Forex 2 Flashcards

Terms Definitions
Japanese yen-denominated deposits held in banks outside Japan. Alsoa term that refers to yen traded in the Eurocurrency market.An example of -------- would be yen deposits held in U.S. banks.
Euroyen
The internationally standardized three-letter abbreviation for a country'scurrency.For example, the ---------------- for the United States Dollarwould be USD.
ISO Currency Code
The process whereby a country's currency is recalibrated due tosignificant inflation and currency devaluation. Certain currencies havebeen ------------ a number of times over the last century forvarious reasons.For example, the Bulgarian lev was ---------
Redenomination
A geographic and economic region that consists of all the EuropeanUnion countries that have fully incorporated the euro as their nationalcurrency. Also referred to as "euroland".The -------- is one of the largest economic regions in theworld and its curre
Eurozone
An unsecured, short-term loan issued by a bank or corporation in theinternational money market, denominated in a currency that differs fromthe corporation's domestic currency.For example, if a U.S. corporation issues a shorttermbond denominated in Canadia
Eurocommercial Paper
The outsourcing of currency risk management to a specialist firm,known as the overlay manager. This is used in international investmentportfolios to separate the management of currency risk from the assetallocation and security selection decisions of the
Currency Overlay
Flip
A country's exchange rate regime where its currency is set by theforeign-exchange market through supply and demand for that particularcurrency relative to other currencies. Thus, -------------change freely and are determined by trading in the forex market. This isin contrast to a "fixed exchange rate" regime.In some instances, if a currency value moves in any one direction at arapid and sustained rate, central banks intervene by buying and sellingits own currency reserves (i.e. Federal Reserve in the U.S.) inthe foreign-exchange market in order to stabilize the localcurrency. However, central banks are reluctant to intervene, unlessabsolutely necessary, in a floating regime.
Finmins
A country's exchange rate regime under which thegovernment or central bank ties the official exchange rate to anothercountry's currency (or the price of gold). The purpose of a ------------------system is to maintain a country's currency value within avery narrow band. Also known as pegged exchange rate.------------ provide greater certainty for exporters and importers. Thisalso helps the government maintain low inflation, which in the long runshould keep interest rates down and stimulate increased trade andinvestment.
Forward Points
When dealing with foreign exchange (FX), a situation where the spotfutures exchange rate, with respect to the domestic currency, is tradingat a higher spot exchange rate then it is currently. A ----------- isfrequently measured as the difference between the current spot rateand the forward rate, but any expected future exchange rate willsuffice.It is a reasonable assumption to make that the future spot rate will beequal to the current futures rate. According to the forward expectation'stheory of exchange rates, the current spot futures rate will be the futurespot rate. This theory is routed in empirical studies and is a reasonableassumption to make in the long term.
A method of foreign currency translation that uses exchange ratesbased on the time assets and liabilities are acquired or incurred. Theexchange rate used also depends on the method of valuation that isused. Assets and liabilities valued at current costs u
Temporal Method
A method of stabilizing a country's currency by fixing its exchange rateto that of another country.Most countries peg their exchange rate to that of the United States.
Pegging
The market that includes all of the European Union member countries -many of which use the same currency, the euro. All tariffs between----------- member countries have been abolished, and import dutiesfrom all non-meber countries have been fixed for all
Euromarket
In the forex market, a particular point in time specified by a forex dealerto stand as the end of the current trading day and the beginning of anew trading day. This is done for primarily administrative and logisticalreasons, because although the forex ma
Daily Cut-Off
The intraday volatility of an exchange rate (or price of a good orservice), that changes due to imbalances in supply and demand. Pricelevels of various goods or services can change very quickly dependingon the current market condition.Low levels of ------
Dayrate Volatility
The quotation and pricing structure of the currencies traded in the forexmarket: the value of a currency is determined by its comparison toanother currency. The first currency of a ------------- is called the"base currency", and the second currency is cal
Currency Pair
Forex (FX)
An exchange-traded contract to buy or sell a specified amount of agiven currency at a predetermined price on a set date in the future. --------- are written with a specific termination date, at which pointdelivery of the currency must occur unless an offsetting trade ismade on the initial position.---------- serve two primary purposes as financial instruments.First, they can be used by companies or sole proprietors to remove theexchange-rate risk inherent in cross-border transactions. Second, theycan be used by investors to speculate and profit from currencyexchange-rate fluctuations.
