ADJUSTABLE PEG SYSTEM
A system in which monetary authorities peg (‘fix’) the price of the domestic currency on the foreign exchange market but in which the price at which the currency is pegged can be adjusted (changed) from time to time.
An increase in the value of a currency in response to market demand.
ASSET PROTECTION TRUST (APT)
An offshore trust which holds title to and protects the grantor’s property from all claims, judgements and creditors, especially because it is located in a country other than the grantor’s home country.
BALANCE OF PAYMENTS ACCOUNTS - DEFICIT/SURPLUS
A summary record of a country’s transactions that typically involve payments or receipts of foreign exchange. A record of all transactions made by one particular country with others during a certain period of time. It compares the amount of economic transactions between a country and all other countries. This account includes trade balance, foreign investments, investment made by foreigners, capital flows.
BALANCE OF TRADE
Net flow of goods between two countries (exports minus its imports).
BANK FOR INTERNATIONAL SETTLEMENTS
‘BIS’ is an international organization fostering the co-operation of central banks and international financial institutions. Essentially, BIS which is located in Basel, Switzerland is a central bank for central banks. BIS monitors and collects data on international banking activity and enforces rules concerning international bank regulation.
Any market that exhibits a declining trend where prices fall.
BLACK MARKET EXCHANGE RATE
The parallel market rate usually that is quoted beside an official fixed exchange rate. Black market exchange rates are most common in third world countries where fixed exchange rate regimes are more common. In many cases, there can be a large spread in rates between an official and black market exchange rate.
The Bretton Woods Institutions, with the role of becoming the largest lenders to governments of developing countries. The World Bank and its sister organization, the International Monetary Fund (IMF), were created at Bretton Woods, New Hampshire in 1944. The accord of Bretton Woods established a fixed exchange rate regime, whose aim was to provide stability in the world economy after the Great Depression and World War II. This accord fixed exchange rates of major currencies to the US-dollar and set the price of gold to $35 USD/oz. This accord also required central bank intervention to maintain the fixed exchange rates. The US central bank was required to exchange dollars for gold, which eventually led to the demise of this system when demand for the US-dollar declined coupled with gold reserves. This forced US President Nixon to stop the exchange for dollars for gold thus ending the system in 1971.
The word fiscal maybe used in replace of budget. Government revenues and expenditures, the budget is in deficit when expenditures are greater than revenues and surplus when revenues are greater than expenditures.
A market where prices are rising or are expected to rise.
Balance of international transactions in financial capital. The ‘capital account’ is associated with the relationship between import and export capital, direct investment & loans, and also deals with securities investments such as repayment of principals of foreign debts, overseas investments, and by investments made by foreign enterprises.
Some countries may implement capital controls to help stabilize their exchange rate, maintain macroeconomic & financial stability. Capital controls are policy tools to help control volatile movements in capital flows in and out of a country’s financial system. There are generally two main types of capital controls in use: direct/administrative and indirect/market-based controls. Both of these area’s each have several instruments available to help control capital flows. An example/illustration of some type of capital controls include: prohibition of certain capital transactions, administrative controls on the banking system to help control flows, dual or multiple exchange rate systems, explicit tax on capital inflows “entrance tax” on certain foreign exchange transactions & foreign loans - usually in the form of a uniform levy on all foreign exchange transactions to discourage short term speculative position taking in foreign currency, indirect taxation of cross-border flows - in the form of non-interest bearing compulsory reserve/deposit requirements, indirect regulatory controls - net external position of commercial banks.
An investment position of buying a higher yielding currency with the capital of a lower yielding currency to gain an interest rate differential.
A banking organization that is usually independent of government, responsible for implementing a country monetary policy and for the function of issuing currency.
A tangible asset that circulates as money. Examples of commodity currency include gold, silver, tobacco, grain, platinum,etc. Gold has historically been the most popular and efficient commodity currency used throughout history.
The spread of economic difficulties from one country’s market to other countries within close geographic proximity. For example, Asian financial crisis in 1997-98.
Currencies that can be exchanged for other currencies or gold.
The risk that a government might default on its financial commitments of which usually causes pain to other areas of the financial system as well as to other countries.
Notes and coins issued by the central bank or government serving as legal tender for trade.
