Definition of Currency selection

Currency selection

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

Adverse selection

A situation in which market participation is a negative signal.

Asian currency units (ACUs)

Dollar deposits held in Singapore or other Asian centers.

Blocked currency

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

Country selection

A type of active international management that measures the contribution to performance
attributable to investing in the better-performing stock markets of the world.

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 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.

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 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.

Security selection decision

Choosing the particular securities to include in a portfolio.

Self-selection

Consequence of a contract that induces only one group (e.g. low risk individuals) to participate.

Soft currency

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

Stock selection

An active portfolio management technique that focuses on advantageous selection of
particular stocks rather than on broad asset allocation choices.

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.

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