In forex trading, the specific value of a trader's account below which theliquidation of the trader's positions is automatically triggered andexecuted at the best available exchange rate at the time. The---------------- is expressed as a percentage value
Liquidation Level
A slang term for the New Zealand dollar (NZD). It derives its name fromNew Zealand's national icon - a flightless bird called a ------- - which ispictured on one side of the country's $1 coin.This is a popular term in currency trading because New Zealand'
Kiwi
A nation's assets in foreign currency and/or commodities like gold andsilver, which are used to back up the national currency. ------------- also provide a cushion for executing central banking functionslike adding to the money supply and settling foreign
Monetary Reserve
Fixed-For-Floating Swap
In forex, the condition of being neither long nor short in a particularcurrency. Also referred to as 'being square'.If you had no positions in the U.S. dollar or your long and shortpositions canceled each other out, you would be ----- or have a -----book.
Fixed Exchange Rate
An arrangement between two parties (known as counterparties) inwhich both parties pay a fixed interest rate that they could nototherwise obtain outside of a swap arrangement.To understand how investors benefit from these types of arrangements,consider a situation in which each party has a comparative advantageto take out a loan at a certain rate and currency. For example, anAmerican firm can take out a loan in the United States at a 7% interestrate, but requires a loan in yen to finance an expansion project inJapan, where the interest rate is 10%. At the same time, a Japanesefirm wishes to finance an expansion project in the U.S., but the interestrate is 12%, compared to the 9% interest rate in Japan.Each party can benefit from the other's interest rate through a -----------currency swap. In this case, the U.S. firm can borrow U.S.dollars for 7%, then lend the funds to the Japanese firm at 7%. TheJapanese firm can borrow Japanese yen at 9%, and then lend thefunds to the U.S.
Foreign Currency Effects
An association of banks specializing in the foreign exchange activitiesin India. The --------------------------, whichwas created in 1958, regulates the governing rules and determinesthe commissions and charges associated with the interbank foreignexchange business.FEDIA determines many of the rules that overlook the day-to-day forextransactions in India. In addition to rule setting, FEDIA assists memberbanks by acting as an advisor and assists with the training ofpersonnel. The association is responsible for accrediting India's foreignexchange brokers and announcing the exchange rates to its memberbanks.
The smallest price change that a given exchange rate can make. Sincemost major currency pairs are priced to four decimal places, thesmallest change is that of the last decimal point - for most pairs this is the equivalent of 1/100th of one percent, or one
Pip
A form of arbitrage involving the rearrangement of a bank's cash bytaking its local currency and depositing it into eurobanks. The interestrate will be higher in the interbank market, which will enable the bank toearn more on the interest it receives for
Outward Arbitrage
The rate of a foreign-exchange contract for immediate delivery. Alsoknown as "benchmark rates", "straightforward rates" or "outright rates",spot rates represent the price that a buyer expects to pay for a foreigncurrency in another currency.Though the ---
Spot Exchange Rate
A method used by monetary authorities to equalize the effects offoreign exchange transactions on the domestic monetary base byoffsetting the purchase or sale of domestic assets within thedomestic markets. The process limits the amount of domesticcurrency
Sterilized Intervention
In the currency market, this is the abbreviation for the New Zealanddollar.
NZD
A system of floating exchange rates in which the government or thecountry's central bank occasionally intervenes to change the directionof the value of the country's currency. In most instances, theintervention aspect of a dirty float system is meant to a
Dirty Float
A 1979 arrangement between several European countries to link theircurrencies in an attempt to stabilize the exchange rate. This systemwas succeeded by the European Monetary Union (EMU), an institutionof the European Union (EU), which established a common
European Monetary System (EMS)
A fixed deposit with variable terms for the currency of payment.Deposits are made in one currency, but withdrawals at maturity occureither in the currency of the initial deposit or in another agreed uponcurrency.This is a deposit that creates a foreign ex
Dual Currency Deposit
A note that grants the holder the right to convert a specific amount ofone currency to another at a given exchange rate until it expires. A------------- is a bearer certificate in that there is no registeredowner. -------------- are a useful tool for hedg
Currency Certificate
An indirect quotation in the foreign exchange markets whereby thevalue of a foreign currency is stated as a per-unit measure of the U.S.dollar. This type of quotation shows how much foreign currency it takesto purchase one U.S. dollar.For example, a -----
European Currency Quotation
Floating Exchange Rate
The gain or loss on foreign investments due to changes in the relativevalue of assets denominated in a currency other than the principalcurrency with which a company normally conducts business. A risingdomestic currency means foreign investments will result in lowerreturns when converted back to the domestic currency. The opposite istrue for a declining domestic currency.Foreign investments are complicated by currency fluctuation andconversion between countries. A high quality investment in anothercountry may prove worthless because of a weak currency. Foreigndenominateddebt used to purchase domestic assets has led tobankruptcy in several cases due to a fast decline in a domesticcurrency or a rapid rise in the currency of the foreigndenominateddebt.