A currency board is a monetary authority that issues notes and coins convertible into a foreign anchor currency (the reserve currency) at a fixed rate on demand. Usually, a currency board does not accept deposits, however in cetain circumstances it may accept those backed by 100 percent by external reserves. As reserves, the currency board holds high-quality, interest-bearing securities and other low risk assets denominated in the anchor currency. Its reserve ratio is fixed at 100 percent or slightly higher of its notes and coins in circulation, as set by law. Profits to the currency board are dervived from the spread between the interest on securities that it holds and the expense of maintaining its notes and coins in circulation. The currency board remits to the government all profits beyond what it needs to pay expenses and maintain its reserve ratio. Market forces determine the quantity of notes and coins in circulation as the currency board has no discretion in monetary policy.
Currency crashes occur when the annual exchange rate drops by 22 percent.
An exchange rate that is fixed to a foreign currency or a basket of foreign currencies at a certain price or pegged (fixed) within a very narrow band set out by the action of monetary authorities.
CURRENCY (EXCHANGE RATE) RISK
The risk associated with drastic changes/fluctuations in exchange rates in which a large loss maybe incurred.
CURRENT ACCOUNT - DEFICIT/SURPLUS
Balance of trade plus NET investment income & transfers. The difference between what the country earns and spends overseas. The ‘current account’ more specifically deals with the daily recurring transactions in the ordinary course of business. It involves international receipts & payments including trading receipts & payments, service receipts & payments and unilateral transfers such as payment of royalties, repatriation of after-tax profits & dividends, remittance of after-tax wages & other income by foreign employees and any payment of interest on foreign debts.
A fall in the average level of all prices. Some modern advanced first world countries may experience deflation as excess debts built up over time are winded out of the financial system via an asset debt liquidation (bankruptcies, etc.) - Japan is one such country where mild deflation is currently taking place.
A pooled reserve, accumulated by periodic levies against multiple banks, which supplements the fractional reserve which individual banks maintain against their outstanding demand-obligations. ‘Insurance’ is a matter of establishing reserves against potential loss due to unavoidable external risks. Government sponsored ‘deposit insurance’ is popular within many banking regions whereby the pooled reserves protect depositors in the advent of insolvency by the financial institution. In the United States for example, some bank accounts are covered by government sponsored deposit insurance up to $100,000 US-dollars, in Canada up to $60,000 CDN.
The decline in the value of an asset or currency. Usually results from a change in demand in the foreign exchange market.
A security derived and whose value is dependent upon the underlying security from which it is derived. Examples include forward contracts, options, future contracts. Underlying securities can include stocks, bonds and currencies. Derivatives are mostly in use to hedge portfolio risk.
When the value of a currency is lowered against another currency, that is it takes more units of the currency to buy the same comparable foreign currency. Devaluation usually arises from government policy. Governments quite often use devaluation as a technique to improve the country’s balance of trade position as exports will become cheaper in foreign markets.
Dollarization occurs when residents of a country extensively use the US-dollar or another foreign currency alongside or instead of the domestic currency. ‘Unofficial dollarization’ occurs when individuals hold foreign-currency bank deposits or paper money to protect against high inflation in the domestic currency. ‘Official dollarization’ occurs when a government adopts a foreign currency as the legal tender currency for their country.
A person’s permanent legal home, as compared to a place that maybe only a temporary residence. Domicile determines what law applies to the person for purposes of marriage, divorce, succession of estate at death and taxation.
Government restrictions imposed on dealings in a national or foreign currency.
Is the price of foreign currency; that is, the amount of domestic currency that must be given up in order to obtain one unit of the foreign currency. For example, if one must give up 4 Canadian dollars to get 3 US-dollars, the exchange rate is then 1.33 CAD to 1 USD.
Money which is declared to be legal tender but has no intrinsic value and is not backed by (not legally defined by convertibility into) any tangible commodity such as gold, silver, etc.. Fiat money is money by decree or proclamation. It derives its value from the perceived authority and creditworthiness of the issuer (national government - central bank of the respective country).
The deliberate use of the government’s revenue - raising (taxation) and spending activities in an effort to influence the behaviour of certain macroeconomic variables such as total employment.
FIXED EXCHANGE RATE ‘OFFICIAL RATE’
When the exchange rate is not allowed to fluctuate against the value of another currency. Fixed exchange rate regimes generally require the country’s central bank to intervene in order to maintain the fixed rate also known as the official rate.
