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Foreign Exchange Market

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Definition of Foreign Exchange Market

Foreign Exchange Market Image 1

Foreign Exchange Market

A worldwide market in which one country's currency is bought or sold in exchange for another country's currency.



Related Terms:

Balance of Payments

The difference between the demand for and supply of a country's currency on the foreign exchange market.


Fixed Exchange Rate

An exchange rate held constant by a government promise to buy or sell dollars at the fixed rate on the foreign exchange market.


Flexible Exchange Rate

An exchange rate whose value is determined by the forces of supply and demand on the foreign exchange market.


Floating exchange rate

A country's decision to allow its currency value to freely change. The currency is not
constrained by central bank intervention and does not have to maintain its relationship with another currency
in a narrow band. The currency value is determined by trading in the foreign exchange market.


Sterilized intervention

foreign exchange market intervention in which the monetary authorities have
insulated their domestic money supplies from the foreign exchange transactions with offsetting sales or
purchases of domestic assets.



Tom next

In the interbank market in Eurodollar deposits and the foreign exchange market, the value
(delivery) date on a Tom next transaction is the next business day. Refers to "tomorrow next."


Unsterilized intervention

foreign exchange market intervention in which the monetary authorities have not
insulated their domestic money supplies from the foreign exchange transactions.


Foreign Exchange Market Image 2

American Stock Exchange (AMEX)

The second-largest stock exchange in the United States. It trades
mostly in small-to medium-sized companies.


Auction markets

markets in which the prevailing price is determined through the free interaction of
prospective buyers and sellers, as on the floor of the stock exchange.


Bear market

Any market in which prices are in a declining trend.


bear market

A market in which stock or bond prices are generally
falling.


Bear Market

A prolonged period of falling stock market prices.


Bill of exchange

General term for a document demanding payment.


Black market

An illegal market.


Brokered market

A market where an intermediary offers search services to buyers and sellers.


Bull market

Any market in which prices are in an upward trend.


Foreign Exchange Market Image 3

bull market

A market in which stock or bond prices are generally rising.


Bull Market

A prolonged period of rising stock market prices.



Bulldog market

The foreign market in the United Kingdom.


Capital market

The market for trading long-term debt instruments (those that mature in more than one year).


Capital market

The market in which investors buy and sell shares of companies, normally associated with a Stock exchange.


Capital Market

A market that specializes in trading long-term, relatively high risk
securities


Capital Market

The market in which savings are made available to those needing funds to undertake investment projects. A financial market in which longer-term (maturity greater than one year) bonds and stocks are traded.


Capital market efficiency

Reflects the relative amount of wealth wasted in making transactions. An efficient
capital market allows the transfer of assets with little wealth loss. See: efficient market hypothesis.


Capital market imperfections view

The view that issuing debt is generally valuable but that the firm's
optimal choice of capital structure is a dynamic process that involves the other views of capital structure (net
corporate/personal tax, agency cost, bankruptcy cost, and pecking order), which result from considerations of
asymmetric information, asymmetric taxes, and transaction costs.


Capital market line (CML)

The line defined by every combination of the risk-free asset and the market portfolio.


capital markets

markets for long-term financing.


Cash markets

Also called spot markets, these are markets that involve the immediate delivery of a security
or instrument.
Related: derivative markets.



Chicago Mercantile Exchange (CME)

A not-for-profit corporation owned by its members. Its primary
functions are to provide a location for trading futures and options, collect and disseminate market information,
maintain a clearing mechanism and enforce trading rules.


Commodities Exchange Center (CEC)

The location of five New York futures exchanges: Commodity
exchange, Inc. (COMEX), the New York Mercantile exchange (NYMEX), the New York Cotton exchange,
the Coffee, Sugar and Cocoa exchange (CSC), and the New York futures exchange (NYFE). common size
statement A statement in which all items are expressed as a percentage of a base figure, useful for purposes of
analyzing trends and the changing relationship between financial statement items. For example, all items in
each year's income statement could be presented as a percentage of net sales.


