Ch 7 - Dealing with Foreign Exchange Flashcards
(25 cards)
foreign exchange rate
The price of one currency in terms of another.
appreciation
An increase in the value of the currency.
depreciation
A loss in the value of the currency.
balance of payments (BoP)
A country’s international transaction statement, which includes merchandise trade, service trade, and capital movement.
floating (or flexible) exchange rate policy
A government policy to let supply-and-demand conditions determine exchange rates.
clean (or free) float
A pure market solution to determine exchange rates.
dirty (or managed) flout
Using selective government intervention to determine exchange rates.
fixed exchange rate policy
A government policy to set the exchange rate of a currency relative to other currencies.
target exchange rates
Specified upper or lower bounds within which an exchange rate is allowed to fluctuate. AKA, crawling bands or “snake in a tube”
peg
A stabilizing policy of linking a developing country’s currency to a key currency.
bandwagon effect
The effect of investors moving in the same direction at the same time, like a herd.
capital flight
A phenomenon in which a large number of’ individuals and companies exchange domestic currency for a foreign currency.
gold standard
A system in which the value of most major currencies was maintained by fixing their prices in terms of gold.
common denominator
A currency or commodity to which the value of all currencies are pegged.
Bretton Woods system
A system in which all currencies were pegged at a fixed rate to the US dollar.
post-Bretton Woods system
A system of flexible exchange rate regimes with no official common denominator.
International Monetary Fund (IMF)
An international organization that was established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements.
quota
The weight a member country carries within the IMF, which determines the amount of its financial contribution (technically known as its “subscription”), its capacity to borrow from the IMF, and its voting power.
foreign exchange market
The market where individuals, firms, governments, and banks buy and sell foreign currencies.
spot transactions
The classic single-shot exchange of one currency for another.
forward transactions
Foreign exchange transaction in which participants buy and sell currencies now for future delivery.
currency hedging
A transaction that protects traders and investors from exposure to the fluctuations of the spot rate.
forward discount
A condition under which the forward rate of one currency relative to another currency is higher than the spot rate.
forward premium
A condition under which the forward rate of one currency relative to another currency is lower than the spot rate.
