Glossary Chapter 10-15 by Nurshakirah

Glossary Chapter 10-15 

by Nurshakirah

CHAPTER 10

1. Balance of Indebtedness

• A summary of all the assets and liabilities held by a sovereign entity. That is, a balance of indebtedness states all the assets a country owns (examples include national art, taxes not yet spent, and stock in nationalized corporations) and all liabilities (including accounts payable to government workers, unpaid entitlement spending, and especially the national debt). One may consider the balance of indebtedness as the balance sheet for a country.

2. Balance of payments

• A statistical compilation formulated by a sovereign nation of all economic transactions between residents of that nation and residents of all other nations during a stipulated period of time, usually a calendar year.

3. capital and financial account

• the net result of both private-sector and official capital and financial transaction

4. credit transaction

• A balance of payment transaction that result in a receipt of a payment from foreign

5. Current account

• Net flow of goods, services, and unilateral transactions (gifts) between countries.

6. debit transaction

• A balance of payment transaction that leads to payment foreign

7. Double-entry accounting

• A system of accounting in which each credit entry is balanced  by a debit entry, and vice versa so that the recording of any transaction leads to two offsetting entries

8. goods and services balance

• the result of combining the balance of trade in service and the merchandise trade balance

9. income balances

• net investment income plus net compensation of employees

10. merchandise trade balance

• the result of combining the dollar value of merchandise exports recorded as a plus (credit) and the dollar value of merchandise import recorded as a minus (debit)

11. net creditor

• the status of a nation when foreign country’s claim on foreigners exceed foreign claims on that country at particular time

12. net debtor

• the status of a nation when foreign claim on country exceed country claims on foreign at particular time

13. net foreign investment

• in national income accounting, is synonymous with the current account balance

14. official reserve assets

• holding key foreign currencies, special drawing right and reserve position in the IMF by official monetary institutions.

15. official settlements transactions

-the movement of financial assets among official holder these financial assets fall into two categories official reserve assets and liabilities to foreign official agencies

16. statistical discrepancy

• a correcting entry inserted into the balance-of-payments statement to make the sum of the credit and debits equal

17. trade balance

• derived by computing the net export (import) in the merchandise accounts also called merchandise trade balance

18. unilateral transfers

• include transfers of good and services or financial assets between the United States and the rest of the world

Chapter 11

1. Appreciation

• An increase in value of a property or other asset. Most property depreciates, and it is fairly rare to discuss a property's appreciation. Real estate and securities are major exceptions, since real estate tends to appreciate over time and securities may increase or decrease in value depending on market conditions. Appreciation may be used to calculate capital gains or property taxes
• An increase in value. Currency appreciation is an increase in the value of one currency relative to another.

2. Bid rate

• The highest exchange rate at which a buyer is willing to buy a currency.

3. Call option

- An option contract that gives its holder the right (but not the obligation) to purchase a specified number of shares of the underlying stock at the given strike price, on or before the expiration date of the contract.

4. Covered interest arbitrage

- Occurs when a portfolio manager invests dollars in an instrument denominated in a foreign currency and hedges the resulting foreign exchange risk by selling the proceeds of the investment forward for dollars.

5. Cross exchange rate

• The resulting rate derived when the exchange rate between any two currencies can be derived from the rate to these two currencies in terms of a third currency

6. Currency swap

- An agreement to swap a series of specified payment obligations denominated in one currency for a series of specified payment obligations denominated in a different currency. Usually  fixed for fixed.

7. Depreciation

- This represents the loss of value from an existing stock of real capital (for an

Individual company or for the whole economy), reflecting the normal wear-and-tear of

machinery, equipment, and infrastructure. A company or country must invest continuously just

to offset depreciation, or else its capital stock will gradually run down.

8. Destabilizing speculation

• Speculation that occurs when speculator expect a current trend in exchange rates to continue and their transaction accelerate the rise or fall of the target currency’s value

9. Discount

• The valuation of a currency when it worth less In the forward market than in the spot market

10. Effective exchange rate

• A weighted average of the exchange rates between a domestic currency and that nation’s most important trading partners with weight given by relative importance of the nation’s trade with each trade partner

11. Exchange arbitrage

• The simultaneous purchase  and sale of a currency in different foreign-exchange market in order to profit from exchange-rate differentials in the two location

12. Exchange rate

• The price of one currency in term of another

13. Exchange-rate index

• A weighted average of the exchange rates between a domestic currency and that nation most important trading partner with weight given by relative importance of the nation’s trade with each trade partner

14. Foreign-currency options

• Provide an options holder the right to buy or sell a fixed amount of foreign currency at a prearrangement price within a few  days or several day

15. Foreign-exchange market

• The organizational setting within which individuals, business, governments and bank buy and sell foreign currencies and other debt instruments