Common market

An agreement between two or more countries that permits the free movement of capital
and labor as well as goods and services.


Common stock market

The market for trading equities, not including preferred stock.


Complete capital market

A market in which there is a distinct marketable security for each and every
possible outcome.


Controlled foreign corporation (CFC)

A foreign corporation whose voting stock is more than 50% owned
by U.S. stockholders, each of whom owns at least 10% of the voting power.


Convertible exchangeable preferred stock

Convertible preferred stock that may be exchanged, at the
issuer's option, into convertible bonds that have the same conversion features as the convertible preferred
stock.


Corner A Market

To purchase enough of the available supply of a commodity or stock in order to
manipulate its price.


Dealer market

A market where traders specializing in particular commodities buy and sell assets for their
own accounts.


Debt market

The market for trading debt instruments.


Derivative markets

markets for derivative instruments.


Direct search market

Buyers and sellers seek each other directly and transact directly.


DLOM (discount for lack of marketability)

an amount or percentage deducted from an equity interest to reflect lack of marketability.


Domestic market

Part of a nation's internal market representing the mechanisms for issuing and trading
securities of entities domiciled within that nation. Compare external market and foreign market.


Effective Exchange Rate

The weighted average of several exchange rates, where the weights are determined by the extent of our trade done with each country.


Efficient capital market

A market in which new information is very quickly reflected accurately in share
prices.


efficient capital markets

Financial markets in which security prices rapidly reflect all relevant information about asset values.


Efficient Market Hypothesis

In general the hypothesis states that all relevant information is fully and
immediately reflected in a security's market price thereby assuming that an investor will obtain an equilibrium
rate of return. In other words, an investor should not expect to earn an abnormal return (above the market
return) through either technical analysis or fundamental analysis. Three forms of efficient market hypothesis
exist: weak form (stock prices reflect all information of past prices), semi-strong form (stock prices reflect all
publicly available information) and strong form (stock prices reflect all relevant information including insider
information).


Efficient Markets Hypothesis

The hypothesis that securities are typically in equilibrium--that they are fairly priced in the sense that the price reflects all publicly available information on the security.


Either-way market

In the interbank Eurodollar deposit market, an either-way market is one in which the bid
and offered rates are identical.


Emerging markets

The financial markets of developing economies.


Equation of Exchange

The quantity theory equation Mv = PQ.


Equilibrium market price of risk

The slope of the capital market line (CML). Since the CML represents the
return offered to compensate for a perceived level of risk, each point on the line is a balanced market
condition, or equilibrium. The slope of the line determines the additional return needed to compensate for a
unit change in risk.


Equity market

Related:Stock market


Eurocurrency market

The money market for borrowing and lending currencies that are held in the form of
deposits in banks located outside the countries of the currencies issued as legal tender.


Excess return on the market portfolio

The difference between the return on the market portfolio and the
riskless rate.


Exchange

The marketplace in which shares, options and futures on stocks, bonds, commodities and indices
are traded. Principal US stock exchanges are: New York Stock exchange (NYSE), American Stock exchange
(AMEX) and the National Association of Securities Dealers (NASDAQ)


Exchange controls

Governmental restrictions on the purchase of foreign currencies by domestic citizens or
on the purchase of the local domestic currency by foreigners.


Exchange of assets

Acquisition of another company by purchase of its assets in exchange for cash or stock.


Exchange of stock

Acquisition of another company by purchase of its stock in exchange for cash or shares.


Exchange offer

An offer by the firm to give one security, such as a bond or preferred stock, in exchange for
another security, such as shares of common stock.


Exchange rate

The price of one country's currency expressed in another country's currency.


exchange rate

Amount of one currency needed to purchase one unit of another.


Exchange Rate Mechanism (ERM)

The methodology by which members of the EMS maintain their
currency exchange rates within an agreed upon range with respect to other member countries.


Exchange Rate, Nominal

The price of one currency in terms of another, in this book defined as number of units of foreign currency per dollar.


Exchange Rate, Real

The nominal exchange rate corrected for price level differences.


