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officially

(when a country adopts the foreign currency as legal tender and ceases to issue the domestic currency).

unofficially

(when private agents prefer the foreign currency over the domestic currency)

- gold standard

, currency issuers guaranteed to redeem notes, upon demand, in an equivalent amount of gold.

APPRECIATION

- (a rise in its value relative to other currencies) means that the country's goods are more expensive for foreign buyers and foreign goods are cheaper for foreign sellers (all else constant).

DEPRECIATION

- (or a fall in its value relative to other currencies) means the country's goods become cheaper for foreign buyers and foreign goods become more expensive for foreign sellers.

ONLINE FOREIGN EXCHANGE TRADING

- - is increasing and the transnational nature of the electronic exchange of funds makes secure, Internet-based trading an ideal platform. -

PURCHASING POWER PARITY

- One factor affecting a country's foreign currency exchange rate with another country is the relative inflation rate in each country (which, as shown below, is directly related to the relative interest rates in these countries).

THEORY OF PURCHASING POWER PARITY (PPP)

- One theory that explains how this adjustment takes place

FISHER EFFECT

- The relationship among nominal interest rates, real interest rates, and expected inflation is often referred named for the economist Irving Fisher, who identified these relationships early in the last century.

REUTERS AND EBS

- Two companies, currently dominate the market for the provision of electronic trading platforms, software, and FX quotation systems.

LAW OF ONE PRICE

- an economic concept which states that in an efficient market, if countries produce a good or service that is identical to that in other countries, that good or service must have a single price, no matter where it is purchased.

CROSSCURRENCY TRADES

- are a pair of currencies traded in foreign exchange markets that do not involve the United States dollar.

Foreign exchange traders

- are generally located in one large trading room at a bank or other FI where they have access to foreign exchange data and telecommunications equipment. Traders generally specialize in just a few currencies.

Forward contracts

- are typically written for a one-, three-, or six-month period from the date the contract is written, although they can be written for any time period from a few days to many years

INDIRECT QUOTE

- foreign currency received for each U.S. dollar exchanged (PER US$, also referred to as the indirect quote).

FOREIGN EXCHANGE MARKETS

- have become among the largest of all financial markets.

INTERNATIONAL MONEY MARKET (IMM) OF THE CHICAGO MERCANTILE EXCHANGE (CME)

- have developed derivatives trading in foreign currency futures and options.

NEGATIVE NET EXPOSURE POSITION

- implies that a U.S. financial institution is net short (i.e., the financial institution has sold more foreign currency than it has purchased) in a foreign currency.

POSITIVE NET EXPOSURE POSITION

- implies that a U.S. financial institution is overall net long in a currency (i.e., the financial institution has purchased more foreign currency than it has sold).

SPOT FOREIGN EXCHANGE TRANSACTIONS

- involve the immediate exchange of currencies at the current (or spot) exchange rate.

foreign exchange risk

- is introduced by adding foreign currency assets and liabilities to a firm's balance sheet.

EURO

- is the name of the European Union's (EU's) single currency.

FOREIGN EXCHANGE RATES

- is the price at which one currency can be exchanged for another currency

FOREIGN EXCHANGE RATES

- is the price at which one currency can be exchanged for another currency in the foreign exchange markets.

THE BRETTON WOODS AGREEMENT

- led to a situation in which some currencies (such as the U.S. dollar) became very overvalued and others (such as the German mark) became very undervalued. -

FOREIGN EXCHANGE MARKETS

- markets in which traders of foreign currencies transact most efficiently and at the lowest cost.

DOLLARIZATION

- referred The use of a foreign currency in parallel to, or instead of, the local currency -

THE SMITHSONIAN AGREEMENT II

- the exchange rate boundaries were eliminated altogether. This effectively allowed exchange rates of major currencies to float freely.

INTERBANK FOREIGN EXCHANGE MARKET

- was the only channel through which spot and forward foreign exchange transactions took place.

ONLINE TRADING PORTALS

—terminals where currency transactions are being executed—are a low-cost way of conducting spot and forward foreign exchange transactions.

TOKYO

-Third-ranked handles approximately one-sixth the volume of London.

ELECTRONIC BROKERS

-automatically provide traders with the best prices available to them.

NEW YORK

-it handles over twice the daily volume, the second-largest market.

INTEREST RATE PARITY THEOREM (IRPT)

The relationship that links spot exchange rates, interest rates, and forward exchange rates

DIRECT QUOTE

U.S. dollars received for one unit of the foreign currency exchanged (IN US$, also referred to as the direct quote) and

LONDON

continues to be the largest center for trading in foreign exchange;

European Monetary Union (EMU).

set out stages for transition to an integrated monetary union among the EC participating countries,

THE SMITHSONIAN AGREEMENT OF 1971

sought to address this situation. Under this agreement, major countries allowed the dollar to be devalued and the boundaries between which exchange rates could fluctuate were increased.