Week 4 - Currency Exchange rates Flashcards
Foreign Exchange Market
it’s the worlds largest financial market that’s used for trading currencies against each other
Exchange rate
the price of a country’s currency in terms of another country’s currency
ISO code
how we refer to each currency (GDP, EUR, USD, CAD)
Real exchange rate - not examined
this is the inflation adjusted version of the nominal exchange rate that represents the relative purchasing power of a currency.
nominal exchange rate
the number of units of one currency that i need to buy units of another currency
spot exchange rate
the nominal exchange rate at a specific point in time - for immediate execution
forward exchange rate
an exchange rate for the exchange of currencies at some specified, future point in time
ie. an exchange rate that I’ve agreed upon on for a certain date
who participates in the FX market
companies and individuals
capital market
hedgers
speculators
types of FX products
spot market
forward contracts
FX swaps
FX options
leveraged accounts
accounts that carry a lot of risk
direct/indirect currency quote
based on what countries perspective you’re looking from.
direct = domestic currency is the price, foreign currency is the base,
indirect is the inverse of this
appreciation
is a gain in value of one currency relative to another currency
depreciation
is the loss in value of one currency relative to another currency
currency cross rate - not examined
the implied exchange rate of a third country pair given the exchange rates of 2/3 pairs that have a common currency
forward premium and forward discount description
if forward rate > spot rate, the base currency is trading at a forward premium
if forward rate < spot rate, the base currency is trading at a forward discount
pips
points in percentage - forward exchange rates are quoted in terms of points
points are 1:10,000
forward quotes can be specified as the number of pips from the spot rate or as a percentage of the spot rate
forward contract
an agreement to exchange one currency for another at some future date at a specified rate
covered interest rate parity
the relationship between spot and forward rates based on the relative interest rates of both countries
bid/offer spread
the difference in price between the bid and the offer
spreads are in terms of pips
triangular arbitrage
is taking advantage of incorrect exchange rates and these actions forcing the markets to balance
purchasing power parity
the condition that goods or services are priced the same in different countries once adjusted for exchange rates
based on the law of one price