Refers to the actual foreign currency or various claims on it, such as bank deposits or promises to pay that are traded for each other. (FOREX) - the buying and selling of currencies.
Movement of large sums of money across national borders, often to escape high taxes or pending political or social unrest.
FLOAT, FLEXIBLE OR FLOATING EXCHANGE RATE
An exchange rate that is left to be determined on the free market without any attempt by monetary authorities to determine its value.
FRACTIONAL RESERVE BANKING
The practice of holding (only) a portion of overall assets in cash or cash equivalents (required reserves) in order to meet short-term obligations immediately upon demand. Money which is not held in reserve is invested, usually loaned out so as to generate interest income. Some reserves support savings accounts and time deposits (deposits which earn interest but don’t allow you to write cheques on). Banking evolved so as to also permit a fractional reserve for “checkable deposits”. The majority of world banking systems today follow this model of fractional banking.
An economy in which the decisions of individual households and firms (as distinct from the central authorities) exert the major influence over the allocation of resources.
The analysis of economic indicators, political and other current events that could effect the future direction of financial markets. The foreign exchange market for fundamental analysis is primarily based upon macroeconomic variables.
‘Gross Domestic Product’, a measure of national income in which the total value of the country’s goods and services are valued.
GOLD EXCHANGE STANDARD
A monetary system in which some countries’ currencies are directly convertible into gold while other countries’ currencies are indirectly convertible by being convertible into the gold-backed currencies at a fixed rate. Under the Bretton Woods version, only the US-dollar was directly convertible into gold.
GROSS OFFICIAL RESERVES
Liquid foreign currency denominated claims in the country’s central bank. This includes monetary claims, free gold, holdings of SDR’s (“special drawing rights”), reserve position in the IMF, holdings of fixed instruments.
A currency that is considered difficult to obtain a large numerical value of, one that historically maintains and holds its value very well relative to other currencies, a hard currency often has low inflation rates within the economy. An example of a hard currency includes the Swiss franc, euro and US-dollar.
HAVEN OR HAVEN NATION
A country where banking, tax, trust and corporation laws are specially designed to attract foreign persons wishing to avoid taxes, or protect assets.
A state of extreme level of inflation often correlated with a weak currency and fragile economy. Inflation levels over 100 percent annually maybe considered at hyperinflation levels, although annual rates of inflation for economies experiencing hyperinflation will quite often exceed 1000 percent. Country’s that have experienced hyperinflation may have courted economic policies under the rule of military or autocratic rule/dictatorships, developing countries usually in the third world, countries at war or civil war, another sign occurs when government spending is out of control, economic crisis persists with massive fiscal/trade/current account deficits, etc.. Hyperinflations are rare in advanced first world industrialized countries. Modern economies tend to experience deflation over hyperinflation.
A rise in the average level of prices.
INTERNATIONAL BUSINESS CORPORATION (IBC)
A term used to describe a variety of offshore corporate structures, characterized by having all or most of its business activity outside the nation of incorporation, maximum privacy, flexibility, low or no taxes on operations, broad powers and minimal filing and reporting requirements.
INTERNATIONAL MONETARY FUND (IMF)
A Bretton Woods institution based in Washington, DC. The IMF is a cooperative
institution - in some ways like a credit union - in which member governments provide temporary financial assistance to any member country experiencing difficulties in paying for imports of goods and services and/or servicing its foreign debt. In return, the country agrees to undertake policy reforms to correct the problems that underlie its balance of payments difficulties. This lending role by the IMF allows the country the opportunity to correct their balance of payment difficulties without resorting to measures destructive to national or international prosperity.
The IMF also exercises a surveillance function by monitoring the economic policies of all
the member countries and providing policy advice. This surveillance activity helps the
IMF to identify financial difficulties in a particular member’s country before they
develop into a full fledge financial crisis.
‘ISO’ INTERNATIONAL ORGANIZATION FOR STANDARDIZATION
The reader will see this ISO symbol that BI.C refers to in the BI.C currency index. The ISO is a worldwide federation of national standards bodies that provides the list of global currencies with a three-character currency code generally used to represent them. Ie. Brazilian Real is represented by ISO symbol: ‘BRL’.
