Prelim Flashcards
A swap designed to allow a floating rate borrower with a pre-set amortization
schedule to swap against fixed rate interest.
Amortizing Swap
An increase in the market value of a currency with respect to a second currency
or a real asset. The term is used in reference to a market price as opposed to an official price or
par value.
Appreciation
The simultaneous purchase and sale or lending and borrowing of two assets in order
to profit from a price disparity.
Arbitrage
A theory of asset pricing in which relative pricing on a set of
assets adheres to a specific return-generating process.
Arbitrage Pricing Theory (APT)
The price that would prevail between unrelated parties.
Arm’s Length Price
Specify the powers and responsibilities vested in the International
Monetary Fund by members of that international organization.
Articles of Agreement
A trading department of a bank in Singapore that has received a license
from the monetary authorities in Singapore to deal in external currency deposits.
Asian Currency Unit
Determination of the optimal combination of stocks and bonds, domestic and
international, in which to invest.
Asset Allocation
The price at which a market maker in an asset will sell the asset; the price sought
by any prospective seller.
Asked Price
The transfer from one bank to another of the right to receive loan principal and
interest from a borrower.
Assignment
An option with a strike price equal to the current market price of the
underlying asset.
At-the-money option
Option on foreign exchange or commodity prices that pays off the
difference between the option strike price and the average price of the underlying asset, this average calculated over the life of the option. Also called Asian Option.
Average-Rate Option
A financial statement prepared for a given country summarizing the flows
of goods, services, and funds between the residents of that country and the residents of the rest of the world during a certain period of time. The balance of payments is prepared using the concept of double-entry bookkeeping, where the total of debits equals the total of credits.
Balance of Payments
Policy proposed to reduce the exposure of commercial banks to the debt of less
developed countries.
Baker Plan
A market in which prices are declining.
Bear Market
A relationship in which spot or cash prices are higher than futures (or forward)
prices.
Backwardation
A negotiable instrument payable on demand to the individual who holds the
instrument. Title passes by delivery without endorsement.
Bearer Instrument
The net of imports and exports of goods and services reported in the balance
of payments.
Balance of Trade
The difference between cash and futures prices for the same commodity. Specifically, the cash price minus the futures price of a specific futures contract.
Basis
The price at which a market-maker in an asset will buy the asset; the price sought by
any prospective buyer.
Bid Price
Any private market that operates in contravention of government restrictions. For
example, such a market may involve the exchange of currencies or goods at prices that are
outside government-mandated levels, the trading of prohibited goods, or trading between
individuals and/or institutions that are not approved by the government.
Black Market
The net of the following accounts in the balance of payments: exports and
imports of goods and services, unilateral transfers, and long-term capital flows.
Basic Balance
One-hundredth of one percent, or 0.0001.
Basis Point
A category in the balance of payments of a country that measures the flows of
financial and real investments across countries’ borders.
Capital Account
Governmental restrictions (such as prohibitions, taxes, quotas) on the
acquisition of foreign assets or foreign liabilities by domestic citizens, or the acquisition ofdomestic assets or domestic liabilities by foreigners.
Capital Controls
A theoretical model that relates the return on an asset to its risk.
The risk is defined as the contribution of the asset to the volatility of the portfolio.
Capital Asset Pricing Model
Interpreting foreign exchange market activity and predicting future movements, usually
over a short period, from graphic depictions of prices and volumes. It is a primary tool of
technical analysis.
Charting
Negotiable instruments issued by a bank and payable to the
bearer. CDs pay a stated amount of interest and mature on a stated date, but may be bought
and sold daily in a secondary market.
Certificates of Deposit (CDs)
The combination of debt (of various kinds) and equity (of various kinds) in a
firm’s financing.
Capital Structure
An institutional arrangement for transferring securities and payment between
sellers and buyers subsequent to the establishment of a trading price.
Clearing System
The institution with the primary responsibility to control the growth of its country’s
money stock. It might also have regulatory powers over commercial banks and sometimes over other financial institutions, and it usually serves as the fiscal agent for the government.
Central Bank
A swap of fixed rate dollars against floating rate dollars with the latter having a
maximum and minimum return.
Collar Swap
A short-term unsecured debt instrument issued by a corporation and sold at
a discount from its maturity value.
Commercial Paper
A fee paid on the unused portion of a credit line.
Commitment Fee
The relative advantage of a country in producing goods and services.
Comparative Advantage
The expected value of a variable, conditional on certain information
being known.
