International Finance Terminology

1. A FOREX market is a market in which one country’s currency is traded for another. It is
an over the counter (OTC) market.

2. Exchange Rate is the price of one currency in terms of another.

3. American Depository Receipt (ADR): security issued in the US that represents shares
in a foreign company’s stock.

4. Cross-rate: implied/implicit exchange rate between two currencies, when both currencies
are quoted in terms of a third one.

5. Eurobond: bond sold in more than one country, but denominated in one currency,
usually the issuer’s domestic currency.

6. Eurocurrency (Eurodollars): money deposited in a bank in a country with a different

currency; Eurodollars are US dollars deposited in a foreign bank.

7. Foreign bonds: bonds issued in a single foreign country in that country’s currency.

8. Gilts: British and Irish Govt. securities

9. London Inter-bank Offer Rate (LIBOR): The rate charged for overnight Eurodollar
loans

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10. Swaps: interest rate (agreement between two parties to pay interest to one another on
some notional amount, one party pays a fixed rate, the other pays a floating rate) and
currency (agreement to periodically swap currencies, with exchange rate based on some
pre-specified rate).

11. Spot trade: an agreement to trade currencies based on the exchange rate today for
settlement within two business days.

12. Fixed (pegged) exchange rate: controlled by the government.

13. Managed float (dirty float): This occurs when the government decide not to intervene
up to a certain level of fluctuation in exchange rates, after which they step in to take
charge.

14. Floating exchange rate: influenced by market forces, no governmental intervention.

15. Purchasing power parity: the idea that the exchange rate adjusts to keep purchasing
power constant among currencies.

16. Absolute purchasing power parity: the idea behind absolute purchasing power parity is
that a commodity costs the same regardless of what currency is used to purchase it or
where it is selling.

17. Interest Rate Parity: the condition stating that the interest rate differential between two
countries is equal to the percentage difference between the forward exchange rate and the
spot exchange rate. Happens when the return from investing at home is equal to the
return from investing abroad.

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18. Spot exchange rate: the exchange rate on a spot trade.

19. Forward trade: an agreement to exchange currency at some time in the future.

20. Forward exchange rate: the agreed-upon exchange rate to be used in a forward trade.

21. Unbiased Forward Rates (UFR): the condition stating that the current forward rate is an
unbiased predictor of the future spot exchange rate. This means that on average the
forward rate will equal the future spot rate.

- F1 = E(S1)

22. Uncovered Interest Parity (UIP): the condition stating that the expected percentage
change in the exchange rate is equal to the difference in interest rates.

23. International Fisher Effect (IFE): Combining PPP and UIP we can get the
International Fisher Effect. The International Fisher Effect tells us that the real rate of
return must be constant across countries. If it is not, investors will move their money to
the country with the higher real rate of return.

24. Exchange rate risk: the risk related to having international operations in a world where
relative currency values vary. Types of exchange rate risk: short-run exposure, long-run
exposure, translation exposure.

25. Political risk: risk related to changes in value that arise because of political actions.