16. Forward market

• Where foreign market exchange can be traded for future delivery

17. Forward rate

• The rate of exchange used in the settlement of forward transactions

18. Forward transaction

• An outright purchase and sale of foreign currency at a fixed exchange rate but with payment or delivery of the foreign currency at a future date

19. Futures market

• A market in which contracting parties agree to future exchanges of currencies and set applicable exchange rates in advance distinguished from the forward market in that only a limited number of leading currencies are traded trading takes place in standarlized contract amount and in a specific geographic location

20. Hedging

- A strategy designed to reduce investment risk using call options, put options, short-selling, or futures contracts. A hedge can help lock in profits. Its purpose is to reduce the volatility of a portfolio by reducing the risk of loss.

- To reduce the risk of an investment by making an offsetting investment.

21. Interbank market

• Bank transaction with other bank

22. Interest arbitrage

- The practice of buying a currency on the spot market, selling it on the forward market, and investing the difference in exchange rate. Interest arbitrage is done in order to profit from a (usually temporary) inefficiency in an exchange rate. One can conduct interest arbitrage with a foreign currency, or one can use one's own currency (provided one can buy it using a foreign currency).

23. International Monetary Market (IMM)
24. Maturity months

• The months of a given year when the futures contract mature

25. Nominal exchange-rate index

• The average value of a currency not adjusted for changes in price level of that country and its trading partners

26. Nominal exchange rate

• Exchanges rate quotes published in newspaper that are not adjusted inflation rates in trading partner

27. Offer rate

• The price at which the bank is willing to sell a unit of foreign currency

28. Option

• An agreement between a holder and a writes that gives the holder the right but not the obligation to buy or sell financial instruments at any time through a specified time

29. Premium

• The valuation of a currency when it is worth more in the forward market than in the spot market

30. Put option

• Gives the holder right to sell foreign currency at a specified price

31. Real exchange rate

• The nominal exchange rate adjusted for change in relative price levels

32. Real exchange-rate index

• The average value of a currency based on real exchange rate

33. Speculation

- Purchasing risky investments that present the possibility of large profits, but also pose a higher-than-average possibility of loss. A profitable strategy over the long term if undertaken by professionals who hedge their portfolios to control the amount of risk.

- The purchase of an asset (such as a financial asset or real estate) purely in the hope

that its market price will increase, allowing a profit (known as a capital gain) to be made on its

subsequent resale.

34. Spot market

- A market in which an asset bought or sold is delivered immediately. To give a basic example, if one buys a stock and it is delivered immediately, one utilizes the spot market. It differs from derivatives markets like futures. Perhaps less commonly, it is called the cash market.

35. Spot transaction

- A foreign exchange transaction in which each party promises to pay a certain amount of currency to the other on the same day or within one or two days.

36. Spread

• The difference between the bid and the ask price

37. Stabilizing speculation

• Occurs when speculator expect a current trend in an exchange rate’s movement to cahnage and their purchase or sell of the currency moderates movement of the exchange rate

38. Strike price

- The stated price per share for which underlying stock may be purchased (in the case of a call) or sold (in the case of a put) by the option holder upon exercise of the option contract.

39. Three-point arbitrage

• A more intricate form of arbitrage involving three currencies and three financial centre also called triangular arbitrage

40. Trade-weighted dollar

• A weighted average of the exchange rate between a domestic currency and the currencies of the nation”s most important trading partner with weight given by relative importance of the nation”s trade with each trade partner

41. Two-point arbitrage

• The simultaneous punchase and sale of a currency in two-foreign-exchange market in order to profit from exchange rate different location

42. Uncovered interest arbitrage

- The transfer of funds into another currency in order to achieve a higher interest rate at the same level of risk. For example, one may transfer a money market fund denominated in U.S. dollars to one denominated in euros because euro interest rates may be slightly higher. The interest arbitrage is uncovered because it does not hedge against foreign exchange risk.

CHAPTER 12

1. Asset-market approach

• A method of determining short-term exchange rate where investors consider two key factor when deciding between domestic and foreign investment,relative levels of interest rates and expected changes in the exchange rate itself over the term of the investment

2. Forecasting exchange rate

• Attempts to predict future rates of exchange

3. Fundamental analysis

• The opposite of technical involved consideration of economic variable that are likely to affect a currency value

4. Judgmental forecasts

• Subjective or common-sense exchange rate forecasts based on economic, political and other data for a country

5. Law of one price

• part of the purchasing-power-parity approach to determining exchange rate asserts that identical goods should cost the same in all nations, assuming that it is cost-less to ship goods between nations and there are no barriers to trade

6. Market expectations

• Example include new about future market fundamental and trader opinion about future exchange rate

