Week 4: Chapter 4 The Foreign Exchange Market

In the late nineteenth century, the U.S. dollar was fixed to gold at this exchange rate.

$20.67/ oz

The rate of return on a commercial office building that was purchased one year ago for $650,000 and sold today for $600,000.

-7.69%

The rate of return on a share of stock whose value rises during the year from $5.50 per share to $6.50 per share.

18.18%

For a U.S. dollar investor, this is the rate of return on a U.S. dollar deposit yielding 3 percent per year.

3%

In the late nineteenth century, the British pound was fixed to gold at this exchange rate.

4.24 pounds/ oz

This group enters the foreign exchange market to make transactions that will be recorded on the current account.

Importers and Exporters

The name of the international organization created after World War II to oversee the fixed exchange rate system.

International Monetary Fund

This group enters the foreign exchange market to make transactions that will be recorded on the financial account.

International investors

The percentage change in the value of an asset over some period

Rate of Return

The term used to describe an increase in the value of the yen.

appreciation

The term used to describe the process of buying low and selling high to make a profit.

arbitrage

The term given to the currency standard using both gold and silver.

bimetallism

The term for the type of bank deposit that offers a higher yield on a deposit that is maintained for a predetermined period of time.

certificate of deposit

The term used to describe a currency system in which a country fixes its exchange rate but also changes the fixed rate at periodic or regular intervals.

crawling pegs

As of 2004, Estonia and Hong Kong implemented this type of currency system.

currency boards

This has happened to the value of the U.S. dollar if the dollar/euro exchange rate rises from 1.10 $/€ to 1.20 $/€

depreciation

The term used to describe the exchange rate predicted to prevail at some point in the future.

expected exchange rate

These three variables influence the rate of return on a foreign deposit.

foreign interest rate, spot exchange rate, expected exchange rate

The term used to describe the exchange rate that appears on a contract to exchange currencies either 30, 60, 90, or 180 days in the future.

forward exchange rate

The term used to describe the process of protecting oneself from the riskiness of exchange rate movements

hedging

A list of three main objectives for international investors

high Rate of Return, low risk, high liquidity

The term used to describe the ease with which an asset can be converted to cash.

liquidity

This currency value is expressed by the euro/peso exchange rate.

peso in relation to euro

The term given to the currency standard in which all countries fix to one central currency, while the central currency is not fixed to anything.

reserve currency system

The term used to describe the possibility that an asset will not return what is originally expected.

risk

The term used to describe the exchange rate that prevails for (almost) immediate trades.

spot exchange rate