of
financial and real investments across countries’ borders.
A
Capital Account
13
Governmental restrictions (such as prohibitions, taxes, quotas) on the
acquisition of foreign assets or foreign liabilities by domestic citizens, or the acquisition ofdomestic assets or domestic liabilities by foreigners.
Capital Controls
13
A theoretical model that relates the return on an asset to its risk.
The risk is defined as the contribution of the asset to the volatility of the portfolio.
Capital Asset Pricing Model
13
Interpreting foreign exchange market activity and predicting future movements, usually
over a short period, from graphic depictions of prices and volumes. It is a primary tool of
technical analysis.
Charting
13
Negotiable instruments issued by a bank and payable to the
bearer. CDs pay a stated amount of interest and mature on a stated date, but may be bought
and sold daily in a secondary market.
Certificates of Deposit (CDs)
14
The combination of debt (of various kinds) and equity (of various kinds) in a
firm's financing.
Capital Structure
14
An institutional arrangement for transferring securities and payment between
sellers and buyers subsequent to the establishment of a trading price.
Clearing System
14
The institution with the primary responsibility to control the growth of its country's
money stock. It might also have regulatory powers over commercial banks and sometimes over other financial institutions, and it usually serves as the fiscal agent for the government.
Central Bank
15
A swap of fixed rate dollars against floating rate dollars with the latter having a
maximum and minimum return.
Collar Swap
16
A short-term unsecured debt instrument issued by a corporation and sold at
a discount from its maturity value.
Commercial Paper
17
A fee paid on the unused portion of a credit line.
Commitment Fee
17
The relative advantage of a country in producing goods and services.
Comparative Advantage
18
The expected value of a variable, conditional on certain information
being known.
Conditional Expectation
18
An entity in which funds contributed by a number of people are pooled
together to trade futures and option contracts under professional management.
Commodity Fund
19
A trading strategy that locks in an arbitrage profit by combining a long put and a
short call with the same strike price and expiration date with a long position in the underlying
asset.
Conversion
19
The calculation of variance for an economic variable that is conditioned
upon a given information set.
Conditional Variance
20
Freedom to exchange a currency without government restrictions or controls.
Convertibility
20
The International Monetary Fund's practice of requiring members to adopt
changes in their domestic economic policies as a condition for receiving balance of payments
loans from the fund.
Conditionality
20
Arbitrage Borrowing one currency, converting the proceeds into another
currency, where it is invested, and simultaneously selling this other currency forward against the initial currency. Covered interest arbitrage takes advantage of and in practice quickly eliminates
- any temporary discrepancies between the forward rate and the interest rate differential of two
currencies.
Covered Interest
21
Hedging a commodity by using a futures contract on a different but related
commodity. A cross hedge is based on the premise that the price movements of the two commodities are related.
Cross Hedging
21
Agreement in a syndicated loan or bond contract concerning the borrower's future
conduct. Such a covenant may involve, for example, the agreement to maintain a given balance
sheet ratio in the future, or the agreement to adhere to an IMF program.
Covenant
22
Protecting the value of the future proceeds of an international transaction usually by
buying or selling the proceeds in the forward market.
Covering
22
Bonds denominated in a portfolio of currencies.
Currency Cocktail Bonds
22
An exchange rate system in which the exchange rate is adjusted
frequently and deliberately, perhaps every few weeks, usually to reflect prevailing rates of
inflation.
Crawling Peg System
23
Warrants Bonds with warrants exercisable into bonds denominated in a
currency other than that of the host bond.
Cross-currency
23
An exchange rate between two currencies neither of which is the U.S. dollar. A
cross rate is usually constructed from the individual exchange rates of the two currencies with
respect to the U.S. dollar.
Cross Rate
24
A provision in a loan agreement that allows the lender to declare the
loan immediately payable and to terminate any further extension of credit if the borrower
defaults on any other debt.
Cross-default Provision
24
Funds in a current account (a checking account) that can be withdrawn at any
time without notice, depending on local regulations. Demand deposits might or might not be
interest-bearing deposits.
Demand Deposit
25
A contractual obligation entered into by two parties to deliver a sum of money
in one currency against a sum of money in another currency at stated intervals.
Currency Swap
26
A rate measuring the overall nominal value of a currency in the
foreign exchange market. It is calculated by forming a weighted average of bilateral exchange
rates, using a weighting scheme that reflects the importance of each country's trade with the
home country.
