FIN 325 ch3

futures contract

is a legal agreement, generally made on the trading floor of a futures exchange, to buy or sell a particular commodity or financial instrument at a predetermined price at a specified time in the future. Futures contracts are standardized to facilitate trading on a futures exchange and, depending on the underlying asset being traded, detail the quality and quantity of the commodity.

direct quote

A direct quote is a foreign exchange rate quoted as the domestic currency per unit of the foreign currency. In other words, it involves a quote in fixed units of foreign currency against variable amounts of the domestic currency. As of June 2016, a direct quote of the U.S. dollar against the Canadian dollar in the United States would be U.S. $0.7858 = C $1 while in Canada, a direct quote for would be C $1.2725 = U.S. $1. The concept of direct quotes versus indirect quotes depends on the location of the speaker, as that determines which currency in the pair is domestic and which is foreign. Non-business publications and other media usually quote foreign exchange rates in direct terms for the ease of consumers. However, the foreign exchange market has quoting conventions that transcend local borders.

forward contract

A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date. A forward contract can be used for hedging or speculation, although its non-standardized nature makes it particularly apt for hedging. Unlike standard futures contracts, a forward contract can be customized to any commodity, amount and delivery date. A forward contract settlement can occur on a cash or delivery basis. Forward contracts do not trade on a centralized exchange and are therefore regarded as over-the-counter (OTC) instruments. While their OTC nature makes it easier to customize terms, the lack of a centralized clearinghouse also gives rise to a higher degree of default risk. As a result, forward contracts are not as easily available to the retail investor as futures contracts.

yankee market

A slang term for the stock market in the United States. Yankee market is usually used buy non-U.S. residents and refers to the slang term for an American - a Yankee.

libor

LIBOR or ICE LIBOR (previously BBA LIBOR) is a benchmark rate, which some of the world's leading banks charge each other for short-term loans. It stands for Intercontinental Exchange London Interbank Offered Rate and serves as the first step to calculating interest rates on various loans throughout the world. . LIBOR is administered by the ICE Benchmark Administration (IBA), and is based on five currencies: U.S. dollar (USD), Euro (EUR), pound sterling (GBP), Japanese yen (JPY), and Swiss franc (CHF). The LIBOR serves seven different maturities: overnight, one week, and 1, 2, 3, 6 and 12 months. There are a total of 35 different LIBOR rates each business day. The most commonly quoted rate is the three-month U.S. dollar rate (usually referred to as the "current LIBOR rate").

foreign exchange market

The foreign exchange market is the market in which participants are able to buy, sell, exchange and speculate on currencies. Foreign exchange markets are made up of banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors. The forex market is considered the largest financial market in the world.

indirect quote

The term indirect quote is a currency quotation in the foreign exchange market that expresses the amount of foreign currency required to buy or sell one unit of the domestic currency. An indirect quote is also known as a "quantity quotation," since it expresses the quantity of foreign currency required to buy units of the domestic currency. In other words, the domestic currency is the base currency in an indirect quote, while the foreign currency is the counter currency.

American depository receipts

is a negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas, and holders of ADRs realize any dividends and capital gains in U.S. dollars, but dividend payments in euros are converted to U.S. dollars, net of conversion expenses and foreign taxes. ADRs are listed on either the NYSE, AMEX or Nasdaq but they are also sold OTC.

forward rate

is a term used in both bond and currency trading to represent the current expectations of future bond interest rates or currency exchange rates. In bond trading, the forward rate is calculated based on interest rates for various maturities. These rates are typically plotted on a graph as a yield curve. An investor can buy a one-year bond and hold it for the year, or he can buy a six-month bond, and then at the end of the sixth months, buy another six-month bond.

forward market

is an over-the-counter marketplace that sets the price of a financial instrument or asset for future delivery. Forward markets are used for trading a range of instruments, but the term is primarily used with reference to the foreign exchange market. It can also it can also apply to markets for securities and interest rates as well as commodities.

cross exchange rate

is the currency exchange rate between two currencies when neither are official currencies of the country in which the exchange rate quote is given. Foreign exchange traders use the term to refer to currency quotes that do not involve the U.S. dollar, regardless of what country the quote is provided in.

interbank market

is the financial system of trading currencies among banks and financial institutions, excluding retail investors and smaller trading parties. While some interbank trading is done by banks on behalf of large customers, most interbank trading is proprietary, meaning that it takes place on behalf of the banks' own accounts.

factors that effect the spread of currency

order costs inventory costs competition volume currency risk

international money market securities

when gov agencies issue debt securities with a short term maturity in the international money market, these instruments are referred to as______________