Exchange rate risk

Also called currency risk, the risk of an investment's value changing because of currency
exchange rates.


Exchange risk

The variability of a firm's value that results from unexpected exchange rate changes or the
extent to which the present value of a firm is expected to change as a result of a given currency's appreciation
or depreciation.


Exchangeable Security

Security that grants the security holder the right to exchange the security for the
common stock of a firm other than the issuer of the security.


expectations theory of exchange rates

Theory that expected spot exchange rate equals the forward rate.


External market

Also referred to as the international market, the offshore market, or, more popularly, the
Euromarket, the mechanism for trading securities that (1) at issuance are offered simultaneously to investors
in a number of countries and (2) are issued outside the jurisdiction of any single country. Related: internal
market


Fair market price

Amount at which an asset would change hands between two parties, both having
knowledge of the relevant facts. Also referred to as market price.


Fair market value

The price that an asset or service will fetch on the open market.


Fair Market Value

The highest price available, expressed in terms of cash, in an open and unrestricted market between informed, prudent parties acting at arm's length and under no compulsion to transact.


Farm Improvement and Marketing Cooperatives Loans Act

See here


Federal funds market

The market where banks can borrow or lend reserves, allowing banks temporarily
short of their required reserves to borrow reserves from banks that have excess reserves.


Federal Open Market Committee (FOMC)

Fed committee that makes decisions about open-market operations.


Financial market

An organized institutional structure or mechanism for creating and exchanging financial assets.


financial markets

markets in which financial assets are traded.


Fixed-exchange rate

A country's decision to tie the value of its currency to another country's currency, gold
(or another commodity), or a basket of currencies.


Fixed-income market

The market for trading bonds and preferred stock.


Floating Exchange Rate

See flexible exchange rate.


Foreign banking market

That portion of domestic bank loans supplied to foreigners for use abroad.


Foreign bond

A bond issued on the domestic capital market of anther company.


Foreign bond market

That portion of the domestic bond market that represents issues floated by foreign
companies to governments.


Foreign Corrupt Practices Act (FCPA)

a law passed by U.S. Congress in 1977 that makes it illegal for a U.S. company to engage in various “questionable” foreign payments and
makes it mandatory for a U.S. company to maintain accurate
accounting records and a reasonable system of internal
control


Foreign currency

foreign money.


Foreign currency option

An option that conveys the right to buy or sell a specified amount of foreign
currency at a specified price within a specified time period.


Foreign currency translation

The process of restating foreign currency accounts of subsidiaries into the
reporting currency of the parent company in order to prepare consolidated financial statements.


Foreign direct investment (FDI)

The acquisition abroad of physical assets such as plant and equipment, with
operating control residing in the parent corporation.


Foreign equity market

That portion of the domestic equity market that represents issues floated by foreign companies.


Foreign exchange

Currency from another country.


Foreign Exchange

The currency of a foreign country.


Foreign exchange controls

Various forms of controls imposed by a government on the purchase/sale of
foreign currencies by residents or on the purchase/sale of local currency by nonresidents.


Foreign exchange dealer

A firm or individual that buys foreign exchange from one party and then sells it to
another party. The dealer makes the difference between the buying and selling prices, or spread.


Foreign Exchange Reserves

A fund containing the central bank's holdings of foreign currency or claims thereon.


Foreign exchange risk

The risk that a long or short position in a foreign currency might have to be closed out
at a loss due to an adverse movement in the currency rates.


Foreign exchange swap

An agreement to exchange stipulated amounts of one currency for another currency
at one or more future dates.


Foreign market

Part of a nation's internal market, representing the mechanisms for issuing and trading
securities of entities domiciled outside that nation. Compare external market and domestic market.


Foreign market beta

A measure of foreign market risk that is derived from the capital asset pricing model.


Foreign Sales Corporation (FSC)

A special type of corporation created by the Tax Reform Act of 1984 that
is designed to provide a tax incentive for exporting U.S.-produced goods.



 

 

 

 

 

 

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