Forex Trading

Forex Trading Term	Explanation

adjustable pegged exchange rates	a system of semifixed exchange rates where it is understood that the par value of the currency will be changed occasionally in response to changing economic conditions
appreciation	(as applied to currency markets) when, over time, it takes fewer units of a nation’s currency to purchase a unit of some foreign currency
call option	gives the holder the right to buy foreign currency at a specified price
cross exchange rate	the resulting rate derived when the exchange rate between any two currencies can be derived from the rates of these two currencies in terms of a third currency
currency board	a monetary authority that issues notes and coins convertible into a foreign anchor currency at a fixed exchange rate
currency crashes	financial crises that often end in currency devaluations or accelerated depreciations
currency risk	investment risk associated with currency depreciations and appreciations as well as exchange controls
currency swap	the conversion of one currency to another currency at one point in time, with an agreement to reconvert it to the original currency at a specified time in the future
depreciation	(as applies to currency markets) when, over time, it takes more units of a nation’s currency to purchase a unit of some foreign currency
devaluation	an official change in a currency’s par value, which causes the currency’s exchange value to depreciate
effective exchange rate	a weighted average of the exchange rates between a domestic currency and that nation’s most important trading partners, with weights given by relative importance of the nation’s trade with each trade partner
exchange arbitrage	the simultaneous purchase and sale of a currency in different foreign-exchange markets in order to profit from exchange-rate differentials in the two locations
exchange rate	the price of one currency in terms of another
exchange-rate index	a weighted average of the exchange rates between a domestic currency and that nation’s most important trading partners, with weights given by relative importance of the nation’s trade with each trade partner
exchange-stabilization fund	a government entity that attempts to ensure that the market exchange rate does not move above or below the official exchange rate through purchases and sales of foreign currencies
exit barriers	cost conditions that make lengthy industry exit a rational response by companies
external balance	when a nation realizes neither BOP deficits nor BOP surpluses
fixed exchange rates	a system used primarily by small developing nations whose currencies are anchored to a key currency, such as the U.S. dollar
floating exchange rates	when a nation allows its currency to fluctuate according to the free-market forces of supply and demand
foreign-currency options	provide an options holder the right to buy or sell a fixed amount of foreign currency at a prearranged price, within a few days or several years
foreign-exchange market	the organizational setting within which individuals, businesses, governments, and banks buy and sell foreign currencies and other debt instruments
foreign-trade multiplier	when an increase in exports sets off a chain reaction that results in greater levels of spending so that domestic income increases by some multiple of the export increase
forward market	where foreign exchange can be traded for future delivery
forward rate	the rate of exchange used in the settlement of forward transactions
forward transaction	an outright purchase and sale of foreign currency at a fixed exchange rate but with payment or delivery of the foreign currency at a future date
fundamental analysis	the opposite of technical analysis; involves consideration of economic variables that are likely to affect a currency’s value
gold exchange standard	a system of fixed exchange rates, with gold serving as the primary reserve asset; member nations officially agreed to state the par values of their currencies in terms of gold or, alternatively, the gold content of the U.S. dollar
hedging	the process of avoiding or covering a foreign-exchange risk
key currency	a currency that is widely traded on world money markets, has demonstrated relatively stable values over time, and has been widely accepted as a means of international settlement
liquidity problem	when a government or central bank runs short of needed international reserves
long position	the position speculators take when they purchase foreign currency on the spot or forward market with the anticipation of selling it at a higher future spot price
net foreign investment	in national income accounting, is synonymous with the current account balance
nominal exchange rate	exchange-rate quotes published in newspapers that are not adjusted inflation rates in trading partners
nominal exchange-rate index	the average value of a currency, not adjusted for changes in price levels of that country and its trading partners
offer rate	the price at which the bank is willing to sell a unit of foreign currency
official exchange rate	the exchange rate determined by comparing the par values of two currencies
option	an agreement between a holder (buyer) and a writer (seller) that gives the holder the right, but not the obligation, to buy or sell financial instruments at any time through a specified date
put option	gives the holder the right to sell foreign currency at a specified price
real exchange rate	the nominal exchange rate adjusted for changes in relative price levels
real exchange-rate index	the average value of a currency based on real exchange rates
revaluation	an official change in a currency’s par value, which causes the currency’s exchange value to appreciate
short position	the position speculators take when they borrow or sell forward a foreign currency with the anticipation of purchasing it at a future lower price to repay the foreign-exchange loan or fulfill the forward sale contract
special drawing right (SDR)	an artificial currency unit based on a basket of four currencies established by the IMF
speculation	the attempt to profit by trading on expectations about prices in the future
spot market	where foreign exchange can be traded for immediate delivery
spot transaction	an outright purchase and sale of foreign currency for cash settlement not more than two business days after the date the transaction
spread	the difference between the bid rate and the offer rate
strike price	the price at which an option can be exercised
target exchange rates	desired exchange rates for a currency set by the host country and supported by intervention
technical analysis	a method of exchange-rate forecasting that involves the use of historical exchange-rate data to estimate future values
three-point arbitrage	a more intricate form of arbitrage, involving three currencies and three financial centers; also called triangular arbitrage
two-point arbitrage	the simultaneous purchase and sale of a currency in two foreign-exchange markets in order to profit from exchange-rate differentials in different locations

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