Fundamentals of Multinational Finance 6th Edition - Chapter 5

Pips

Percentage in point, in reference to an exchange rate fluctuation.

Clearinghouse Interbank Payments System (CHIPS)

A New York-based computerized clearing system used by banks to settle interbank foreign exchange obligations (mostly U.S. dollars) between members.

Continuous linked settlement

A U.S. financial institution that provides foreign exchange settlement services to members.

Bank for international settlements (BIS)

A bank in Basel, Switzerland, that functions as a bank for European central banks.

Foreign exchange intervention

The active entry into the foreign exchange market by buying and selling a currency by an official authority in order to manage or fix the currency's value relative to other traded currencies.

Value date

The date when value is given (i.e.,funds are deposited) for foreign exchange transactions between banks.

Bid-ask spread

The difference between a bid and an ask quotation.

Forward discount

The difference between spot and forward rates, expressed as an annual percentage, also known as the forward premium.

Forward premium

The difference between spot and forward rates, expressed as an annual percentage, also known as the forward premium.

Spot transaction

A foreign exchange transaction to be settled (paid for) on the second following business day.

Nondeliverable forward (NDF)

A forward or futures contract on currencies, settled on the basis of the differential between the contracted forward rate and occurring spot rate, but settled in the currency of the traders. For example, a forward contract on the Chinese yuan that is settled in dollars, not yuan.

Forward transaction

An agreed-upon foreign exchange transaction to be settled at a specified future date, often one, two, or three months after the transaction date.

Triangular currency arbitrage

An arbitrage activity of exchanging currency A for currency B for currency C back to currency A to exploit slight disequilibrium in exchange rates.

American terms

Foreign exchange quotations for the U.S. dollar, expressed as the number of U.S. dollars per unit of non-U.S. currency.

European terms

Foreign exchange quotations for the U.S. dollar, expressed as the number of non- U.S. currency units per U.S. dollar.

Ask price

The price at which a dealer is willing to sell foreign exchange, securities, or commodities. Also called offer price.

Direct quotation

The price of a unit of foreign exchange expressed in the home country's cur- rency.The term has meaning only when the home country is specified.

Bid price

The price that a dealer is willing to pay to pur- chase foreign exchange or a security. Also referred to as the bid rate.

Herstatt risk

The risk arising from foreign exchange trades between banks operating in different countries and different time zones. Also termed settlement risk.

Speculators

An attempt to make a profit by trading on expectations about future prices. Speculators and arbitragers seek to profit from trading within the market itself. True profit seekers, they operate in their own interest, without a need or obligation to serve clients or to ensure a continuous market. Whereas dealers seek profit from the spread between bids and offers in addition to what they might gain from changes in exchange rates, speculators seek their profit from exchange rate changes. Arbitragers try to profit from simultaneous exchange rate differences in different markets.

Cross rates

An exchange rate between two currencies derived by dividing each currency's exchange rate with a third currency. Colloquially, it is often used to refer to a specific currency pair such as the euro/yen cross-rate, as the yen/dollar and dollar/ euro are the more common currency quotations.

Arbitrageurs

An individual or company that practices arbitrage. Arbitrage. A trading strategy based on the purchase of a commodity, including foreign exchange, in one market at one price while simultaneously selling it in another market at a more advantageous price, in order to obtain a risk-free profit on the price differential.

Foreign exchange broker

An individual or firm that arranges foreign exchange transactions between two parties, but is not itself a principal in the trade. Foreign exchange brokers earn a commission for their efforts.

Swap transaction

In general it is the simul- taneous purchase and sale of foreign exchange or securities, with the purchase executed at once and the sale back to the same party carried out at an agreed-upon price to be completed at a specified future date. Swaps include interest rate swaps, currency swaps, and credit swaps.

Indirect quotation

Indication. A quotation, typically in the form of a bid rate and ask rate, for a currency or other financial asset.

Market makers

a dealer in securities or other assets who undertakes to buy or sell at specified prices at all times.

Currency nicknames: cable, loonie, kiwi, Aussie, Swissie, Sing Dollar

cable = pound £, loonie = canadian dollar C$, kiwi - new zealand dollar, Aussie = Australian dollar AU$ , Swissie = Swiss Franc CHF, Sing Dollar = Singapore dollar S$