appreciation:
the increase in the value of one currency in terms of another
capital mobility:
the ability to shift funds between countries easily; if there are no impediments at all and costs are minimal, capital is said to be perfectly mobile
covered interest arbitrage:
the use of a forward foreign exchange contract to hedge against foreign exchange risk as it affects the yield on foreign assets
cross-rate:
the exchange rate between two currencies via a third currency
depreciation:
the decrease in the value of one currency in terms of another
devaluation:
an abitrary decrease in the value of a currency that had previously been fixed in value
exchange rate:
the price of one currency in terms of another
fixed exchange rate regime:
an exchange rate regime that pegs an exchange rate at a particular value
flexible exchange rate regime:
an exchange rate regime that allows the marketplace to determine the exchange rate independently; also called a floating system
forward exchange rate:
the exchange rate on a contract to deliver foreign exchange at some future date at a price negotiated today
interest rate parity:
the condition that the differential between domestic and foreign interest rates reflects the forward premium or discount between currencies
law of one price:
a law stating that, under certain assumptions, the domestic and foreign prices of a tradable good should be equal
managed ("dirty") float regime:
a regime of flexible exchange rates in which the central bank intervenes occasionally to influence exchange rates; also called a "dirty" float
peso problem:
named after the Mexican peso, it describes a phenomenon in which the economic fundamentals predict a devaluation that almost never actually takes place
purchasing power:
the ability, usually of one unit of currency, to buy goods and services; can be measured as 1/P where P is the price level measured, say, by the consumer price index
purchasing power parity (PPP):
the situation that exists when the exchange rate be tween two currencies is such that the domestic purchasing power of those currencies is equivalent; two forms exist: absolute (in terms of price levels) and relative (in terms of inflation rates)
real exchange rate:
the exchange rate adjusted for changes in relative price levels in different countries
revaluation:
an arbitrary increase in the value of a currency that had previously been fixed in value
spot rate:
the rate for immediate delivery of an asset, usually of a currency