Effective Exchange Rate
27
Cross-border equity investment with control, through the purchase of stock,
the acquisition of a foreign firm, or the establishment of a new subsidiary.
Direct Investment
27
A gradual decrease in the market value of a currency with respect to a second
currency or a real asset. The term is used in reference to a market price as opposed to an
official price or par value.
Depreciation
28
An issue denominated in one currency with a coupon and/or repayment
of principal at a fixed rate in another currency, eg., yen denominated and serviced but redeemed
in dollars.
Dual-Currency Issue
29
One of a set of portfolios that provides the highest level of return for a given
level of risk.
Efficient Portfolio
30
The degree of responsiveness of one variable to changes in another.
Elasticity
31
World financial centers that play the role of bringing foreign
lenders and foreign borrowers together. The countries in which these centers are located might
or might not be capital exporters or importers, but they are channels through which international
funds pass.
Entrepot Financial Centers
32
Governmental restrictions (such as prohibitions, taxes, quotas, or
government-set prices) on the purchase of foreign currencies by domestic citizens or on the
purchase of the local domestic currency by foreigners.
Exchange Controls
32
The excess return, over the risk free rate, for holding equity.
Equity Risk Premium
33
Financial intermediaries that simultaneously bid for time deposits and make loans in
a currency or currencies other than that of the country in which they are located.
Eurobanks
34
The money market for borrowing and lending currencies that are held in
the form of deposits in banks located outside the countries in which those currencies are issued
as legal tender.
Eurocurrency Market
35
Intermediate-term loans of Eurocurrencies made by banking syndicates to
corporate and government borrowers.
Eurocredits
36
European Free Trade Association (EFTA) Common regulations for tariffs and trade
established in 1959 by Austria, Denmark, Norway, Portugal, Sweden, Switzerland, and the United Kingdom.
European Free Trade Association (EFTA)
37
A dollar-denominated deposit in a bank outside the United States or at International
Banking Facilities (IBFs) in the United States.
Eurodollar
38
European Option An option that can be exercised only on the option's expiration date.
European Option
39
The risk assumed by a party to an international transaction in which the party
could incur an exchange loss as a result of currency movements.
Exchange Risk
40
Occurs when exchange rate changes are in excess of some given standard of volatility.
Exchange Rate Overshooting
41
The particular system by which the central banks agree to
intervention levels, or upper and lower rates for each currency relative to one another (ERM"floors" or "ceilings"), at which the central banks will conduct market transactions to keep currencies within the limits.
Exchange Rate Mechanism (ERM)
42
Public debt owed to nonresidents.
External Debt
43
The monetary amount paid on a bond at redemption (excluding any terminal
coupon payment). The face value is printed on the bond certificate.
Face Value
44
A pricing model in which expectations are formed such that a change in the current spot price will lead to a further change in the same direction.
Extrapolative Expectations
44
The theoretical value of an option or futures contract derived from a mathematical
valuation model. It is also referred to as the no-arbitrage value.
Fair Value
45
Market Federal funds are deposits held by commercial banks at the Federal
Reserve System. The federal funds market is the interbank market for borrowing and lending
these deposits. Since reserve requirements of commercial banks are satisfied by federal funds,
banks with deposits in excess of required reserves will lend the excess deposits to banks with a
reserve shortage at a market-determined interest rate, the federal funds rate.
Federal Funds
45
The theory that interest rates in any country rise by an amount approximately
equal to the anticipated rate of inflation. If the basic rate of interest is 3% a year when there is
no inflation, and if inflation is then anticipated to equal 5% a year, the rate of interest will rise to
approximately 8% a year.
Fisher Effect
45
Exchange between two counter-parties of fixed rate interest in one
currency for fixed rate interest in the other. This swap requires: an optional exchange ofprincipal; the ongoing exchange of interest; and the re-exchange of principal amounts at maturity.
Fixed Rate Currency Swap
46
A system in which the values of various countries' currencies
are tied to one major currency (such as the U.S. dollar), gold, or special drawing rights. The
term should not be taken literally because fluctuations within a range of 1% or 2% on either side
of the fixed rate are usually permitted in such a system.
Fixed Exchange Rate System
47
Certificate of deposit issued by a commercial bank, typically in the
Eurocurrency market, paying a floating interest rate like a floating rate note.
Floating Rate CD
48
A medium-to long-term security with the quarterly or semi-annual interest rate linked to the three or six month London inter-bank rate; the rate is re-fixed every
three or six months at a stated margin above or below the inter-bank rate.
