Settlement risk is the risk that a counterparty will not be able to meet its obligations under a financial contract. This risk can arise if the counterparty is unable to pay its debts as they come due, or if it becomes insolvent. Settlement risk can be a significant issue in the forex market, as most … Read more
UIP states that the forward exchange rate between two currencies equals the spot exchange rate adjusted for the interest rate differential between the two countries. In other words, the expected future spot exchange rate equals the present spot exchange rate plus the interest rate differential between the two countries. The forward exchange rate is the … Read more
Redenomination is the process of changing the face value or unit of currency. This can be done to stabilize a currency, to inflate or deflate the value of a currency, or for other reasons. For example, after World War II, many countries redenominated their currencies to rid themselves of the old currency’s association with the … Read more
In countertrade, two companies agree to trade goods or services without using any currency. Typically, one company will provide goods or services to the other company in exchange for goods or services of equal value from the other company. In some cases, one company may provide goods or services to the other company in exchange … Read more
A money market hedge is an investment strategy employed by companies to mitigate the risk of adverse movements in exchange rates. The objective of a money market hedge is to offset any potential losses that may be incurred as a result of fluctuations in the value of a foreign currency. To hedge, a company will … Read more
Sterilized intervention is a type of intervention where a central bank buys or sells foreign currency in order to influence the exchange rate, but then takes offsetting actions in order to neutralize the impact of its intervention on the money supply. Sterilized intervention can be used to either defend a currency that is under attack, … Read more
Covered interest arbitrage is a type of Forex arbitrage that involves taking advantage of discrepancies in interest rates between two different currency pairs. In order to execute a covered interest arbitrage trade, a trader would buy a currency with a higher interest rate and simultaneously sell a currency with a lower interest rate. The trade … Read more
Forex options trading is a type of trading where the trader speculates on the future price of a currency pair, and purchases an option that will give them the right to buy or sell the currency pair at a set price at a future date. The price of the option is determined by the current … Read more
