It is important
that you are familiar with some of the important terms which are used in the
currency markets and throughout these sections:
DEPRECIATION - APPRECIATION
Depreciation is a gradual decrease
in the market value of one currency with respect to a second currency. An
appreciation is a gradual increase in the market value of one currency with
respect another currency.
SOFT CURRENCY – HARD CURRENCY
A soft currency is likely to
depreciate. A hard currency is likely to appreciate.
DEVALUATION - REVALUATION
Devaluation is a sudden decrease in
the market value of one currency with respect to a second currency. A
revaluation is a sudden increase in the value of one currency with respect to a
second currency.
WEAKEN - STRENGTHENS
If a currency weakens it losses
value against another currency and we get less of the other currency per unit
of the weaken currency ie. if the £ weakens against the DM there would be a
currency movement from 2 DM/£1 to 1.8 DM/£1. In this case the DM has
strengthened against the £ as it takes a smaller amount of DM to buy £1.
LONG POSITION – SHORT POSITION
A short position is where we have a
greater outflow than inflow of a given currency. In FX short positions arise
when the amount of a given currency sold is greater than the amount purchased.
A long position is where we have greater inflows than outflows of a given
currency. In FX long positions arise when the amount of a given currency
purchased is greater than the amount sold.
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