FIN 165 Exam 1 - Chapter 5

International Swaps and Derivatives Association (ISDA)

A New York City trade association for over the country (OTC) derivatives. The ISDA maintains the documentation used in most of the financial services trading of financial derivatives used globally.

Clearing House Interbank Payments Systems (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 Settlements (CLS)

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

Home currency

The currency of a company's incorporation; the currency for financial reporting purposes

Non deliverable Forward (NFD)

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.

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

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

Indirect Quote

The price of a unit of a home country's currency expressed in terms of a foreign country's currency

foreign exchange transaction

is an agreement between a buyer and seller that a fixed amount of one currency will be delivered for some other currency at a specified rate.

foreign exchange

means the money of foreign country; that is, foreign currency bank balances, banknotes, checks, and drafts.

pip

percentage in point, in reference to an exchange rate fluctuation

foreign exchange market

provides the physical and institutional structure through which the money of one country is exchanged for that of another currency

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 trade related currencies.

Base Currency or Unit currency

the base or unit currency is the USD in a currency quotation, such as USD1.0750 = EUR 1.00

bid-ask spread

the difference between a bid and an ask quotation

forward discount/ forward premium

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

Direct quote

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

Foreign Exchange Rate

the price of one country's currency in terms of another currency, or in terms of a commodity such as gold or silver. Also termed foreign currency exchange rate.

Bid

the price that dealer is willing to pay to purchase foreign exchange or a security. Also referred to as bid rate

Price Currency or Quote currency

the quote currency in a currency price quotation. The euro (EUR) is the price currency in a typical exchange rate quotation on the dollar-euro such as USD 1.0750 = EUR 1.00

swap or swap transaction

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

Spot transaction

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

swap rates

a forward foreign exchange quotation expressed in terms of the number of points by which the forward rate differs from the spot rate.

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 arbitrage

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

Foreign Currency

any currency other than that used officially for contracts and transactions in the domestic economy