20.7: Key Terms
- Page ID
- 94821
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- American option
- an option that the holder can exercise at any time up to and including the exercise date
- appreciate
- when one unit of a currency will purchase more of a foreign currency than it did previously
- call option
- an option that gives the owner the right, but not the obligation, to buy the underlying asset at a specified price on some future date
- depreciate
- when one unit of a currency will purchase less of a foreign currency than it did previously
- derivative
- a security that derives its value from another asset
- duration
- a measure of interest rate risk
- economic risk
- the risk that a change in exchange rates will impact the number of customers a business has or its sales
- European option
- an option that the holder can exercise only on the expiration date
- exchange rate
- the price of one currency in terms of another currency
- exercise price (strike price)
- the price the option holder pays for the underlying asset when exercising an option
- exercising
- choosing to purchase or sell the asset underlying a held option according to the terms of the option contract
- expiration date
- the date an option contract expires
- forward contract
- a contractual agreement between two parties to exchange a specified amount of assets on a specified future date
- futures contract
- a standardized contract to trade an asset on some future date at a price locked in today
- hedging
- taking an action to reduce exposure to a risk
- margin
- the collateral that must be posted to guarantee that a trader will honor a futures contract
- marking to market
- a procedure by which cash flows are exchanged daily for a futures contract, rather than at the end of the contract
- natural hedge
- when a company offsets the risk that something will decrease in value by having a company activity that would increase in value at the same time
- option
- an agreement that gives the owner the right, but not the obligation, to purchase or sell an asset at a specified price on some future date
- option writer
- seller of a call or put option
- premium
- the price a buyer of an option pays for the option contract
- put option
- an option that gives the owner the right, but not the obligation, to sell the underlying asset at a specified price on some future date
- speculating
- attempting to profit by betting on the uncertain future, knowing that a risk of loss is involved
- spot rate
- the current market exchange rate
- strike price (exercise price)
- the price an option holder pays for the underlying asset when exercising the option
- swap
- an agreement between two parties to exchange something, such as their obligations to make specified payment streams
- transaction risk
- the risk that a change in exchange rates will impact the value of a business’s expected receipts or expenses
- translation risk
- the risk that a change in exchange rates will impact the value of items on a company’s financial statements
- vertical integration
- the merger of a company with its supplier