Multinational financial management chapter 2

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Freely floating exchange rate
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How an exchange rate is and how it is determined in the absence of government intervention
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Devaluation
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Refers to a decrease in the stated par value of a pegged currency
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Pegged currency
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One whose value is set by the government
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Revaluation
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An increase in par value
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Floating currency
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One who’s baliw is that primarily by market forces
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Exchange rate
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The price of one nation’s currency in terms of another currency
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Spot rate
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The price at which currencies are traded for immediate delivery actual delivery takes place two days later
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Forward rate
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The price at which foreign exchange is quoted for delivery at a specified future date
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Equilibrium exchange rate
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The price at which both the supply and demand for one currency in terms of another are just equal
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Real interest rate
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Equals the nominal or actual interest rate minus the rate of inflation
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Central bank
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The Nations official monetary authority job is to use the instruments of monetary policy including the sole power to create money achieved one or more of the following objective price stability low interest rates or a target currency value
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Fiat money
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Non convertible paper money
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Monetize the deficit
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Financing the public sector deficit by buying government debt with newly created money
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Dollar ization
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The complete replacement of the local currency with the US dollar
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Seignorage
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The central bank’s profit on the currency it prints
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Real exchange rate
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Measured as the nominal or actual exchange rate adjusted for changes in relative price levels
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Foreign exchange market intervention
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Refers to official purchases and sales of foreign exchange that nations undertake through their central banks to influence their currencies
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Unsterilized intervention
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The monetary authorities have not insulated their domestic money supplies from the foreign exchange transaction
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Open market operation
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Just the sale or purchase of Treasury securities
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Monetary base
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Currency in circulation plus bank reserves

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