Concept
The spot exchange rate is the current price at which one currency can be exchanged for another for immediate delivery. It reflects the supply and demand dynamics in the foreign exchange market and is influenced by factors such as interest rates, economic indicators, and geopolitical events.
Relevant Fields:
Concept
The foreign exchange market is a global decentralized or over-the-counter market for the trading of currencies, which determines the foreign exchange rates for every currency. It is the largest and most liquid financial market in the world, operating 24 hours a day except weekends, with major centers in London, New York, Tokyo, and Sydney.
Concept
A currency pair is the quotation of two different currencies, with the value of one currency being quoted against the other. It is a fundamental concept in the foreign exchange market, where traders speculate on the relative strength of two currencies to make a profit.
Concept
Interest Rate Parity (IRP) is a financial theory which posits that the difference in interest rates between two countries is equal to the differential between the forward exchange rate and the spot exchange rate. It ensures that investors cannot achieve arbitrage profits by exploiting interest rate differentials in foreign exchange markets.
Concept
Exchange rate risk refers to the potential for financial loss due to fluctuations in the exchange rate between two currencies, affecting businesses and investors involved in international transactions. Managing this risk is crucial for maintaining profitability and financial stability in a globalized economy.
Concept
Market liquidity refers to the ease with which assets can be bought or sold in a market without affecting the asset's price. High liquidity indicates a large volume of trade and tight bid-ask spreads, facilitating efficient market transactions.
Concept
Economic indicators are statistical metrics used to gauge the health of an economy, providing insights into its current state and future trends. They are crucial for policymakers, investors, and businesses to make informed decisions by analyzing patterns in economic activity, inflation, employment, and other critical areas.
Concept
Geopolitical risk refers to the potential for political, economic, and social instability in a region to impact global markets and international relations. These risks can arise from factors such as conflicts, policy changes, and diplomatic tensions, influencing investment decisions and economic forecasts worldwide.
Concept
Supply and demand is a fundamental economic model that explains how prices are determined in a market based on the availability of goods (supply) and the desire for them (demand). When demand exceeds supply, prices tend to rise, and when supply exceeds demand, prices tend to fall, reaching an equilibrium where supply equals demand.
Concept
The forward exchange rate is the agreed-upon price for a currency to be exchanged at a future date, often used to hedge against foreign exchange risk. It reflects the market's expectations of future currency movements and is influenced by factors such as interest rate differentials between the two currencies involved.
Uncovered Interest Rate Parity (UIP) posits that the difference in interest rates between two countries is equal to the expected change in exchange rates between their currencies. It assumes that investors are indifferent to currency risk, leading to no arbitrage opportunities in the foreign exchange market over time.
Concept
Covered Interest Rate Parity (CIRP) is a financial theory stating that the difference in interest rates between two countries is equal to the differential between the forward exchange rate and the spot exchange rate, eliminating arbitrage opportunities. This principle ensures that investors cannot earn risk-free profits from discrepancies in interest rates and currency exchange rates by using forward contracts.
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