Exchange Rate Key Terms

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foreign exchange

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Refers to foreign national currencies, i.e. for any country, it refers to currencies other than its own.

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exchange rate

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The value of one currency expressed in term of another currency; for example, €1 = US$1.5.

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floating exchange rate

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An exchange rate system where the exchange

rate is determined solely by the market demand and market supply of the currency in the foreign exchange market without any central bank intervention.

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appreciation

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When the price of a currency increases in a

floating exchange rate system.

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depreciation

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A decrease in the value of a currency in terms

of another currency in a floating or managed

exchange rate system.

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foreign direct investment (FDI)

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When a firm establishes a productive facility

in a foreign country or acquires controlling

interest (at least 10% of the ordinary shares) in

an existing foreign firm

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portfolio investment

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The purchase of financial assets such as shares and bonds in order to gain a financial return in the form of interest or dividends. Appears in the financial account of the balance of payments.

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remittances

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The transfer of money by foreign workers to

individuals, often family members, in their home country.

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speculation

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Refers to a process where something is bought

or sold with a view to making a short term

profit, for example, currency speculation where currencies are bought or sold so that a profit can be made when the exchange rate changes.

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fixed exchange rates

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An exchange rate system where the exchange

rate is fixed, or pegged, to the value of another

currency (or to the average value of a selection of currencies) and maintained there with appropriate central bank intervention.