| Term | Definition |
|---|---|
| Forex | The foreign exchange market, where currencies are traded |
| (Nominal) exchange rate | The price of one currency in terms of another. Example: $1 = 2 BPS means that one dollar will buy 2 British pounds |
| Arbitrage | the practice of taking advantage of a risk-free profit opportunity |
| Basis point | 1/100th of 1% |
| Covered interest parity | The idea that the interest rate earned in one country must be equal to the interest paid in another country when the exchange rate risk is "covered" by trade on the forward market |
| Forward Exchange Market | The market on which one may trade foreign exchange to be delivered at a future date |
| Purchasing power parity | The idea that a good should have the same price independent of which country in which it is purchased |
| Real exchange rate | The rate at which real goods can be exchanged between countries |
| Spot Exchange Market | The market on which one can trade currencies in the current period |
| Uncovered interest parity | The idea that the interest rate earned in one country must be equal to the interest paid in another country when the exchange rate risk is not covered by trade on the forward market; the expected returns in the two countries are calculated using the expected future exchange rate |