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Exchange rate
The price of foreign currency in terms of the
domestic currency.
Spot Transactions at spot rate
In a spot transaction, one currency is traded
for another currency today
Rates are typically “Direct Quotes”
Direct Quote
Indicates the number of units of the home currency
required to buy one unit of the foreign currency
Example: 1.6288 dollars per British pound
Indirect Quote
Indicates the number of units of a foreign currency
that can be bought for one unit of the home
currency. It is the reciprocal of direct quote.
Example: =1/1.6288 = .6139 pounds per dollar
Simple
Eliminates exchange rate differentials across the
markets for a single currency
Triangular
Eliminates exchange rate differentials across
markets for all currencies
Covered-Interest
Eliminates differentials across currency and interest-
rate markets