A glossary of foreign exchange

September 19, 1992|By Bloomberg Business News

The following is a glossary of commonly used terms in foreign exchange and currency transactions:

* European Community, or EC -- An economic and political alliance of West European countries designed to foster trade and cooperation.

The 12 members are Germany, France, Belgium, the Netherlands, Luxembourg, Italy, Denmark, Great Britain, Ireland, Spain, Portugal and Greece.

* European currency unit, or ECU -- An artificial currency made up of a market basket of EC currencies.

* European rate mechanism, or ERM -- The system that fixes the rates of 10 EC currencies to one another and to the Ecu. Each currency is allowed to fluctuate within a specified range of 2.25 percent to 6 percent against each of the others.

Whenever the currency wanders outside its specified range against another currency, the two central banks are obliged to intervene.

The member currencies are the German deutsche mark, the French franc, the British pound, the Italian lira, the Spanish peseta, the Belgian franc, the Netherlands guilder, the Danish krone, the Portuguese escudo and the Irish punt. The Luxembourg franc is tied directly to the Belgian franc. The Greek drachma is not part of the system.

* European monetary union, or EMU -- A plan that calls for a single currency in the European Community by 1999 at the latest. The plan is also called the Maastricht treaty, since it was hammered out in the Dutch town of the same name in December.

* Floating rate system -- An arrangement in which a currency's value is determined by the market forces of supply and demand.

* Fixed rate system -- An arrangement in which a currency's value is tied (pegged) at specified levels to another currency or to gold.

* Devaluation -- Devaluation of a currency occurs when a central bank or government lowers the value of its currency relative to others.

* Revaluation -- Revaluation of a currency occurs when a central bank or government raises the value of its currency relative to others.

* Intervention -- If a government feels that its currency is too weak or too strong relative to other currencies, it may intervene in the market. For example, if the Italian government felt its lira was too weak against the deutsche mark, it might buy lire for marks in the open market.

* Spot price -- The price of a currency delivered today as opposed to a future, or forward, date.

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