Conditional Expectation
An entity in which funds contributed by a number of people are pooled
together to trade futures and option contracts under professional management.
Commodity Fund
A trading strategy that locks in an arbitrage profit by combining a long put and a
short call with the same strike price and expiration date with a long position in the underlying
asset.
Conversion
The calculation of variance for an economic variable that is conditioned
upon a given information set.
Conditional Variance
Freedom to exchange a currency without government restrictions or controls.
Convertibility
The International Monetary Fund’s practice of requiring members to adopt
changes in their domestic economic policies as a condition for receiving balance of payments
loans from the fund.
Conditionality
Arbitrage Borrowing one currency, converting the proceeds into another
currency, where it is invested, and simultaneously selling this other currency forward against the initial currency. Covered interest arbitrage takes advantage of and in practice quickly eliminates
- any temporary discrepancies between the forward rate and the interest rate differential of two
currencies.
Covered Interest
Hedging a commodity by using a futures contract on a different but related
commodity. A cross hedge is based on the premise that the price movements of the two commodities are related.
Cross Hedging
Agreement in a syndicated loan or bond contract concerning the borrower’s future
conduct. Such a covenant may involve, for example, the agreement to maintain a given balance
sheet ratio in the future, or the agreement to adhere to an IMF program.
Covenant
Protecting the value of the future proceeds of an international transaction usually by
buying or selling the proceeds in the forward market.
Covering
Bonds denominated in a portfolio of currencies.
Currency Cocktail Bonds
An exchange rate system in which the exchange rate is adjusted
frequently and deliberately, perhaps every few weeks, usually to reflect prevailing rates of
inflation.
Crawling Peg System
Warrants Bonds with warrants exercisable into bonds denominated in a
currency other than that of the host bond.
Cross-currency
An exchange rate between two currencies neither of which is the U.S. dollar. A
cross rate is usually constructed from the individual exchange rates of the two currencies with
respect to the U.S. dollar.
Cross Rate
A provision in a loan agreement that allows the lender to declare the
loan immediately payable and to terminate any further extension of credit if the borrower
defaults on any other debt.
Cross-default Provision
Funds in a current account (a checking account) that can be withdrawn at any
time without notice, depending on local regulations. Demand deposits might or might not be
interest-bearing deposits.
Demand Deposit
A contractual obligation entered into by two parties to deliver a sum of money
in one currency against a sum of money in another currency at stated intervals.
Currency Swap
A rate measuring the overall nominal value of a currency in the
foreign exchange market. It is calculated by forming a weighted average of bilateral exchange
rates, using a weighting scheme that reflects the importance of each country’s trade with the
home country.
Effective Exchange Rate
Cross-border equity investment with control, through the purchase of stock,
the acquisition of a foreign firm, or the establishment of a new subsidiary.
Direct Investment
A gradual decrease in the market value of a currency with respect to a second
currency or a real asset. The term is used in reference to a market price as opposed to an
official price or par value.
Depreciation
An issue denominated in one currency with a coupon and/or repayment
of principal at a fixed rate in another currency, eg., yen denominated and serviced but redeemed
in dollars.
Dual-Currency Issue
One of a set of portfolios that provides the highest level of return for a given
level of risk.
Efficient Portfolio
The degree of responsiveness of one variable to changes in another.
Elasticity
World financial centers that play the role of bringing foreign
lenders and foreign borrowers together. The countries in which these centers are located might
or might not be capital exporters or importers, but they are channels through which international
funds pass.
Entrepot Financial Centers
Governmental restrictions (such as prohibitions, taxes, quotas, or
government-set prices) on the purchase of foreign currencies by domestic citizens or on the
purchase of the local domestic currency by foreigners.
Exchange Controls
The excess return, over the risk free rate, for holding equity.
Equity Risk Premium
Financial intermediaries that simultaneously bid for time deposits and make loans in
a currency or currencies other than that of the country in which they are located.
Eurobanks
The money market for borrowing and lending currencies that are held in
the form of deposits in banks located outside the countries in which those currencies are issued
as legal tender.
Eurocurrency Market
Intermediate-term loans of Eurocurrencies made by banking syndicates to
corporate and government borrowers.
Eurocredits
European Free Trade Association (EFTA) Common regulations for tariffs and trade
established in 1959 by Austria, Denmark, Norway, Portugal, Sweden, Switzerland, and the United Kingdom.
