Definition of Currency basket

Currency basket

The value of a portfolio of specific amounts of individual currencies, used as the basis for
setting the market value of another currency. It is also referred to as a currency cocktail.

Asian currency units (ACUs)

Dollar deposits held in Singapore or other Asian centers.

Basket options

Packages that involve the exchange of more than two currencies against a base currency at
expiration. The basket option buyer purchases the right, but not the obligation, to receive designated
currencies in exchange for a base currency, either at the prevailing spot market rate or at a prearranged rate of
exchange. A basket option is generally used by multinational corporations with multicurrency cash flows
since it is generally cheaper to buy an option on a basket of currencies than to buy individual options on each
of the currencies that make up the basket.

Basket trades

Related: Program trades.

Blocked currency

A currency that is not freely convertible to other currencies due to exchange controls.

Currency

Money.

Currency arbitrage

Taking advantage of divergences in exchange rates in different money markets by
buying a currency in one market and selling it in another market.

Currency future

A financial future contract for the delivery of a specified foreign currency.

Currency option

An option to buy or sell a foreign currency.

Currency risk

Related: Exchange rate risk

Currency risk sharing

An agreement by the parties to a transaction to share the currency risk associated with
the transaction. The arrangement involves a customized hedge contract embedded in the underlying
transaction.

Currency selection

Asset allocation in which the investor chooses among investments denominated in
different currencies.

Currency swap

An agreement to swap a series of specified payment obligations denominated in one currency
for a series of specified payment obligations denominated in a different currency.

Devaluation A decrease in the spot price of the currency

Dual-currency issues

Eurobonds that pay coupon interest in one currency but pay the principal in a different
currency.

Eurocurrency deposit

A short-term fixed rate time deposit denominated in a currency other than the local
currency (i.e. US$ deposited in a London bank).

Eurocurrency market

The money market for borrowing and lending currencies that are held in the form of
deposits in banks located outside the countries of the currencies issued as legal tender.

European Currency Unit (ECU)

An index of foreign exchange consisting of about 10 European currencies,
originally devised in 1979.

Foreign currency

Foreign money.

Foreign currency option

An option that conveys the right to buy or sell a specified amount of foreign
currency at a specified price within a specified time period.

Foreign currency translation

The process of restating foreign currency accounts of subsidiaries into the
reporting currency of the parent company in order to prepare consolidated financial statements.

Hard currency

A freely convertible currency that is not expected to depreciate in value in the foreseeable future.

Multicurrency clause

Such a clause on a Euro loan permits the borrower to switch from one currency to
another currency on a rollover date.

Multicurrency loans

Give the borrower the possibility of drawing a loan in different currencies.

Reporting currency

The currency in which the parent firm prepares its own financial statements; that is, U.S.
dollars for a U.S. company.

Reserve currency

A foreign currency held by a central bank or monetary authority for the purposes of
exchange intervention and the settlement of inter-governmental claims.

Soft currency

A currency that is expected to drop in value relative to other currencies.

Virtual currency option

A new option contract introduced by the PHLX in 1994 that is settled in US$ rather
than in the underlying currency. These options are also called 3-Ds (dollar denominated delivery).

Reserve Currency

A currency, frequently the U.S. dollar, that is used by other countries to denominate the assets they hold as international reserves.

Fixed-exchange rate

A country's decision to tie the value of its currency to another country's currency, gold
(or another commodity), or a basket of currencies.

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