07 - Foreign Exchange
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Bank for International Settlements (BIS)
Central bank of central banks.
Conducts market research and makes recommendations relating to the supervision and stability of the international financial system.
Electronic system operated by global financial institutions that facilitates international financial transactions.
Financial centre within London
Value of one currency relative to another currency.
Floating Exchange Rate
Exchange rate is determined by supply and demand factors in the FX markets.
Exchange rate is held within a defined band relative to another currency.
Limited fluctuations allowed.
Managed float where an exchange rate is allowed to appreciate in controlled steps over time.
Linked Exchange Rate Regime
Value of the pegged currency is tied into the value of another currency or basket of currencies.
Facilitate the buying and selling of foreign currencies.
Institutions that quote buy and sell prices and acts as principals in the FX markets.
Obtain the best prices n the global FX markets and match FX dealer's buy and sell orders for a fee.
Official Reserve Assets
Central bank holdings of foreign currencies, gold and international drawing rights.
Exchange rate is determined by market forces without central bank intervention.
Central bank regularly intervenes in the FX market to influence a floating exchange rate.
The underlying asset has been bought forward.
Entering into a forward contract to sell an asset that is not held at that time.
FX Dealing Room
Physical location of FX dealers (usually within institution's treasury operation).
Locks in an exchange rate today for settlement and delivery in two business days.
Locks exchange rate today for settlement and delivery at a specified date beyond the spot date.
Tod (Today) Values (Tom (Tomorrow))
FX contract with settlement and delivery today.
First-named currency in an FX quote.
One unit expressed in terms of another currency.
Second-named currency in an FX quote.
Used to express the value of the base currency.
Direct - USD is the base currency.
Indirect - Currency other than USD is the base currency.
Exchange rate of two currencies, neither being the USD.
Interest Rate Parity
Principle that exchange rates will adjust to reflect interest rate differentials between countries.
Forward exchange rate variation to a spot based on interest rate differentials.
Forward Discount (Premium)
Forward exchange rate is less (higher) than the spot rate.
Interest rates in the base-currency country are higher (lower) than the terms-currency country.
Currencies are generally accepted in international trade and financial transactions.
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