LSC 475 - Ch 8

convertible currency

A currency that can be converted into another currency. A convertible currency can be a hard currency (easy to convert) or a soft currency (not so easy to convert), but it can be converted.

hard currency

A currency that can easily be converted into another currency.

inconvertible currency

A currency that cannot be converted into another currency.

artificial currency

A currency that is not in circulation.

pegged currency

A currency whose value is determined by a fixed exchange rate with another, more widely traded currency.

floating currency

A currency whose value is determined by market forces. The exchange rate of a floating currency varies frequently.

Ex-Im Bank

An agency of the U.S. federal government that provides financial assistance to U.S. exporters.

Special Drawing Right (SDR)

An artificial currency (it does not circulate, see artificial currency) of the International Monetary Fund. Its value is determined by the value of a basket of four currencies: the euro (approximately 34 percent of the SDR's value), the Japanese yen (approximately 11 percent), the U.S. dollar (approximately 44 percent), and the British pound (approximately 11 percent).

Purchasing Power Parity

An economic theory that holds that exchange rates should reflect the price differences of each and every product between countries. The idea is that a set amount of money (regardless of the currency in which it is expressed) would purchase the same goods in any country of the world.

Interest Rate Parity

An economic theory that holds that the forward exchange rate between two currencies should reflect the differences in the interest rates in those two countries.

Fisher effect

An economic theory that holds that the interest rates that businesses and individuals pay to borrow money should be uniform throughout the world and that the nominal interest rates that they actually pay in a given country are composed of this common interest rate and the inflation rate of that country.

International Fisher effect

An economic theory that holds that the spot exchange rates between two countries' currencies should change in function of the differences between these two countries' nominal interest rates.

SWIFT- Society for Worldwide Interbank

Financial Telecommunication An interbank electronic network for the secure transfer of funds and documents.

points

In a forward exchange rate, the difference between the outright rate and the swap rate. Their value depends on the way a currency is expressed, but is the smallest decimal value in which that currency is traded.

central bank

The entity that controls the money supply of a nation and functions as a clearinghouse for inter-bank exchanges.

forward exchange rate

The exchange rate of a foreign currency for delivery in 30, 90, or 180 days from the date of the quote.

swap rate

The exchange rate of a foreign currency for delivery in 30, 90, or 180 days from the date of the quote. The difference between the current spot rate and the rate at which a commercial customer would purchase the currency.

spot exchange rate

The exchange rate of a foreign currency for immediate delivery (within 48 hours).

International Monetary Fund

The international organization created in 1945 to oversee exchange rates and develop an international system of payments.

currency

The monetary unit used in a particular country for economic transactions (e.g., the dollar in the United States, the British pound in the United Kingdom, the euro in Europe, and the yen in Japan).

exchange rate risk

The risk represented by the fluctuation in exchange rates between the time at which two companies entered into an international contract and the time at which that contract is paid.

indirect quote

The value of a domestic currency expressed in units of a foreign currency; for example, the dollar was worth 94.82 yen as of May 25, 2009.

direct quote

The value of a foreign currency expressed in units of the domestic currency; for example, the euro was worth $1.4011 as of May 25, 2009.

Bank for International Settlements

The bank that advises central banks and provides a clearinghouse for exchanges between central banks.

World Bank

The bank that was created at Bretton-Woods in 1944 and finances large-scale infrastructure projects in the world.

euro

The common currency of seventeen of the 27 countries of the European Union, developed in the early 1990s and placed in circulation on January 1, 2002.

forward market hedge

A financial technique designed to reduce exchange rate fluctuation risks in which a business agrees to purchase (or sell) a particular currency at a predetermined exchange rate at some future time (generally 30, 60, 90, 180, or 360 days later).

options market hedge

A financial technique designed to reduce exchange rate fluctuation risks in which a business purchases (or sells) options in a particular currency.

money market hedge

A financial technique designed to reduce exchange rate fluctuation risks. When a business has to make a payment at a future date and is pursuing a money market hedge, it invests the funds in an interest-bearing account abroad.

currency bloc

A group of currencies whose values fluctuate in parallel fashion. The currencies within the group have a fixed exchange rate, but their exchange rates with currencies outside of the group float.

call options

A method used to speculate on the value of a currency in the future. A firm can purchase options to buy (called call options) or options to sell (called put options) a particular currency at a particular price, called the strike price, on a given date.

put options

A method used to speculate on the value of a currency in the future. A firm can purchase options to buy (called call options) or options to sell (called put options) a particular currency at a particular price, called the strike price, on a given date.

currency futures

A method used to trade currencies; the value of a fixed quantity of foreign currency for delivery at a fixed point in the future is determined by market forces.

dollarization

A phenomenon whereby other countries decide to adopt the U.S. dollar as their circulating currency.

risk retention

A risk management strategy in which a company elects to retain a certain type of risk and decides not to insure that risk.