KEY TERMS

exchange rate

appreciation

depreciation

effective exchange rate

exchange rate regimes

fixed (or pegged) exchange rate regime

floating (or flexible) exchange rate regime

free float

band

managed float

crawl

currency (or monetary) union

dollarization

currency board

foreign exchange (forex or FX) market

59

spot contract

spot exchange rate

spread

market friction

transaction cost

derivatives

forward

swap

futures

option

commercial banks

interbank trading

corporations

nonbank financial institutions

capital control

official market

black market

intervention

arbitrage

equilibrium

no-arbitrage condition

cross rate

vehicle currency

forward exchange rate

covered interest parity (CIP)

expected exchange rate

rate of return

risk

liquidity

expected rate of return

uncovered interest parity (UIP)

expected rate of depreciation

forward premium