7. Market fundamentals

• Economic variable such as productivity, inflation rates, real interest rates, consumer preferences and government trade policy

8. Nominal interest rate

• The rate of return on assets that can be earned in a particular country, not adjusted for the rate of inflation

9. Overshooting

-an instance of an exchange rate short-term response to a change in market fundamental is greater than it long-term response

10. Purchasing-power-parity theory

• A method of determining the equilibrium exchange rate by means of the price levels and their variations in different nations

11. Real interest rate

• The nominal interest rate minus the inflation rate

12. Technical analysis

• A method of exchanged-rate forecasting that involves the use of historical exchange rate data to estimate future value

CHAPTER 13

1. Adjustment mechanism

• A mechanism that work to return balance of payment to equilibrium after the initial equilibrium has been disrupted, the process takes two different forms :automatic and discretionary

2. Automatic adjustment

• A mechanism that work to return a balance of payments to equilibrium automatically through the adjustment in economic variables

3. Foreign repercussion effect

• The feedback effect on a domestic economy when its macroeconomic changes cause large enough changes abroad for those in turn to cause further changes at home. Most commonly, a rise in income stimulates imports, causing an expansion abroad that in turn raises demand for the home country's exports.

4. Gold standard

• Gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold.

5. Income adjustment mechanism

• In 1930s John Maynard Keynes formulated this theory that focuses on automatic changes in income to bring about adjustment in a nation’s current account

6. Price adjustment mechanism

• States that increases in the money supply lead directly to an increase in overall prices and a shrinking money supply causes overall prices to fall

7. Quantity theory of money

• States that increases in the money supply lead directly to an increase in overall prices and a shrinking money supply causes overall prices to fall

CHAPTER 14

1. Absorption approach

• An approach to currency depreciation that deals with the income effect of depreciation, a decrease in domestic expenditures relative to income must occur for depreciation to promote payments equilibrium according to the absorption approach

2. Elasticity approach

- The elasticity approach tries to predict the outcome policy changes will have on the balance of payments. For example, this approach illustrates how exchange rates will affect the balance. Further, the elasticity approach assumes that if the BOP is in equilibrium, devaluation can improve the balance of payments. However, for devaluation to function successfully, the total of the price elasticity of domestic and foreign demand for imports has to increase. When a country devalues a currency, it improves the balance of payments under ideal conditions. This ideal condition is known as the Marshall-Lerner condition.

3. Exchange-rate pass-through

• The extent to which changing currency values lead to change in import and export prices

4. J-curve effect

• a popular description of the time path of trade flows that suggest that in the very short term a currency depreciate will lead to a worsening of the nation trade balance, but as time passes the trade balance will likely improve

5. Marshall-Lerner condition

• refers to the condition that an exchange rate devaluation or depreciation will only cause a balance of trade improvement if the absolute sum of the long-term export and import demand elasticity is greater than unity

6. Monetary approach

CHAPTER 15

1. Adjustable pegged exchange rates

• A system of semi fixed exchange rates where it is understood that the par value of the currency will be changed occasionally in response to changing economic condition

2. Bretton Woods system

• A new international monetary system created in 1944 by delegates from 44 members nations of the united nation that met at Bretton Woods, New Hampshire

3. Capital controls

• Government imposed barriers to foreign savers investing in domestic assets or to domestic savers investing in foreign assets also know as exchange control

4. Clean float

• When free-market forces of supply and demand are allowed to determine the exchange value of a  currency

5. Crawling peg

• A system in which a nation makes small, frequency to correct balance-of-payment disequilibrium

6. Currency board

• A monetary authority that issues notes and coins convertible into a foreign anchor currency at a fixed exchange rate

7. Currency crashes

• Financial crises that often end in currency devaluation or accelerated deprecation

8. Currency crisis

• A situation in which a weak currency experiences heavy selling pressure  also called a speculative attack

9. Devaluation

• an official change in a currency par value which cause the currency exchange rate depreciate

10. Dirty float

• A condition under a managed floating system when free-market forces of supply and demand a not allowed to achieve their equilibrating role

11. Dollarization

• Occurs when residents of a foreign country use the US dollar alongside or instead of their domestic currency

12. Exchange controls

• Government imposed barriers to foreign saver investing in domestic assets or to domestic saver investing in foreign assets

13. Exchange-stabilization fund

• a government entity that attempt to ensure that the market exchange rate  does not move above or below the official exchange rate through purchase and sales of foreign currencies

14. Fixed exchange rates

• A system used primarily by small developing nation whose currencies are anchored to a key currency, such as US dollar

15. Floating exchange rates

• When a nation allow it currency to fluctuate according to the free-market forces of supply and demand

