Glossary Chapter 8 arbitrage the artificial trade of goods between countries solely for the purpose of exploiting any price differential caused by shifting exchange rates. arbitrage opportunity the opportunity to buy an asset at a low price then immediately sell it on a different market for a higher price. call an agreement that gives an investor the right to buy a stock, bond, commodity, or other instrument at a specified price within a specific time period. capital controls exist when a government places restrictions on capital-account transactions. cash convertibility the ability to exchange a unit of bank deposits for a unit of notes and coins on demand. commodity convertibility the ability to buy domestic goods and services with cash or credit. consumer confidence index a monthly report that expresses how a representative sample of households measures their confidence in the country’s current and future economic state. convertibility the currency can buy domestic and foreign goods and services, including foreign currencies. cross currency swap involves the exchange of payments denominated in one currency for payments denominated in another. derivatives a financial instrument, the price of which is directly dependent upon the value of one or more underlying securities, equity indices, debt instruments, commodities, other derivative instruments, or any agreed upon pricing arrangement. devaluation the lowering of the value of a country’s currency by its government. efficient market view accepts that the foreign exchange rates published in local financial pages are the best possible forecast of future exchange rates. Fisher effect nominal rate of interest = the real rate of interest + inflation foreign exchange option this option on the Canadian dollar gives a company the right but not the obligation to buy, for example, Canadian dollars and sell U.S. dollars at a pre-set strike price that will vary on a day-to-day basis with the movement in the Canadian dollar/U.S. dollar exchange rate. foreign-exchange convertibility the ability to buy foreign goods and services, including foreign currencies. forward rate agreement a tailor-made futures contract to fix a future interest rate today. full convertibility a currency with cash, commodity, and FX convertibility. fundamental analysis often uses complex models containing a number of fundamental economic indicators in different combinations and permutations that are statistically analyzed in order to forecast the future exchange rate. hot money funds that flow into a country to exploit small differences in interest or exchange rates. inefficient market view contends that the efficient market view does not contain all of the data and/or information available. inter-bank market a network of major banks around the world. interest rate swap an agreement to exchange interest payments in a single currency for a stated time period. law of one price an economic law stated as, "in an efficient market all identical goods must have only one price." London Interbank Offered Rate (LIBOR) the interest rate charged by one international bank to another for lending money. lost opportunity a description for investments that are not earning the current available rate of interest. market makers persons or firms authorized to create and maintain a market in a security. over-the-counter (OTC) transaction a security that is not listed on an exchange, generally because it does not meet the exchange listing requirements. price of determination The name the U.S. dollar is goven in cases where all sales worldwide of a given commodity or product are denominated in U.S. dollars. revaluation the raising of the value of a country’s currency by its government. seigniorage the net revenue derived from the issuing of currency. spot rate the FX rate at which two currencies can be exchanged in two days time. technical analysis uses charts and past trends in the currency price(s) to predict future foreign exchange rate and currency relationships. vehicle currency one that is often used as the metric to convert funds between two other currencies.