| Term | Definition |
|---|
| Balance of Payments | A system of accounts that measures transactions of good, services, income, and financial assets between domestic residents, businesses, and governments and the rest of the world during a specific time period. |
| Debit entry | A negative entry in the balance of payments that records a transaction resulting in a payment aboard by a domestic resident. |
| Credit entry | A positive entry in the balance of payments that records a transaction resulting in a payment to a domestic resident from abroad. |
| Current account | Measures the flow of goods, services, income, and transfers or gifts between domestic residents, businesses, and governments and the rest of the world. |
| Capital account | A tabulation of the flows of financial assets between domestic private residents and businesses and foreign private residents and businesses. |
| Official settlement balance | A balance-of-payments account that tabulates transactions of reserve assets by official government agencies. |
| Double entry bookkeeping system | Records both sides of a two-party transaction as two offsetting entries. |
| Balance-of-Payments Deficit | The sum of the credits and debits in the current account and the private capital account is negative. |
| Balance-of Payments Surplus | A situation where the sum of the debits and credits in the current and private capital account is positive. |
| Balance-of Payments Equilibrium | A situation where the sum of the debits and credits in the current account and the private capital account is zero. |
| Exchange rate | expresses the value of one currency relative to another currency as the number of units of one currency required to purchase one unit of the other currency. |
| Spot market | A market for immediate purchase and delivery of currencies. |
| Bilateral exchange rate | An exchange rate that relates the value of two currencies, it is "bilateral" meaning "two sides." |
| Currency Appreciation | The amount of currency required to purchase another currency has decreased, |
| Currency Depreciation | The amount of a currency required to purchase another currency has increased. |
| Spot exchange rate | Market prices of foreign exchanges in the spot market that are pertain to the trading of foreign-currency-denominated deposits among major banks in amounts of $1 million and more. |
| Effective exchange rate | A weighted-average measure of the value of a currency relative to two or more currencies. |
| Foreign exchange risk | The risk that the value of a future receipt or obligation will change due to variation in foreign exchange rates. |
| Transaction exposure | The risk that the revenues or costs associated with a transaction expressed in terms of the domestic currency may change due to variations in exchange rates. |
| Translation exposure | Foreign exchange risk resulting from the conversion of a firm's foreign-currency-denominated assets and liabilities into domestic currency value. |
| Economic exposure | The risk that changes in exchange values might alter today's value of a firm's future income streams. |
| Hedging | The act of offsetting or eliminating risk exposure. |
| Covered exposure | A foreign exchange risk that has been completely eliminated with a hedging instrument. |
| Forward contract | A guarantee of a rate of exchange at a future date that can eliminate foreign exchange risk, or cover an exposure. |
| Forward exchange market | A market for contracts that ensures the future delivery of and payment for a foreign currency at a specified exchange rate. |
| Forward exchange rates | The price of contracts traded in the forward exchange market. |
| Forward Premium or Discount | The difference between the forward exchange rate and the spot exchange rate expressed as a percentage of the spot exchange rate. |
| Derived demand for a currency | The demand for a currency arises from the demand for the goods, services, and assets that people use the currency to purchase. |
| Supply for a currency | derived from domestic residents' demand for another nation's goods, services, and financial assets. |
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