16. Fundamental disequilibrium

• When the official exchange rate and the market exchange rate may move apart, reflecting changes in fundamental economic condition

17. Impossible trinity

• A restriction whereby a country can maintain only two of the following three policies-free capital flows, a fixed exchange rate and an independent monetary policy

18. Key currency

• A currency that is widely traded on world money markets has demonstrated relatively stable values over time and has been widely accepted as a mean of international settlement

19. Learning against the wind

• Intervening to reduce short-term fluctuations in exchange rates without attempting to adhere to any particular rate over the long term

20. Managed floating system

• An exchange rate system in which the rate is usually allowed to be determined by the free-market forces the supply and demand, while sometimes entailing some degree of government intervention

21. Official exchange rate

• The exchange rate determined by comparing the par value of two countries

22. Par value

• A central value in term of a key currency that government participating in a fixed-exchanged rate system set their currencies

23. Revaluation

• An official change in a currency par value which causes the currency exchange value to appreciate

24. Seigniorage

• Profit from issuing money

25. Special drawing right

- An artificial currency unit based on a basket of four currencies established by the IMF

26. Speculative attack

• A situation in which a weak currency experiences heavy selling pressure also called speculative attack

27. Target exchange rates

CHAPTER 16

1. Demand-pull inflation

• When a nation capacity to produce has been achieved and further increases in aggregate demand pull price upward

2. Direct controls

• Consist of government restriction on the market economy

3. Expenditure-changing policies

• Policies that alter level of aggregate demand for good and service including those produced domestically and those imported

4. Policies that modify that alter the level of aggregate demand for good and service, including those produced domestically and those imported  
5. Expenditure-switching policies

• Policies that modify the directions of the demand, shifting it between domestic output and import

6. External balance

• When a nation realizes neither balance-of-payments deficits nor balance-of-payment surpluses

7. Fiscal policy

• Refer to change in government spending and taxes

8. Group of Five

• five industrial nation US ,UK ,Japan, France and Germany

9. Group of Seven

• Seven industrial nation- US, UK, Japan, Canada, Germany, France and Italy-that launched coordinated purchases of the euro to boost it value

10. Internal balance

• The goal of economic stability at full employment

11. International economy policy coordination

• The attempt to coordinate national policies-monetary fiscal or exchange-rate policy-in recognition of international economic interdependence

12. Monetary policy

• Refer to change in the money supply by a nation central bank

13. Overall balance

• When an economy attains internal and external balance

14. Wage and price controls

• Intervention by the government to set the price and wage levels

CHAPTER 17

1. Conditionality

• The standard imposed by the IMF on borrowing countries to qualify for a loan which can include requirement that the borrower initiate program to correct economic difficulties, adopt austerity program to shore up their economies and put their muddled fiancés in order

2. Country risk

• Risk associated with political development in a country, especially the government views concerning international investment and loans.

3. Credit risk

• the probability that part or all of the interest or principal of a loan will  not be repaid

4. Debt/equity swap

• When a commercial bank sell its loans at a discount to the debtor-nation’s government for local currency which it then uses to finance an equity investment in the debtor nation

5. Debt forgiveness

• Any arrangement that reduce the value of contractual obligations of the debtor nations

6. Debt reduction

• Any voluntary scheme that lessens the burden on the debtor  nation to service its external debt

7. Debt service/export ratio

• The scheduled interest and principal payments as a percentage of export earnings

8. Demonetization of gold

• Occurred in the 1970s when the official price of gold was abolished as the unit of account for the international monetary system

9. Euro dollar market

• A market that operates as a financial intermediary bringing together lenders and borrower also called as European Central Bank

10. General Arrangements to Borrow

• A borrowing/lending medium for members of the Group of Ten. Members of the lending country deposit funds into the International Monetary Fund (IMF), which are made available to be withdrawn by the borrowing member in need. One of the advantages of this is that each country deals in their own currency, leaving all conversions to the IMF.

11. Gold exchange standard

• a monetary system by which one country's currency, which is not itself based on the gold standard, is kept at a par with another currency that is based on the gold standard

12. Gold standard

• Gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold.

13. IMF drawings

• The transactions is which the fund makes foreign currency loans available

14. International reserves

• Assets held to enable nations to finance disequilibrium in their balance of payment position

15. Liquidity problem

• When a government or central bank runs short of needed international reserve

16. Special drawing-right

• An artificial currency unit based on a basket of four currencies established by the IMF

17. Supply of international reserve

-include owned reserves such as key currencies and special drawing right and borrowed reserves which can come from the IMF and other official arrangement or can be obtained from major commercial banks.

18. Swap arrangements

• Bilateral agreements between central bank where each government provides for an exchange or swap of currencies to help finance temporary payments disequilibrium