Definition of Exchange

Exchange

The marketplace in which shares, options and futures on stocks, bonds, commodities and indices
are traded. Principal US stock exchanges are: New York Stock exchange (NYSE), American Stock exchange
(AMEX) and the National Association of Securities Dealers (NASDAQ)

American Stock Exchange (AMEX)

The second-largest stock exchange in the United States. It trades
mostly in small-to medium-sized companies.

Bill of exchange

General term for a document demanding payment.

Chicago Mercantile Exchange (CME)

A not-for-profit corporation owned by its members. Its primary
functions are to provide a location for trading futures and options, collect and disseminate market information,
maintain a clearing mechanism and enforce trading rules.

Commodities Exchange Center (CEC)

The location of five New York futures exchanges: Commodity
exchange, Inc. (COMEX), the New York Mercantile exchange (NYMEX), the New York Cotton exchange,
the Coffee, Sugar and Cocoa exchange (CSC), and the New York futures exchange (NYFE). common size
statement A statement in which all items are expressed as a percentage of a base figure, useful for purposes of
analyzing trends and the changing relationship between financial statement items. For example, all items in
each year's income statement could be presented as a percentage of net sales.

Convertible exchangeable preferred stock

Convertible preferred stock that may be exchanged, at the
issuer's option, into convertible bonds that have the same conversion features as the convertible preferred
stock.

The Exchange

A nickname for the New York stock exchange. Also known as the Big Board. More than
2,000 common and preferred stocks are traded. The exchange is the oldest in the United States, founded in
1792, and the largest. It is located on Wall Street in New York City.

Exchange controls

Governmental restrictions on the purchase of foreign currencies by domestic citizens or
on the purchase of the local domestic currency by foreigners.

Exchange of assets

Acquisition of another company by purchase of its assets in exchange for cash or stock.

Exchange of stock

Acquisition of another company by purchase of its stock in exchange for cash or shares.

Exchange offer

An offer by the firm to give one security, such as a bond or preferred stock, in exchange for
another security, such as shares of common stock.

Exchange rate

The price of one country's currency expressed in another country's currency.

Exchange Rate Mechanism (ERM)

The methodology by which members of the EMS maintain their
currency exchange rates within an agreed upon range with respect to other member countries.

Exchange rate risk

Also called currency risk, the risk of an investment's value changing because of currency
exchange rates.

Exchange risk

The variability of a firm's value that results from unexpected exchange rate changes or the
extent to which the present value of a firm is expected to change as a result of a given currency's appreciation
or depreciation.

Exchangeable Security

Security that grants the security holder the right to exchange the security for the
common stock of a firm other than the issuer of the security.

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.

Floating exchange rate

A country's decision to allow its currency value to freely change. The currency is not
constrained by central bank intervention and does not have to maintain its relationship with another currency
in a narrow band. The currency value is determined by trading in the foreign exchange market.

Foreign exchange

Currency from another country.

Foreign exchange controls

Various forms of controls imposed by a government on the purchase/sale of
foreign currencies by residents or on the purchase/sale of local currency by nonresidents.

Foreign exchange dealer

A firm or individual that buys foreign exchange from one party and then sells it to
another party. The dealer makes the difference between the buying and selling prices, or spread.

Foreign exchange risk

The risk that a long or short position in a foreign currency might have to be closed out
at a loss due to an adverse movement in the currency rates.

Foreign exchange swap

An agreement to exchange stipulated amounts of one currency for another currency
at one or more future dates.

Forward exchange rate

exchange rate fixed today for exchanging currency at some future date.

Gold exchange standard

A system of fixing exchange rates adopted in the Bretton Woods agreement. It
involved the U.S. pegging the dollar to gold and other countries pegging their currencies to the dollar.

Historical exchange rate

An accounting term that refers to the exchange rate in effect when an asset or
liability was acquired.

London International Financial Futures Exchange (LIFFE)

A London exchange where Eurodollar futures
as well as futures-style options are traded.

London International Financial Futures Exchange (LIFFE)

London exchange where Eurodollar futures as well as futures-style options are traded.

New York Stock Exchange (NYSE)

Also known as the Big Board or The Exhange. More than 2,00 common
and preferred stocks are traded. The exchange is the older in the United States, founded in 1792, and the
largest. It is lcoated on Wall Street in New York City

Nominal exchange rate

The actual foreign exchange quotation in contrast to the real exchange rate that has
been adjusted for changes in purchasing power.

Organized exchange

A securities marketplace wherein purchasers and sellers regularly gather to trade
securities according to the formal rules adopted by the exchange.