LIBO (LONDON INTERBANK OFFER RATE)
The interest rate at which major international banks lend to one another, it also widely used as guide for setting short-term rates.
The study of the determination of economic aggregates, such as total output (ie.GDP), total employment and the price level (ie. inflation rate).
Also known as a ‘dirty float’. An exchange rate regime whereby the currency is not pegged but rather managed by the central bank in order to prevent extreme currency valuations in the exchange rate. The central bank can use interest rates to attract or deflect capital and/or through the buying and selling of the currency itself.
An attempt to influence the economy by operating on such monetary variables as the quantity of money and the rate of interest. The nation’s central bank is usually involved with monetary policy.
The process of concealing the criminal origins or uses of cash so that it appears the funds involved are from legitimate sources. A crime in most major nations.
Nominal interest rates, nominal GDP growth
Real rate + inflation
NUMBERED BANK ACCOUNTS
Any account in a financial institution that is identified not by the account holder’s name, but a number, limiting knowledge of the owner to a few bank officials. Law in many nations protects the privacy of such accounts and account holders. Swiss banking is often associated with numbered bank accounts, these type of accounts are also available in many other asset haven nations.
OFFSHORE & ONSHORE BANKING
Offshore banking - banking outside your home country. ‘Offshore banking’ is also referred to banking activities associated with many haven nations such as the Cayman Islands, Jersey, British Virgin Islands, Bahamas, etc.
Onshore banking - banking within your home country.
The risk of government impacting the stability of a country, this is more closely looked at in third world countries.
PURCHASING POWER PARITY (PPP)
The law of one price. The exchange rates between currencies are equalized when the price of an identical good in two countries has the same purchasing power. PPP refers to the equalization of price levels across countries, thus the exchange rate between two countries should equal the ratio of the two countries price level of a fixed basket of goods & services. In theory without taking into account transportation and other transaction costs, competitive markets will equalize the price level of an identical good in two countries when the prices are quoted in the same currency. When a country’s domestic price level is rising, it experiences inflation. In order for that country to return to PPP, that country’s exchange rate must be depreciated.
Real interest rates, real GDP growth
Inflation not included.
Seigniorage revenue is the net revenue derived for governments from the issuing of coins and bank notes. It is the difference between interest earned on the issuance of money and the costs associated with the producing and distributing bank notes & coins. Unlike the seigniorage for coins, bank note seigniorage is collected in instalments over a period of years due to paper money’s short life span (ie. damaged notes) and the future liability to government of redeeming the currency.
Revenue = the nominal value of denomination + interest - (redemption nominal value + distribution & production). The net profit to government is upwards in the range of 5 percent of the value of the currency in circulation.
Usually a currency with very high inflation rates, continually being debased, currency is easy to obtain. The Yugoslav new dinar is an example of a soft currency.
SPECIAL DRAWING RIGHT (SDR)
The SDR is an artificial currency used by the International Monetary Fund (IMF) for internal accounting purposes. Some countries use the SDR as a peg for their currency. Currently, the basket of currencies that make up the SDR include the US-dollar, Euroland Euro, British Pound and the Japanese Yen. Special Drawing Rights Allocations - the international reserve asset created by the IMF in which financial assistance to a member country maybe allocated based on the member’s quota.
Any policy designed to reduce the economy’s cyclical fluctuations. Attempts by the central authorities to remove inflationary and deflationary gaps when they appear.
Deficit à The excess of imports over exports.
Surplus à The excess of exports over imports.
Based in Washington, DC, the World Bank currently employs 10,000 people. The World Bank’s primary mandate is poverty alleviation. Originally created to finance the reconstruction of war-torn Europe after World War II in 1945, the World Bank has become the primary financier of development projects in the Third World and also has become the Third World’s largest creditor. The World Bank is currently the largest multi-national lending and technical agency dealing with Third World development. As the world’s leading development agency, the World Bank has a wide-ranging mandate, from consolidating loans for large-scale development projects to providing structural adjustment loans and sectoral adjustment loans to developing countries experiencing balance of payments difficulties. The Bank’s annual administrative budget alone is over
$1.4 billion US-dollars. The largest contributors to the World Bank are the United States, Japan, Germany, France, Britain, Canada to name a few.