Floating Rate Notes (FRN)
49
Bonds issued by nonresidents in a country's domestic capital market. Such bonds are subject to domestic regulations and are underwritten primarily by banks registered in
the country where the issue is made.
Foreign Bonds
49
A system in which the values of various currencies relative to
each other are established by the forces of supply and demand in the market without
intervention by the governments involved. In practice most floating rates are really "managed floating" with periodic ad hoc intervention by central banks.
Floating Exchange Rate System
49
An individual who introduces the two parties in a currency or deposit
transaction to each other. The parties could be a buyer and a seller of foreign currencies or a
borrower and a lender of a given currency. The broker charges a fee for this service. Brokers
seldom take a position for themselves; they only arrange for transactions among other parties.
Foreign Exchange Broker
50
The risk that a firm will gain or lose as a result of changes in
exchange rates.
Foreign Exchange Exposure
51
Phrase used to describe a currency whose forward price is cheaper than its
spot price.
Forward Discount
51
An agreement to exchange at a specified future date currencies of different
countries at a specified contractual rate (the forward Date). Foreign currency traded for
settlement beyond two working or business days from today.
Forward Contract
52
Price for a currency to be delivered at a certain date in the futures.
Forward Exchange Rate
52
A forward exchange contract (as opposed to an option contract) that differs
from an ordinary forward contract only in that it has a variable, instead of a fixed, maturity date.
The buyer of a forward option may, for example, be entitled to take delivery of a currency at any
time during a given month as opposed to a specific day.
Forward Option
53
) A cash-settled interbank forward contract on interest rates.
The seller pays the buyer the difference if the interest rate has risen above the agreed rate. In
the reverse case, the buyer pays the seller.
Forward Rate Agreement (FRA
53
(or Forward Swap) A pair of forward exchange deals involving a
forward purchase and a forward sale of a currency, simultaneously entered into, but of different
maturities.
Forward Forward Swap
54
Fundamental Analysis A method of analyzing and predicting price movements using
information about supply and demand.
Fundamental Analysis
54
Securities that are not individually designated by serial numbers belonging
to a particular owner. Instead, a clearing system or depository institution credits owners with a
given number of a particular bond issue (or other security issue). The owner has title to, say, fifty
bonds, but not to fifty specific bonds with designated serial numbers.
Fungible Securities
55
A highly standardized foreign exchange contract written against the
exchange clearing house for a fixed number of foreign currency units and for delivery on a fixed
date. Because of the high level of standardization, futures contracts can be traded readily in a
secondary market.
Futures Contract
55
The trading practice of buying a currency in one geographical market
and selling it in another where the price is higher.
Geographic Arbitrage
56
A monetary agreement under which national currencies are backed by gold and
the gold is utilized for international payments. Also called the Gold Exchange Standard.
Gold Standard
57
A temporary debt certificate issued by a Eurobond borrower, representing the
borrower's total indebtedness. The global bond will subsequently be replaced by the individual
bearer bonds.
Global Bond
57
Bonds with detachable warrants to buy gold.
Gold Warrants
58
The total market value of all goods and services which is
produced in an economy in one year.
Gross National Product (GNP)
59
The future price volatility of an asset that the market currently expects, based
on the current price of a particular option contract.
Implied Volatility
59
A strong, freely convertible currency. A strong currency is one that is not
expected to devalue in the foreseeable future.
Hard Currency
59
The IMM is the
world's largest market for foreign currency and eurodollar futures trading.
IMM (The International Money Market of the Chicago Mercantile Exchange)
60
The process of reducing the variation in the value (from price fluctuations) of a total
portfolio. Hedging is accomplished by adding to an original portfolio items such as spot assets
or liabilities, forward contracts, futures contracts, or options contracts in such a way that the total
variation of the new portfolio is smaller than that of the original portfolio.
Hedging
61
Speculative bank deposits that are moved around the international money markets
to take advantage of currency and interest rate movements.
Hot Money
61
A Eurobond issue to which is attached a warrant or similar instrument.
Host Bond
62
Bonds in which redemption is quoted as a function of the change in the
value of a stock exchange index over time. Essentially a bond with a long-dated equity option or
forward contract written on the principal amount.
Index-Linked Bonds
62
The rate of interest at which a borrowing or a lending transaction of a
shorter maturity may be rolled over to yield an equivalent interest rate with a borrowing or a
lending transaction of longer maturity.
