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What Does Standard of Value Mean?
An agreed-upon value for a transaction in a country’s medium of exchange, such as the dollar or peso. A standard of value allows all merchants and economic entities to set uniform prices for goods and services. This standard is necessary in order to maintain a stable economy.
Historically, gold has been used as a standard of value in many countries. The U.S. went off the gold standard domestically in 1934 and internationally in 1971. A floating rate of currency exchange is now used instead.
What Does Overnight Trading Mean?
The buying or selling of currencies between 9pm and 8am local time. This type of transaction occurs when an investor takes a position at the end of the trading day in a foreign market that will be open while the local market is closed. The trade will be executed sometime that evening or early morning.
For example, the forex market trades 24 hours a day in exchanges around the world. The overlap of trading hours between North American, Australia, Asia and European currency exchanges makes this possible. However, investors must be aware of the significant level of risk involved with trading overnight, which includes foreign-exchange risk and overnight delivery risk.
What Does Uncovered Interest Rate Parity – UIP Mean?
A parity condition stating that the difference in interest rates between two countries is equal to the expected change in exchange rates between the countries’ currencies. If this parity does not exist, there is an opportunity to make a profit.
“i1″ represents the interest rate of country 1
“i2″ represents the interest rate of country 2
“E(e)” represents the expected rate of change in the exchange rate
For example, assume that the interest rate in America is 10% and the interest rate in Canada is 15%. According to the uncovered interest rate parity, the Canadian dollar is expected to depreciate against the American dollar by approximately 5%. Put another way, to convince an investor to invest in Canada when its currency depreciates, the Canadian dollar interest rate would have to be about 5% higher than the American dollar interest rate.
What Does International Monetary Fund – IMF Mean?
An international organization created for the purpose of:
1. Promoting global monetary and exchange stability.
2. Facilitating the expansion and balanced growth of international trade.
3. Assisting in the establishment of a multilateral system of payments for current transactions.
