FIN 1 CHAPTER 9

• Foreign exchange markets


  Markets in which cash flows from the sale of products or assets denominated in a foreign currency are transacted
• Foreign exchange rate


  The price at which one currency can be exchanged for another currency
• Foreign exchange risk


  Risk that cash flows will vary as the actual amount of U.S Dollars received on a foreign investment changes due to a change in forex rates
• Currency depreciation


  When a country's currency faults in value relative to other currencies meaning the country's goofs became cheaper for foreign buyers and foreign goods became more expensive for foreign sellers
• Currency appreciation


  When a country's currency rises in value relative to other currencies, meaning that the country's goods are more expensive for foreign buyers and foreign goods are cheaper for foreign sellers
• Dollarization


  The use of a foreign currency in parallel to instead of, the local currency
• Spot foreign exchange transactions


  Foreign exchange transactions involving the immediate exchange of currencies at the current (or spot) exchange rate
• Forward foreign exchange transaction


  The exchange of currencies at a specified exchange rate (or forward exchange rate) at some specified date in the future
• Net exposure


  A financial institution's overall foreign exchange exposure in any given currency
• Net long (short) in a currency


  A position of holding more (fewer) assets than liabilities in a given currency
• Purchasing power parity (PPP)


  The theory explaining the change in foreign currency exchange rates as inflation rates in the countries change
• Law of one price


  An economic rule which states that, in an efficient market, identical goods and services produced in difference countries should have a single price
• Interest rate parity theorem (IRPT)


  The theory that the domestic interest rate should equal the foreign interest rate minus the expected appreciation of the domestic currency
• Marketable securities are short-term investments that can be easily converted into cash within one year or less, such as U.S. Treasury bills, commercial paper, certificates of deposit (CDs), money market mutual funds, and corporate bonds with maturities of three years or less.
• Cash equivalents include items like bankers' acceptances, time drafts, and repurchase agreements.
• Cash is defined as physical currency and coins held by individuals and businesses, including bank deposits, checking accounts, savings accounts, and money market accounts.