Implied Forward Rate
62
A rate of exchange quoted in units of domestic currency for each unit
of foreign currency.
Indirect Quotation
63
An exchange between two counter-parties of fixed rate interest for floating
rate interest in the same currency. The principal amount relating to the underlying assets or
liabilities is not exchanged.
Interest Rate Swap
64
The practice of adjusting asset prices, liabilities or payments by some measure of
inflation to preserve the purchasing power of the original amounts.
Indexing
64
The amount of money that customers must put up when establishing a futures or
options position to guarantee their contract obligations.
Initial Margin
65
The process that ensures that the annualized forward premium or discount
equals the interest rate differentials on equivalent securities in two currencies.
Interest Rate Parity
66
An affiliate of the World Bank (IBRD)
established to make long term low interest loans to developing countries.
International Development Association (IDA)
66
Collective term referring to both Eurobonds and foreign bonds.
International Bonds
66
Models that account for the influence of world as well as domestic markets
on the returns of securities.
International CAPM
67
The buying and selling of currencies by central banks to influence the exchange
rate.
Intervention
67
A centralized auction market in Chicago where currency and
financial futures contracts are traded. Part of the Chicago Mercantile Exchange.
International Monetary Market
67
To have greater inflows than outflows of a given currency. In foreign exchange
operations, long positions arise when the amount purchased of a given currency is greater than
the amount sold.
Long Position
68
The price, stated as a percentage of face value, at which a new bond is
announced. It is used as a basis for calculating investment banking fees, but does not
necessarily represent the actual price paid by any investor.
Issue Price
68
A floating exchange rate system in which some government
intervention still takes place. A government could announce that it will let its currency float, but it
might secretly allow its central bank to intervene in the exchange market to avoid too much
appreciation or depreciation.
Managed Float (Dirty Float)
68
An international institution created to provide a forum in
which nations can jointly examine each other's economic policies, discuss the operation of the
international monetary system, and negotiate revisions in international monetary relations. The
objectives of the Fund include supervising the exchange market intervention of member nations,
providing the financing needed by members to overcome short-term payments imbalances, and
encouraging monetary cooperation and international trade among nations.
International Monetary Fund (IMF)
68
The amount by which an option is in-the-money (see in-the-money option).
Intrinsic Value
69
The fixed percentage above the reference rate paid by a borrower in a rollover
credit or on a floating-rate note.
Lending Margin
69
According to this law, a country will specialize in producing
and will export those goods that it can produce cheaply relative to the costs of producing them
in foreign countries. It will import those goods that it can produce only at relatively high cost.
Law of Comparative Advantage
70
The portion of total investment banking fees accruing to the managing banks
in a bond issue. In a syndicated credit, the fee paid to the managing bank or banks for
organizing the loan.
Management Fee
70
A letter issued by a bank, usually at the request of an importer, indicating that
the opening bank or another will honor drafts if they are accompanied by specified documents
under specified conditions.
Letter of Credit
71
The amount of money and/or securities that must be posted as a security bond to
ensure performance on a contract. In the futures market, both short and long positions post
margin. This ensures that the side with a daily cash flow loss will meet its payment obligation.
Margin
72
An analysis of balance of payments or exchange rates that emphasizes
the factors affecting money supply and money demand.
Monetary Approach
72
The daily adjustment of an open futures contract to reflect profits and losses on
the contract. All futures positions are marked to market using closing (or settlement) futures
prices.
Mark to Market
72
A well-diversified portfolio of risky securities with little or no unsystematic risk,
and little or no scope for further risk reduction by means of diversification.
Market Portfolio
73
A technique used to predict short-term exchange rate changes.
Momentum models study the direction and impetus behind past exchange rate movements to
predict future movements.
Momentum Analysis
73
A financial market for short-term securities; a market in which short-term
borrowings and investments are made. Negotiable certificates of deposit, acceptances, and
commercial paper are some of the instruments commonly used in the money market.
Money Market
73
The amount of central bank liabilities that will potentially serve to satisfy the
required reserves of the commercial banking system. In the United States, the monetary base
consists of deposits at the Federal Reserve and currency in circulation.
Monetary Base
74
The reduction of exchange risk by means of debt. Typically a foreign
currency cash inflow is matched with a maturing debt so that cash inflows and cash outflows in
a foreign currency are offset.
Money Market Hedge
75
The bond warrant can be redeemed for a set amount at different times
during the life of the warrant, ensuring the investor a minimum value for the warrant.
