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Definition of exchange rate
Amount of one currency needed to purchase one unit of another.
The price of one country's currency expressed in another country's currency.
The methodology by which members of the EMS maintain their
Also called currency risk, the risk of an investment's value changing because of currency
A country's decision to tie the value of its currency to another country's currency, gold
A country's decision to allow its currency value to freely change. The currency is not
exchange rate fixed today for exchanging currency at some future date.
An accounting term that refers to the exchange rate in effect when an asset or
The actual foreign exchange quotation in contrast to the real exchange rate that has
exchange rates that have been adjusted for the inflation differential between two countries.
exchange rate on currency for immediate delivery. Related: forward exchange rate.
Theory that expected spot exchange rate equals the forward rate.
The weighted average of several exchange rates, where the weights are determined by the extent of our trade done with each country.
The price of one currency in terms of another, in this book defined as number of units of foreign currency per dollar.
The nominal exchange rate corrected for price level differences.
An exchange rate held constant by a government promise to buy or sell dollars at the fixed rate on the foreign exchange market.
An exchange rate whose value is determined by the forces of supply and demand on the foreign exchange market.
Floating Exchange Rate
See flexible exchange rate.
Real Exchange Rate
exchange rate adjusted for relative price levels.
forward rate of exchange
exchange rate for a forward transaction.
spot rate of exchange
exchange rate for an immediate transaction.
The change in the value of a firm's foreign currency denominated accounts due to a
Bretton Woods Agreement
An agreement signed by the original United Nations members in 1944 that
exchange rate between British pounds sterling and the U.S.$.
An automatic system for revising the exchange rate. It involves establishing a par value around
The exchange rate between two currencies expressed as the ratio of two foreign exchange rates
Taking advantage of divergences in exchange rates in different money markets by
Related: exchange rate risk
Current time to maturity on an outstanding debt instrument.
Current rate method
Under this currency translation method, all foreign currency balance-sheet and income
A system of floating exchange rates in which the government occasionally intervenes to change
The extent to which the value of the firm will change because of an exchange rate change.
The variability of a firm's value that results from unexpected exchange rate changes or the
Expectations hypothesis theories
Theories of the term structure of interest rates which include the pure
Offsetting exposures in one currency with exposures in the same or another currency,
An exchange rate system characterized by the absence of government intervention. Also known as
Gold exchange standard
A system of fixing exchange rates adopted in the Bretton Woods agreement. It
Interest rate parity theorem
Interest rate differential between two countries is equal to the difference
Also known as "dirty" float, this is a system of floating exchange rates with central bank
Degree to which exchange rate changes, in combination with price changes, will alter a
Philadelphia Stock Exchange (PHLX)
A securities exchange where American and European foreign
Purchasing power parity
The notion that the ratio between domestic and foreign price levels should equal
Currency options with a guaranteed exchange rate that enable buyers who like the asset, German
A forward exchange rate contract that places upper and lower bounds on the cost of foreign exchange.
Relative purchasing power parity (RPPP)
Idea that the rate of change in the price level of commodities in
Target zone arrangement
A monetary system under which countries pledge to maintain their exchange rates
Under this currency translation method, the choice of exchange rate depends on the
Risk to a firm with known future cash flows in a foreign currency that arises from
Risk of adverse effects on a firm's financial statements that may arise from changes in exchange rates.
purchasing power parity (PPP)
Theory that the cost of living in different countries is equal, and exchange rates adjust to offset inflation differentials across countries.
Site of a 1944 international monetary conference at which the postwar fixed exchange rate system was structured and the International Monetary Fund (IMF) and World Bank were created.
A flexible exchange rate system in which the government does not intervene.
a) Of capital stock: decline in the value of capital due to its wearing out or becoming obsolete.
Fall in the government-determined fixed exchange rate.
A flexible exchange rate system in which the government intervenes.
A fixed exchange rate system in which a currency is directly convertible into gold.
International Monetary Fund (IMF)
Organization originally established to manage the postwar fixed exchange rate system.
Purchasing Power Parity
Theory that says that over the long run exchange rate changes offset any difference between foreign and domestic inflation. This result assumes that the real exchange rate remains constant, something that is not true even in the long run.
Central bank action offsetting money supply changes automatically generated by a balance of payments surplus or deficit under a fixed exchange rate system.
Accumulated Other Comprehensive Income
Cumulative gains or losses reported in shareholders'
the rate of return on investment that would be required by a prudent investor to invest in an asset with a specific level risk. Also, a rate of return used to convert a monetary sum, payable or receivable in the future, into present value.
Accelerated cost recovery system (ACRS)
Schedule of depreciation rates allowed for tax purposes.
Any depreciation method that produces larger deductions for depreciation in the
Active portfolio strategy
A strategy that uses available information and forecasting techniques to seek a
Adjustable rate preferred stock (ARPS)
Publicly traded issues that may be collateralized by mortgages and MBSs.
After-tax real rate of return
Money after-tax rate of return minus the inflation rate.
All equity rate
The discount rate that reflects only the business risks of a project and abstracts from the
American Stock Exchange (AMEX)
The second-largest stock exchange in the United States. It trades
Amortizing interest rate swap
Swap in which the principal or national amount rises (falls) as interest rates
Annual percentage rate (APR)
The periodic rate times the number of periods in a year. For example, a 5%
Arithmetic average (mean) rate of return
Arithmetic mean return.
Auction rate preferred stock (ARPS)
Floating rate preferred stock, the dividend on which is adjusted every
Average rate of return (ARR)
The ratio of the average cash inflow to the amount invested.
Average tax rate
Taxes as a fraction of income; total taxes divided by total taxable income.
A strategy in which the maturities of the securities included in the portfolio are concentrated
Base interest rate
Related: Benchmark interest rate.
Basic business strategies
Key strategies a firm intends to pursue in carrying out its business plan.
Benchmark interest rate
Also called the base interest rate, it is the minimum interest rate investors will
Bill of exchange
General term for a document demanding payment.
Break-even payment rate
The prepayment rate of a MBS coupon that will produce the same CFY as that of
Break-even tax rate
The tax rate at which a party to a prospective transaction is indifferent between entering
Broker loan rate
Related: Call money rate.
A strategy in which a portfolio is constructed so that the maturities of its securities are highly
A passive investment strategy with no active buying and selling of stocks from the
Call money rate
Also called the broker loan rate , the interest rate that banks charge brokers to finance
Chicago Mercantile Exchange (CME)
A not-for-profit corporation owned by its members. Its primary
A strategy in which a put and with the same strike price and expiration are either both
Commodities Exchange Center (CEC)
The location of five New York futures exchanges: Commodity
A firm engaged in two or more unrelated businesses.
A merger involving two or more firms that are in unrelated businesses.
Convertible exchangeable preferred stock
Convertible preferred stock that may be exchanged, at the
The acquisition of one firm by anther firm.
Debt obligations issued by corporations.
A legal document creating a corporation.
One of the three areas of the discipline of finance. It deals with the operation of the firm
Corporate financial management
The application of financial principals within a corporation to create and
Corporate financial planning
Financial planning conducted by a firm that encompasses preparation of both
Corporate processing float
The time that elapses between receipt of payment from a customer and the
Corporate tax view
The argument that double (corporate and individual) taxation of equity returns makes
Corporate taxable equivalent
rate of return required on a par bond to produce the same after-tax yield to
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