European Free Trade Association (EFTA)
A dollar-denominated deposit in a bank outside the United States or at International
Banking Facilities (IBFs) in the United States.
Eurodollar
European Option An option that can be exercised only on the option’s expiration date.
European Option
The risk assumed by a party to an international transaction in which the party
could incur an exchange loss as a result of currency movements.
Exchange Risk
Occurs when exchange rate changes are in excess of some given standard of volatility.
Exchange Rate Overshooting
The particular system by which the central banks agree to
intervention levels, or upper and lower rates for each currency relative to one another (ERM”floors” or “ceilings”), at which the central banks will conduct market transactions to keep currencies within the limits.
Exchange Rate Mechanism (ERM)
Public debt owed to nonresidents.
External Debt
The monetary amount paid on a bond at redemption (excluding any terminal
coupon payment). The face value is printed on the bond certificate.
Face Value
A pricing model in which expectations are formed such that a change in the current spot price will lead to a further change in the same direction.
Extrapolative Expectations
The theoretical value of an option or futures contract derived from a mathematical
valuation model. It is also referred to as the no-arbitrage value.
Fair Value
Market Federal funds are deposits held by commercial banks at the Federal
Reserve System. The federal funds market is the interbank market for borrowing and lending
these deposits. Since reserve requirements of commercial banks are satisfied by federal funds,
banks with deposits in excess of required reserves will lend the excess deposits to banks with a
reserve shortage at a market-determined interest rate, the federal funds rate.
Federal Funds
The theory that interest rates in any country rise by an amount approximately
equal to the anticipated rate of inflation. If the basic rate of interest is 3% a year when there is
no inflation, and if inflation is then anticipated to equal 5% a year, the rate of interest will rise to
approximately 8% a year.
Fisher Effect
Exchange between two counter-parties of fixed rate interest in one
currency for fixed rate interest in the other. This swap requires: an optional exchange ofprincipal; the ongoing exchange of interest; and the re-exchange of principal amounts at maturity.
Fixed Rate Currency Swap
A system in which the values of various countries’ currencies
are tied to one major currency (such as the U.S. dollar), gold, or special drawing rights. The
term should not be taken literally because fluctuations within a range of 1% or 2% on either side
of the fixed rate are usually permitted in such a system.
Fixed Exchange Rate System
Certificate of deposit issued by a commercial bank, typically in the
Eurocurrency market, paying a floating interest rate like a floating rate note.
Floating Rate CD
A medium-to long-term security with the quarterly or semi-annual interest rate linked to the three or six month London inter-bank rate; the rate is re-fixed every
three or six months at a stated margin above or below the inter-bank rate.
Floating Rate Notes (FRN)
Bonds issued by nonresidents in a country’s domestic capital market. Such bonds are subject to domestic regulations and are underwritten primarily by banks registered in
the country where the issue is made.
Foreign Bonds
A system in which the values of various currencies relative to
each other are established by the forces of supply and demand in the market without
intervention by the governments involved. In practice most floating rates are really “managed floating” with periodic ad hoc intervention by central banks.
Floating Exchange Rate System
An individual who introduces the two parties in a currency or deposit
transaction to each other. The parties could be a buyer and a seller of foreign currencies or a
borrower and a lender of a given currency. The broker charges a fee for this service. Brokers
seldom take a position for themselves; they only arrange for transactions among other parties.
Foreign Exchange Broker
The risk that a firm will gain or lose as a result of changes in
exchange rates.
Foreign Exchange Exposure
Phrase used to describe a currency whose forward price is cheaper than its
spot price.
Forward Discount
An agreement to exchange at a specified future date currencies of different
countries at a specified contractual rate (the forward Date). Foreign currency traded for
settlement beyond two working or business days from today.
Forward Contract
Price for a currency to be delivered at a certain date in the futures.
Forward Exchange Rate
A forward exchange contract (as opposed to an option contract) that differs
from an ordinary forward contract only in that it has a variable, instead of a fixed, maturity date.
The buyer of a forward option may, for example, be entitled to take delivery of a currency at any
time during a given month as opposed to a specific day.
Forward Option
) A cash-settled interbank forward contract on interest rates.
The seller pays the buyer the difference if the interest rate has risen above the agreed rate. In
the reverse case, the buyer pays the seller.
Forward Rate Agreement (FRA
(or Forward Swap) A pair of forward exchange deals involving a
forward purchase and a forward sale of a currency, simultaneously entered into, but of different
maturities.
Forward Forward Swap
