Econ310_Notes20101104

Econ310_Notes20101104 - ForeignExchange 004 Definitions o...

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Foreign Exchange (11/4/2010) Econ 310- 004 Definitions exchange rate  – price of one currency in terms of another o e.g., dollars/euro ($/€) or euros/dollar €/$) spot transaction  – immediate (2 day) exchange of bank deposits spot exchange rate  – exchange rate for spot transactions forward transaction  – exchange of bank deposits at some future date forward exchange rate  – exchange rate for forward transactions foreign exchange market  – the financial market where exchange rates are determined appreciation  – when a currency increases in value relative to another currency depreciation  – when a currency decreases in value relative to another currency law of one price (LOOP)  – the price of a good should be the same throughout the world  (assuming transportation costs and trade barriers are low) arbitrage  – taking advantage of a price difference between two markets theory of purchasing power parity (PPP)
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Econ310_Notes20101104 - ForeignExchange 004 Definitions o...

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