Topic 7 - Chapter 21

Eurobanks

banks that make loans and accept deposits in foreign currencies

American Options

A call or put option that can be exercised on or before its expiration date

Forward trade

Agreement to exchange currency at some time in the future

Swaps

Agreements to exchange to securities of currencies

Spot trade

An agreement to trade currencies based on the exchange rate today for settlement in two days

Gilts

British and Irish government securities, including issues of local british authorities and some overseas public-sector offerings

Export development Canada (EDC)

Federal crown corporation that promotes Canadian exports by making loans to foreign purchasers

Foreign Bonds

International bonds issued in a single country, usually denominated in that country's currency

Eurobond

International bonds issued in multiple countries but denominated in a single currency

Note issuance facility

Large borrowers issue notes up to one year in maturity in the euromarket. Banks underwrite or sell notes

Eurocurrency

Money deposited in a financial centre outside of the country whose currency is involved

political risk

Risk related to changes in value that arise because of political actions

Counter party

Second borrower in currency swap. Counterparty borrows funds in currency desired by principal

Forward exchange rate

The agreed-on exchange rate to be used in a forward trade

Interest rate parity (IRP)

The condition starting that the interest rate differential between two countries is equal to the difference between the forward exchange rate and the spot exchange rate

Unbiased forward issues

The condition stating that the current forward rate is an unbiased predictor of the future exchange rate

Uncovered interest parity

The condition stating that the expected percentage change in the exchange rate is equal to the difference in interest rates

Spot exchange rate

The exchange rate on spot trade

Purchasing power parity (PPP)

The idea that the exchange rate adjusts to keep purchasing power constant among currencies

Cross-rate

The implicit exchange rate between two currencies (non us) quoted in some third currency (us)

Foreign exchange market

The market where one country's currency is traded for another's

Exchange rate

The price of one country's currency expressed in another countrys currency

London international offer rate (LIBOR)

The rate most international banks charge one another for overnight eurodollar loans

General fisher effect

The theory that real interest rates are equal across countries