Philadelphia Stock Exchange (PHLX)

A securities exchange where American and European foreign
currency options on spot exchange rates are traded.

Real exchange rates

exchange rates that have been adjusted for the inflation differential between two countries.

Securities & Exchange Commission

The SEC is a federal agency that regulates the U.S.financial markets.

SIMEX (Singapore International Monetary Exchange)

A leading futures and options exchange in Singapore.

Spot exchange rates

exchange rate on currency for immediate delivery. Related: forward exchange rate.

Stock exchanges

Formal organizations, approved and regulated by the Securities and exchange Commission
(SEC), that are made up of members that use the facilities to exchange certain common stocks. The two major
national stock exchanges are the New York Stock exchange (NYSE) and the American Stock exchange (ASE
or AMEX). Five regional stock exchanges include the Midwest, Pacific, Philadelphia, Boston, and Cincinnati.
The Arizona stock exchange is an after hours electronic marketplace where anonymous participants trade
stocks via personal computers.

Securities and Exchange Commission (SEC)

The federal agency that
oversees the issuance of and trading in securities of public businesses.
The SEC has broad powers and can suspend the trading in securities of a
business. The SEC also has primary jurisdiction in making accounting
and financial reporting rules, but over the years it has largely deferred to
the private sector for the development of generally accepted accounting
principles (GAAP).

exchange rate

Amount of one currency needed to purchase one unit of another.

expectations theory of exchange rates

Theory that expected spot exchange rate equals the forward rate.

forward rate of exchange

exchange rate for a forward transaction.

Securities and Exchange Commission (SEC)

Federal agency responsible for regulation of securities markets in the United
States.

spot rate of exchange

exchange rate for an immediate transaction.

Effective Exchange Rate

The weighted average of several exchange rates, where the weights are determined by the extent of our trade done with each country.

Equation of Exchange

The quantity theory equation Mv = PQ.

Exchange Rate, Nominal

The price of one currency in terms of another, in this book defined as number of units of foreign currency per dollar.

Exchange Rate, Real

The nominal exchange rate corrected for price level differences.

Fixed Exchange Rate

An exchange rate held constant by a government promise to buy or sell dollars at the fixed rate on the foreign exchange market.

Flexible Exchange Rate

An exchange rate whose value is determined by the forces of supply and demand on the foreign exchange market.

Floating Exchange Rate

See flexible exchange rate.

Foreign Exchange

The currency of a foreign country.

Foreign Exchange Market

A worldwide market in which one country's currency is bought or sold in exchange for another country's currency.

Foreign Exchange Reserves

A fund containing the central bank's holdings of foreign currency or claims thereon.

Forward Exchange Market

A market in which foreign exchange can be bought or sold for delivery (and payment) at some specified future date but at a price agreed upon now.

Medium of Exchange

Any item that can be commonly exchanged for goods and services.

Real Exchange Rate

exchange rate adjusted for relative price levels.

Realizable Revenue A revenue transaction where assets received in exchange for goods and

services are readily convertible into known amounts of cash or claims to cash.

Securities and Exchange Commission (SEC)

A federal agency that administers securities legislation,
including the Securities Acts of 1933 and 1934. Public companies in the United States
must register their securities with the SEC and file with the agency quarterly and annual financial
reports.

Accounting exposure

The change in the value of a firm's foreign currency denominated accounts due to a
change in exchange rates.

American-style option

An option contract that can be exercised at any time between the date of purchase and
the expiration date. Most exchange-traded options are American style.

Asset

Any possession that has value in an exchange.

Asset for asset swap

Creditors exchange the debt of one defaulting borrower for the debt of another
defaulting borrower.

Auction markets

Markets in which the prevailing price is determined through the free interaction of
prospective buyers and sellers, as on the floor of the stock exchange.

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.

Big Bang

The term applied to the liberalization in 1986 of the London Stock exchange in which trading was
automated with the use of computers.

Big Board

A nickname for the New York Stock exchange. Also known as The exchange. More than 2,000
common and preferred stocks are traded. Founded in 1792, the NYSE is the oldest exchange in the United
States, and the largest. It is located on Wall Street in New York City.

Block trade

A large trading order, defined on the New York Stock exchange as an order that consists of
10,000 shares of a given stock or a total market value of $200,000 or more.

Blocked currency

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

Bretton Woods Agreement

An agreement signed by the original United Nations members in 1944 that
established the International Monetary Fund (IMF) and the post-World War II international monetary system
of fixed exchange rates.

Broker

An individual who is paid a commission for executing customer orders. Either a floor broker who
executes orders on the floor of the exchange, or an upstairs broker who handles retail customers and their
orders.

