Chapter 7 Definitions International Finance
European Terms
method of quoting currencies, it is expressed as the number of foreign currency units per US Dollar
Traders
in forward market, the category of participants who use forward contracts to eliminate or cover the risk of loss on export or import orders that are dominated in foreign currencies
Arbitrageurs
market participants who seek to earn risk-free profits by taking advantage of difference in prices of assets, commodities or interest rates between markets
Hedgers
market participants, mostly multinational firms, who engage in forward contracts to protect the home currency value of various foreign currency-denominated assets and liabilities on their balance sheets that are not to be realized over the life of the contracts
Currency Arbitrage
taking advantage of divergences in exchange rates in different money markets by buying a currency in one market and selling it in another
American Terms
Method of quoting currencies, it is expressed as the number of US dollar per unit of foreign currency
Liquidity
ability to readily exchange an asset for goods or other assets at a known price, thereby facilitating economic transactions. It is usually measured by the difference between the rates at which dealers can buy and sell that asset
Outright Rate
actual forward rate expressed in dollars per currency unit, or vice verse
Forward Contract
agreement between a bank and a customer that calls for delivery, at a fixed future date, of a specified amount of one currency against dollar payment; the exchange rate is fixed at the time the contract is entered into
Clearing House Interbank Payments System (CHIPS)
computerized network for transfer of international dollar payments, linking about 140 depository institutions that have offices or affiliates in NYC
Forward Market
contracts are made to buy or sell currencies for future delivery
Spot Market
currencies are traded for immediate delivery, which is actually within two business days after the transaction has been concluded
Value Date
date on which the monies must be paid to the parties involved in a foreign exchange transaction, for spot transactions it is set as the second working day after the date on which the transaction is concluded
SWIFT (Society for Worldwide Interbank Financial Telecommunications)
dedicated computer network to support funds transfer messages internationally among more than 900 member banks worldwide
Fed Funds
deposits held by member banks at various federal reserve branches
Swap Rate
difference between spot and forward rates expressed in points
Bid-Ask Spread
difference between the buying and selling rates
Contract Note
document that is part of the settlement process involved in foreign exchange transactions, includes the amount of foreign currency, the dollar equivalent at the agreed rate, and confirmation of the payment instructions that is sent to the customer
Cross Rates
exchange rate between two currencies, neither of which is the US dollar, calculated by using the dollar rates for both currencies
FedWire
federal reserves network for transferring fed funds
Swap
foreign exchange transaction that combines a spot and a forward contract, transaction in which two counter parties agree to exchange streams of payments over time, such as in a currency swap or an interest rate swap
Settlement/Herstatt Risk
named afterGerman bank that went bankrupt, this is the risk that a bank will deliver currency on one side of a foreign exchange deal only to find that its counter party has not sent any money in return
Electronic Trading Systems
offers automated matching, traders can enter buy and sell orders directly into their terminals on an anonymous basis, and these prices will be visible to all market participants, another trader anywhere in the world can execute a trade by simply hitting two buttons
Long
one has more assets than liabilities in a particular currency
Short
one has more liabilities than assets in a particular currency
Speculators
participants in foreign exchange market that actively expose themselves to currency risk by buying or selling currencies forward in order to profit from exchange rate fluctuations, degree of participation does not depend on their business transactions in other currencies, it is based on prevailing forward rates and their expectations for spot exchange rates in the future
Spot Price
price at which foreign exchange can be bought or sold with payment set for the same day
Foreign Exchange Quotes
price at which one currency is quoted in terms of another
Indirect Quotation
quote that gives the foreign currency price of the home currency
Direct Quotation
quote that gives the home currency price of a foreign currency
Forward Prices
rate quoted today for delivery at a fixed future date of a specified amount of one currency against dollar payments
No-arbitrage condition
relationship between exchange rates such that profitable arbitrage opportunities do not exist, if this condition is violated on an ongoing basis, we would wind up with a money machine
Triangular Currency Arbitrage
sequence of foreign exchange transactions, involving three different currencies, that one can use to profit from discrepancies in the different exchange rates
Forward Premium
situation that pertains when the forward rate expressed in dollar is above the spot rate
Forward Discount
situation that pertains when the forward rate expressed in dollars is below the spot rate
Foreign Exchange Brokers
specialists in matching net supplier and demander banks in foreign exchange market
Position Sheet
spreadsheet that shows a banks position by currency, as well as by maturities of forward contracts, so that the bank has accurate information on individual transactions and on its cumulative currency exposure at any time
Exchange Risk
variability of a firms value that is due to uncertain exchange rate changes
Interbank Market
wholesale foreign exchange market in which major banks trade currencies with each other
Nostro Account
working balances maintianed with a correspondent bank to facilitate delivery and receipt of currencies