Money-Back Warrants
75
A clause that gives a Eurocurrency borrower the right to switch from one
currency to another at an interest reset date.
Multicurrency Clause
76
In international business treaties, a provision against tariff
discrimination between tow or more nations. It provides that each participant will automatically
extend to other signatories all tariff reductions that are offered to non-member nations.
Most-favored-nation Clause
77
Under such a system, a government sets different exchange
rates for different transactions.
Multiple Exchange-Rate System
78
An issue of warrants without any host bond.
Naked Warrants
79
Government-owned international assets that include convertible foreign
currencies, gold and Special Drawing Rights.
Official Reserves
80
Banking activity that accepts deposits and makes loans in currencies other
than that of the country of location of the bank. In other words, Eurocurrency banking.
Offshore Banking
80
A forward exchange contract
in which the rate is fixed but the maturity is open, within a specified range of dates.
Optional Date Forward Contract (or Forward Option Contract)
81
A market in which transactions are carried out with minimum
transactions costs.
Operational Efficiency
81
The person who sells or grants an option in return for a premium, and who is
obligated to perform if the option holder exercises his right under the option contract.
Option Writer
82
The price of an option, which the option buyer pays and the option seller
receives.
Option Premium
83
The right to buy or sell a specific quantity of a specific asset at a fixed price at
or before a specified future date.
Option Contract
84
The portion of total fees in a syndicated credit that go to the participating
banks.
Participation Fees
84
A forward exchange rate expressed in terms of the amount of one
currency required to buy a unit of another currency.
Outright Forward Rate
85
One or a syndicate of banks responsible for paying the interest and principal of a
bond issue to bondholders on behalf of the bond issuer.
Paying Agent
86
A document in a syndicated Eurocredit that sets out details of the
proposed loan and that gives information about the borrower.
Placement Memorandum
86
An index that measures the value of a representative sample of goods and
services. The most popular is the Consumer Price Index (CPI).
Price Index
87
The selling of government-owned companies to the private sector.
Privatization
88
A theory that attempts to explain prices and other features of a
market over the phases of a product's life.
Product Life Cycle Theory
88
The notion that in equilibrium the market exchange rate for
any two currencies will exactly reflect the relative purchasing powers of the two currencies.
Purchasing Power Parity (PPP)
89
A swap with an option to terminate early.
Puttable Swap
90
The theory that a proportional increase in the money supply leads
to a proportionate increase in the price level.
Quantity Theory of Money
91
The value of a currency in terms of real purchasing power
determined by comparing the price of a hypothetical market basket of goods in two
different countries, translated into the same currency at the prevailing exchange rate.
It is useful for measuring the price competitiveness of domestic goods in international
markets and also for calculating the real value of investment projects.
Real Exchange Rate
91
Obligations imposed on commercial banks to maintain a certain
percentage of deposits with the central bank or in the form of central bank liabilities.
Reserve Requirements
92
Discharge of a bond obligation by the issuer by payment of the bond's face value
to the bondholder. Redemption may occur at bond maturity or earlier, under conditions stated in
the bond contract.
Redemption
93
A preliminary prospectus (offering circular) giving the expected, but not final,
details of a forthcoming securities offering.
Red Herring
93
A foreign currency held by a central bank (or exchange authority) for the
purposes of exchange intervention and the settlement of intergovernmental claims.
Reserve Currency
94
An agreement by one party to sell a security with an agreement to buy
it back at a specified price on a specified date. The seller gets immediate cash, for the use of which he will in return pay the difference between the repurchase price and the sale price. If the buyer takes possession of the security in the meantime, a repo represents a form of secured lending from the buyer's standpoint, since if the seller defaults on the repurchase, the buyer still has the security.
Repurchase Agreement
94
A line of bank credit that may be used or not used at the borrower's
discretion. Interest is paid on the amount of credit actually in use, while a commitment fee is
paid on the unused portion.
Revolving Credit
94
An official government act that produces a substantial increase in an exchange
rate, usually overnight.
Revaluation
94
In the context of foreign exchange, this is a premium embedded in a currency
forward or futures price. It stems from the risk-averse nature of market participants, and may be a function of the covariance between the participant's portfolio of assets and liabilities and the
exchange rate. Because of the risk premium, the forward rate or futures price may be a biased estimator of the exchange rate expected to prevail at date of delivery.
