Please enable JavaScript.
Coggle requires JavaScript to display documents.
Chapter 2 (Derivatives: an arrangement or instrument whose value derives…
Chapter 2
Derivatives: an arrangement or instrument whose value derives from and is dependent on the value of an underlying asset.
Spot Contract: The buying or selling a commodity, security or currency for immediate settlement
-
Forward: An informal agreement traded through a broker-dealer network to buy and sell specified assets, typically currency, at a specified price at a certain future date
Forward Premium: A currency trades at a forward premium when its forward price is higher than its spot price.
Forward Exchange Rate: The exchange rate at which a bank agrees to exchange one currency for another at a future date when it enters into a forward contract with an investor.
Swap: A derivative contract through which two parties exchange financial instruments. These instruments can be almost anything, but most swaps involve cash flows based on a notional principal amount that both parties agree to.
Futures: An agreement traded on an organized exchange to buy or sell assets, especially commodities or shares, at a fixed price but to be delivered and paid for later.
Option: An options contract is an agreement between two parties to facilitate a potential transaction on the underlying security at a preset price, referred to as the strike price, prior to the expiration date. The two types of contracts are put and call options, which can be purchased to speculate on the direction of stocks or stock indices, or sold to generate income.
Kinds of Exchange Rates
Free Float: Here the value of the exchange rate is determined by the free market and is free to fluctuate.
Managed Float: For this exchange rate, a government intervenes at some frequency to change the direction of the float by buying or selling currencies
Band: When one currency links its value to that of another currency but allows it to fluctuate within certain limits. Proponents maintain that exchange rate bands give a currency a certain level of flexibility so that it can respond to market factors while leaving control with the central bank.
Crawl: A system of exchange rate adjustments in which a currency with a fixed exchange rate is allowed to fluctuate within a band of rates.
Cross Rate: An exchange rate between two countries currencies that is computed by reference to a third currency (typically the US dollar)
Return: To make a profit
Expected Rate of Return: A percentage return expected to be earned by an investor during a set period of time, for example, year, quarter, or month
Risk: The probability or likelihood of occurrence of losses relative to the expected return on any particular investment
Rate of Return: The ratio of money gained or lost on an investment relative to the amount of money invested.
-
Exchange Rate Regimes: An exchange-rate regime is the way an authority manages its currency in relation to other currencies and the foreign exchange market. It is closely related to monetary policy and the two are generally dependent on many of the same factors.
Fixed Exchange Rate Regimes: A currency's value is fixed against either the value of another single currency, to a basket of other currencies, or to another measure of value, such as gold.
Floating Exchange Rate Regimes: A currency's value is allowed to fluctuate in response to foreign-exchange market mechanisms.
-
Covered Interest Parity (CIP): The principle that the yields from interest-bearing foreign and domestic investments should be equal when the currency market is used to predetermine the domestic currency payoff from a foreign investment
Uncovered Interest Parity (UIP): Uncovered interest rate parity theory states the difference in interest rates between two countries will equal the relative change in currency foreign exchange rates over the same period.
-
Effective Exchange Rate: An index that describes the strength of a currency relative to a basket of other currencies.
Currency Board: A monetary authority which is required to maintain a fixed exchange rate with a foreign currency.
Currency Union: When two or more states sharing the same currency without them necessarily having any further integration
Foreign Exchange Market: The foreign exchange market is the market in which participants are able to buy, sell, exchange and speculate on currencies.
-
Transaction Costs: Expenses incurred when buying or selling a good or service. Transaction costs represent the labor required to bring a good or service to market, giving rise to entire industries dedicated to facilitating exchanges.
-
Interbank Trading: The interbank market is the global network utilized by financial institutions to trade currencies between themselves.
Corporations: A company or group of people authorized to act as a single entity (legally a person) and recognized as such in law.
Nonbank Financial Institutions: A financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency.
-
Official Market: the legal, official, authorized, or intended market for goods and services.
Black Market: A black market is economic activity that takes place outside government-sanctioned channels. Black market transactions usually occur “under the table” to let participants avoid government price controls or taxes.
Market Intervention: An economic policy perspective favoring government intervention in the market process to correct the market failures and promote the general welfare of the people.
Arbitrage: The simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset.
-
No-Arbitrage Condition: A situation in which all relevant assets are priced appropriately and there is no way for one's gains to outpace market gains without taking on more risk.
Vehicle Currency: The currency used to invoice an international trade transaction, especially when it is not the national currency of either the importer or the exporter.