Cable

exchange rate between British pounds sterling and the U.S.$.

Cash transaction

A transaction where exchange is immediate, as contrasted to a forward contract, which
calls for future delivery of an asset at an agreed-upon price.

CBOE

Chicago Board Options exchange. A securities exchange created in the early 1970s for the public
trading of standardized option contracts.

CFTC

The Commodity Futures Trading Commission is the federal agency created by Congress to regulate
futures trading. The Commodity exchange Act of 1974 became effective April 21, 1975. Previously, futures
trading had been regulated by the Commodity exchange Authority of the USDA.

Clearing member

A member firm of a clearing house. Each clearing member must also be a member of the
exchange. Not all members of the exchange, however, are members of the clearing organization. All trades of
a non-clearing member must be registered with, and eventually settled through, a clearing member.

Clearing house / Clearinghouse

An adjunct to a futures exchange through which transactions executed its floor are settled by a
process of matching purchases and sales. A clearing organization is also charged with the proper conduct of
delivery procedures and the adequate financing of the entire operation.

Closed-end fund

An investment company that sells shares like any other corporation and usually does not
redeem its shares. A publicly traded fund sold on stock exchanges or over the counter that may trade above or
below its net asset value. Related: Open-end fund.

Commission broker

A broker on the floor of an exchange acts as agent for a particular brokerage house and
who buys and sells stocks for the brokerage house on a commission basis.

Contract

A term of reference describing a unit of trading for a financial or commodity future. Also, the actual
bilateral agreement between the buyer and seller of a transaction as defined by an exchange.

Convertibility

The degree of freedom to exchange a currency without government restrictions or controls.

Counter trade

The exchange of goods for other goods rather than for cash; barter.

Country financial risk

The ability of the national economy to generate enough foreign exchange to meet
payments of interest and principal on its foreign debt.

Covered interest arbitrage

A portfolio manager invests dollars in an instrument denominated in a foreign
currency and hedges his resulting foreign exchange risk by selling the proceeds of the investment forward for
dollars.

Crawling peg

An automatic system for revising the exchange rate. It involves establishing a par value around
which the rate can vary up to a given percent. The par value is revised regularly according to a formula
determined by the authorities.

Cross rates

The exchange rate between two currencies expressed as the ratio of two foreign exchange rates
that are both expressed in terms of a third currency.

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 risk

Related: exchange rate risk

Current maturity

Current time to maturity on an outstanding debt instrument.
Current / noncurrent method
Under this currency translation method, all of a foreign subsidiary's current
assets and liabilities are translated into home currency at the current exchange rate while noncurrent assets
and liabilities are translated at the historical exchange rate, that is, the rate in effect at the time the asset was
acquired or the liability incurred.

Current rate method

Under this currency translation method, all foreign currency balance-sheet and income
statement items are translated at the current exchange rate.

Delivery points

Those points designated by futures exchanges at which the financial instrument or
commodity covered by a futures contract may be delivered in fulfillment of such contract.

Direct quote

For foreign exchange, the number of U.S. dollars needed to buy one unit of a foreign currency.

Dirty float

A system of floating exchange rates in which the government occasionally intervenes to change
the direction of the value of the country's currency.

Dow Jones industrial average

This is the best known U.S.index of stocks. It contains 30 stocks that trade on
the New York Stock exchange. The Dow, as it is called, is a barometer of how shares of the largest
U.S.companies are performing. There are thousands of investment indexes around the world for stocks,
bonds, currencies and commodities.

Economic exposure

The extent to which the value of the firm will change because of an exchange rate change.

EDGAR

The Securities & exchange Commission uses Electronic Data Gathering and Retrieval to transmit
company documents such as 10-Ks, 10-Qs, quarterly reports, and other SEC filings, to investors.

Electronic data interchange (EDI)

The exchange of information electronically, directly from one firm's
computer to another firm's computer, in a structured format.

Equity swap

A swap in which the cash flows that are exchanged are based on the total return on some stock
market index and an interest rate (either a fixed rate or a floating rate). Related: interest rate swap.

European Currency Unit (ECU)

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

European Monetary System (EMS)

An exchange arrangement formed in 1979 that involves the currencies
of European Union member countries.

Execution

The process of completing an order to buy or sell securities. Once a trade is executed, it is reported
by a Confirmation Report; settlement (payment and transfer of ownership) occurs in the U.S. between 1
(mutual funds) and 5 (stocks) days after an order is executed. Settlement times for exchange listed stocks are
in the process of being reduced to three days in the U. S.

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