Risk Premium
95
A bank loan whose interest rate is periodically updated to reflect market interest rates. The interest rate in the loan for each subperiod is specified as the sum of a reference rate and a lending margin.
Rollover Credit
96
A greater outflow than inflow of a given currency. In foreign exchange
operations, short positions arise when the amount of a given currency sold is greater than the
amount purchased.
Short Position
97
A weak currency whose convertibility is, or is expected to become, restricted.
Soft Currency
98
Sovereign Risk In cross-border contracts, the risk that a country will impose foreign exchange
controls. Also called country risk, it can include the risk of government default on a loan made to
it or guaranteed by it.
Sovereign Risk
99
In the foreign exchange market, term used to describe a swap transaction for value
on the spot date with the reverse transaction taking place the next working day after the spot
date. In the Eurocurrency market, term used to describe a loan or deposit for value on the spot
date with maturity on the next working day after the spot date.
Spot/Next
99
A trader whose objective is to make profits by successfully anticipating future price
movements.
Speculator
99
Monetary accounts held at the International Monetary Fund
for payments among governments. The rights can be transferred to other countries in exchange
for convertible currencies, either voluntarily or for convertible currencies supplied by countries
designated by the IMF. At first, SDRs had a fixed value in gold, but later their value was
determined by a weighted basket of major currencies.
Special Drawing Rights (SDRs)
100
Intervention in the foreign exchange market by a central bank where the change in
the monetary base caused by the foreign exchange intervention is offset by open market
operations involving domestic assets.
Sterilization
100
A market involving an exchange of bank deposits
denominated in different currencies. A spot contract implies an exchange two business days
after the transaction.
Spot Foreign Exchange Market
101
The difference between the buying and selling rates or prices.
Spread
101
Terms of Trade The ratio of export prices to import prices expressed in the same currency.
Terms of Trade
102
The effort by a lead manager in a bond issue to regulate the price at which bonds
trade in the secondary market during the period while the bond syndicate is still in existence.
Stabilization
103
In the interbank foreign exchange market, the simultaneous purchase and sale of
identical amounts of a currency for different value dates. (The currency will be priced in terms of a second currency whose amounts will differ, depending on the relationship between the purchase price and the sale price of the first currency). More generally, a swap is a contractual
obligation entered into by two parties to deliver one sum of money against another sum of money at stated intervals. See also Currency Swap and Interest Rate Swap.
Swap
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An option to enter a fixed for floating swap at a predetermined fixed rate.
Swaption
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The risk common to all assets; risk that cannot be diversified away.
Systematic Risk
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Exposure Foreign currency assets, liabilities, revenues, and
expenses that are consolidated at a current exchange rates into parent currency-denominated
group financial statements.
Translation (or Accounting)
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An hypothesis that the forward exchange rate is an
unbiased predictor of the future spot rate.
Unbiased Forward Rate Hypothesis
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The share of total investment banking fees accruing to the
underwriting group.
Underwriting Allowance
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The risk unique to a particular company or country; risk which can be
eliminated through diversification.
Unsystematic Risk
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The banks, in a new bond issue, that agree to pay a minimum price to
the borrower even if the bonds cannot be sold on the market at a higher price.
Underwriting Syndicate
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A special spot foreign exchange transaction in which delivery and payment are
made on the same day as the contract, instead of the normal one or two business day lag.
Value Today
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A measure of the amount by which an asset's price fluctuated over a given period.
Normally, it is measured by the annualized standard deviation of daily returns on the asset.
Volatility
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Variation Margin The gains or losses on open futures contracts calculated by marking the
contracts to the market price at the end of each trading day (or session). These gains or losses
are credited or debited by the clearinghouse to each clearing member's account, and by
members to their respective customers' accounts.
Variation Margin
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The contracted date on which the foreign exchange is to be delivered or received.
For forward transactions, the value date and maturity date are synonymous.
Value Date
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A call option to buy a stated number of shares of stock at a specified price.
Warrant
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Bonds issued at a deep discount from face value, paying
no interest [zero] or a lower than normal market rate [deep discount].
Zero Coupon/Deep Discount Bond
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A dollar-denominated foreign bond issued in New York. These bonds are subject
to U.S. law and must be registered with the Securities and Exchange Commission.
Yankee Bond
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The hypothesis that asset prices reflect all information
about the history of prices of that asset.
Weak Efficient Market Hypothesis
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Yield-to-Maturity The rate of return earned by a debt instrument if held to maturity and
reinvested at that same return.
Yield-to-Maturity
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