Unit 3: Foreign exchange trading Flashcards
What is foreign exchange?
money or currency of a foreign country
What are the exchange rates?
The exchange rate (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specifies how much one currency is worth in terms of the other.
It is the value of a foreign nation’s currency in terms of the home nation’s currency
What is the spot exchange rate?
It refers to the current exchange rate
What is the forward exchange rate?
It refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date
What is the nominal exchange rate?
The nominal exchange rate is the price in foreign country of one unit of a domestic currency
What is the real exchange rate?
(RER) is defined as RER = e(P/Pf)
where Pf is the foreign price level
P the domestic price level
P and Pf must have the same arbitrary value in some chosen base year
In the base year, RER = e
What is a gold standard?
A monetary system used in the nineteenth and early twentieth centuries whereby the value of currencies could, on request of the owner (holder), be converted into gold at a country’s central bank.
As all currencies had a gold value, they also had a certain value in relation to each other. This was the beginning of a foreign exchange system.
What is a central bank?
A country’s chief bank, which is government owned. It regulates the commercial banks and holds gold and foreign currency reserves. It actively intervenes by buying and selling its own currency in the foreign exchange markets so that the currency will keep a certain value.
What are functions of a central bank?
(1) implementing monetary policy
(2) controlling the nation’s entire money supply
(3) the Government’s banker and the bankers’ bank
(4) managing the country’s foreign exchange and gold reserves and the Government’s stock register
(5) regulating and supervising the banking industry
(6) setting the official interest rate - used to manage both inflation and the country’s exchange rate - and ensuring that this rate takes effect via a variety of policy mechanisms
What is a fixed exchange rate?
A fixed exchange rate, sometimes called pegged exchange rate, is a type of exchange rate regime wherein a currency’s value is matched to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold.
What is a legal tender?
Legal tender or forced tender is payment that, by law, cannot be refused in settlement of a debt . Legal tender is issued by the Government
What is a floating exchange rate?
A system in which currencies have no specific par value; value is normally determined by supply and demand. Central bank are not required to intervene, but they often do to avoid wild fluctuations.
What is a fiat currency?
Fiat currency (fiat money) is money declared by a government to be legal tender. The term derives from the Latin fiat, meaning “let it be done”.
Fiat currency achieves value because a government requires it in payment of taxes and says it can be used to pay debt or buy goods and services and because people trust that the value of the currency will be reasonably stable.
What is a spot transaction?
Currency bought or sold today with delivery two business days later
What is a forward transaction?
To buy or sell a currency in the future, with payment and delivery at that future date