The alteration of normal payment or receipts in a foreign exchangetransaction because of an expected change in exchange rates. Anexpected increase in exchange rates is likely to speed up payments,while an expected decrease in exchange rates will probably
Leads And Lags
A currency trading term that describes when the banks' buying price inthe forward market is lower than the selling price in the spot market. Atrader is ------------- when he or she buys at one price now andthen agrees to sell for less in the future. This
Losing The Points
The risk that a foreign central bank will alter its foreign-exchangeregulations thereby significantly reducing or completely nulling thevalue of foreign-exchange contracts.This is one of the many risks that an investor faces when holding forexcontracts. A
Sovereign Risk
In currency transactions, the purchase and sale of a currency made toavoid taking actual delivery of the currency. The current position isclosed out at the daily close rate and re-entered at the new openingrate the next trading day. Also referred to as "-
Tomorrow Next (Tom Next)
A slang term for the Swiss franc. The Swiss franc, or --------, has oftenbeen considered a safe-haven currency during times of geopoliticalunrest. This is mainly due to the country's neutral stance in globalconflicts.For example, one may hear in a news re
Swissie
A strategy in which an investor sells a certain currency with arelatively low interest rate and uses the funds to purchase adifferent currency yielding a higher interest rate. A trader using thisstrategy attempts to capture the difference between the rate
Currency Carry Trade
A form of risk that arises from the change in price of one currencyagainst another. Whenever investors or companies have assets orbusiness operations across national borders, they face --------------- iftheir positions are not hedged.For example if you ar
Currency Risk
A system of managing a nation's currency and exchange rate by linkingthe national currency to another base currency that is held at a fixedratio in deposit at domestic banks.Once the exchange rate is set, there is typically no interference fromthe governm
Linked Exchange Rate System
Terms used by floor traders to signify buying and selling. Mainlyused in forex transactions.If a trader wanted to buy something, he/she would type or say "----,"as in "It's mine." If the trader wanted to sell, he/she would type or say"------," as in "It's
Mine and Yours
A market with a low number of buyers and sellers. Since fewtransactions take place in a ---------, prices are often more volatileand assets are less liquid. The low number of bids and asks will alsotypically result in a larger spread between the two quote
Thin Market
An attempt by a country's monetary authorities to influence exchangerates and its money supply by not buying or selling domestic or foreigncurrencies or assets. This is a passive approach to exchange ratefluctuations, and allows for fluctuations in the mo
Unsterilized Foreign Exchange Intervention
A type of quote that gives both the bid and the ask price of a security,informing would-be traders of the current price at which they could buyor sell the security. ----------- also shows the spread betweenthe bid and the ask, giving traders an idea of th
Two-Way Quote
Forward Rate Agreement (FRA)
In the currency market, this is the abbreviation for the British pound.
An economic theory that states that an expected change in the currentexchange rate between any two currencies is approximately equivalentto the difference between the two countries' nominal interest rates forthat time.Calculated as:Where:"E" represents th
International Fisher Effect (IFE)
A parity condition stating that the difference in interest rates betweentwo countries is equal to the expected change in exchange ratesbetween the countries’ currencies. If this parity does not exist, there isan opportunity to make a profit."i1" repr
Uncovered Interest Rate Parity (UIP)
Foreign Official Dollar Reserves (FRODOR)
1. The risk of an investment's value changing due to changes incurrency exchange rates.2. The risk that an investor will have to close out a long or shortposition in a foreign currency at a loss due to an adverse movement inexchange rates. Also known as "currency risk" or "exchange-rate risk".This risk usually affects businesses that export and/or import, but it canalso affect investors making international investments. For example, ifmoney must be converted to another currency to make a certaininvestment, then any changes in the currency exchange rate will causethat investment's value to either decrease or increase when theinvestment is sold and converted back into the original currency.
A measure of the value of the U.S. dollar relative to majority of its mostsignificant trading partners. This index is similar to other trade-weightedindexes, which also use the exchange rates from the same majorcurrencies.Currently, this index is calculat
U.S. Dollar Index (USDX)
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