International Business – The Foreign Exchange Market Chapter 9 notes – Flashcards
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Foreign Exchange Market
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is a market for converting the currency of one country into that of another country.
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Exchange Rate
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is the rate at which one currency is converted into another
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Foreign exchange Market serves two main functions:
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1. To convert the currency of one country into the currency of another. 2. Provide some insurance against foreign exchange risk
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International Business have four main uses of foreign exchanges
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1. The payments a company receives for its exports. 2. Must pay a foreign company for its products or services in its country's currency. 3. Use foreign exchange markets when they have spare case that they wish to invest for short terms in money markets
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Currency Speculation
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Involves the short-term movement of funds from another currency to another in hopes of profiting from shifts in exchange rates.
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Carry trade
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involves borrowing in one currency where interest rates are low, and then using the proceeds to invest in another currency where interests are high.
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Hedging
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The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps.
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Spot exchange rate
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rate at which a foreign exchange dealer converts one currency into another currency on a particular day
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Forward exchange
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occurs when two parties agree to exchange currencies and execute the deal at some specific date in the future.
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Forward Exchange Rates
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Are quoted for 30 days, 90 days etc
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The Law of one price
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In a competitive market, free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same wprice when their price is expressed in terms of the same currency
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Efficient Market
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A market which as no impediments of` the free flow of goods and services, such as trade barriers and prices reflect all available public information
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The Fisher effect
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states that a country's nominal interest rate is the sum of the required "real" rate of interest
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Foreign Exchange risk
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The risk that changes in exchange rates that will hurt the profitability of a business deal
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Currency Speculation
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The short term movement from one currency to another in order to profit from the shift in exchange rates
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Carry Trade
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Involves borrowing in one currency where interest rates are low and then using the proceeds to invest in another currency where interest rates are high
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Spot exchange rates
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The exchange rate at which a foreign exchange dealer converts it into another country. what the exchange rate is today,
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Forward Exchange
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When two parties agree to exchange currency and execute the deal at some specific date in the future. 30, 90, 120 days
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Currency Swap
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Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
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Arbitrage
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The purchase of securities in one market for immediate resale in another to profit from a price discrepancy.
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The law of one price
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In competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in the same currency.
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Efficient Market
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Has few impediments to international trade and investment exist
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Inefficient Market
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one in which prices do not reflect all available information
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Fisher effect
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An economic theory proposed by economist Irving Fisher that describes the relationship between inflation and both real and nominal interest rates. The Fisher effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate. Therefore, real interest rates fall as inflation increases, unless nominal rates increase at the same rate as inflation. nominal interest rates in each country equal the required real rate of interest and the expected rate of inflation over the period of time for which the funds are to be lent
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international fisher effect
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An economic theory proposed by economist Irving Fisher that describes the relationship between inflation and both real and nominal interest rates. The Fisher effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate. Therefore, real interest rates fall as inflation increases, unless nominal rates increase at the same rate as inflation. on an international level.
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Bandwagon Effect
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when traders move like a herd, all in the same direction and at the same time, in response to each others' perceived actions
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Freely convertible currency
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When government allows residents and nonresidents to purchase freely of foreign currencies with the domestic currency
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Non convertible Currency
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where non residents and residents are prohibited from converting their holding of that currency into another currency
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Capital flight
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when residents of a country convert domestic currency into a foreign currency when things are not going well with the domestic country.
