4.5 Exchange Rates

• Forex

  Short for foreign exchange, refers to the global marketplace for buying and selling currencies.
• Remittance

  Transfer of money by a foreign worker to an individual in their home country.
• Stakeholder

  Individuals or groups that have an interest in the success and outcomes of a business or organization.
• Exchange Rate

  The value of one currency expressed in terms of another currency.
• Floating Exchange Rate

  An exchange rate system where the value of a currency is determined by market forces without government intervention.
• Appreciation (Currency)

  Increase in the value of a currency in a floating exchange rate system.
• Depreciation (Currency)

  Decrease in the value of a currency in a floating exchange rate system.
• Portfolio Investment

  Investment in a collection of assets such as stocks and bonds in a foreign country.
• Revaluation (Currency)

  Increase in the value of a currency in a fixed exchange rate system.
• Devaluation (Currency)

  Decrease in the value of a currency in a fixed exchange rate system.
• Fixed Exchange Rate System

  An exchange rate system where the value of a currency is fixed against another currency or a basket of currencies.
• Currency Peg

  A country's commitment to maintain its currency's value at a fixed exchange rate.
• Outsourcing of Jobs

  Practice of hiring external parties to perform tasks that were previously done in-house.
• Managed Float Exchange Rate System

  An exchange rate system where the currency's value is allowed to fluctuate within a specific range, with occasional government intervention.
• Speculation

  Engaging in financial transactions in an attempt to profit from fluctuations in exchange rates.
• Foreign Direct Investment (FDI)

  Investment in business interests in a foreign country, typically involving a long-term relationship.
• Inward FDI

  Investment from foreign sources into the domestic market of a country.
• Outward FDI

  Investment by domestic sources into foreign markets.
• Inward Portfolio Investments

  Investments in a country made by foreign entities in the form of stocks, bonds, etc.
• Outward Portfolio Investments

  Investments made by domestic entities in foreign countries in the form of stocks, bonds, etc.
• Purchasing Power Parity (PPP)

  Theory that exchange rates between two currencies will equalize the purchasing power of a basket of goods in both countries.
• Foreign Exchange Reserves

  Foreign currencies held by a country's central bank used to back liabilities and influence monetary policy.
• Overvalued Currency

  A currency that is trading at a higher exchange rate than its true value based on economic fundamentals.
• Undervalued Currency

  A currency that is trading at a lower exchange rate than its true value based on economic fundamentals.
• Big Mac Index

  Informal way to measure purchasing power parity between two currencies based on the price of a Big Mac in each country.
• Balance of Trade

  The difference between the value of a country's exports and imports of goods.
• Current Account

  Record of a country's trade balance, net income, and direct payments.
• Living Standards

  The level of wealth, comfort, material goods, and necessities available to a certain socioeconomic class.