Multinational financial management chapter 2
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How an exchange rate is and how it is determined in the absence of government intervention
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Freely floating exchange rate
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Refers to a decrease in the stated par value of a pegged currency
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Devaluation
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One whose value is set by the government
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Pegged currency
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An increase in par value
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Revaluation
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One who's baliw is that primarily by market forces
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Floating currency
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The price of one nation's currency in terms of another currency
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Exchange 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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Spot rate
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The price at which foreign exchange is quoted for delivery at a specified future date
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Forward 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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Equilibrium exchange rate
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Equals the nominal or actual interest rate minus the rate of inflation
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Real interest rate
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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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Central bank
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Non convertible paper money
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Fiat money
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Financing the public sector deficit by buying government debt with newly created money
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Monetize the deficit
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The complete replacement of the local currency with the US dollar
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Dollar ization
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The central bank's profit on the currency it prints
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Seignorage
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Measured as the nominal or actual exchange rate adjusted for changes in relative price levels
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Real exchange rate
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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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Foreign exchange market intervention
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The monetary authorities have not insulated their domestic money supplies from the foreign exchange transaction
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Unsterilized intervention
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Just the sale or purchase of Treasury securities
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Open market operation
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Currency in circulation plus bank reserves
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Monetary base
