Definitions Flashcards
International Finance
is concerned with the determination of income, consumption over time, and linking 2 or more international markets.
Balance of Payment
statistical statements of all economic transactions between Australian residents and the world over a particular period.
FX Market
market in which one currency is bought and sold for another currency.
Interbank operations
buying and selling of currencies between banks.
Eurocurrency market
market for short term assets and liabilities that are denominated in currencies other than that of the country in which they are held.
Eurocurrencies
short term assets and liabilities denominated in currencies other than that of the country where they are issued.
Eurobanks
banks dealing in short term assets and liabilities denominated in currencies other than that of the country where they are located.
International banking
banks operations with non-residents in both domestic and foreign currency, and residents in foreign currency.
Euro Commercial Paper
short-term unsecured promissory note issued in currency other tan that of the country in which it is issued
- maturity: 60-180 days
- bearer instrument
- interest paid on maturity
Euro Notes
short term unsecured promissory notes issued in a currency other than that of the country in which it is issued
- maturity: 2-4 years
- bearer instrument
- interest paid semi-annually
Bond
fixed interest securities
Foreign bond
fixed interest securities that are issued in a foreign market denominated in the currency of the country of issue
Euro bond
fixed interest securities that are issued in a foreign market denominated in the currency other than that of the country of issue.
Equity market
market in which shares are traded and issued
International equity market
primary and secondary markets for international equities
Equity
value of the shares issued by a company
Euro equity market
market in which euroequity is issued and traded
Euroequity
an equity sold to investors in more than one national market other than the country where the company is domiciled
American Depository Receipts (ADR)
negotiable certificate issued by a US bank representing a specified number of shares in a foreign stock traded on the US exchange
Exchange rate
price of one currency in terms of another
Spot rate
exchange rate for immediate delivery
Forward rate
agreement you make for delivery at some specific future rate
Indirect ER
- S(f/d)
- buy > sell
- increase S = appreciation of domestic
Direct ER
- S(d/f)
- sell > buy
- increase S = depreciation of domestic
Buy/sell rates
the rates at which the bank buys/sells
Buy/sell margin
(spread) difference between buy and sell rates
Cross rate
ER between two currencies computed by reference to a third currency
Effective exchange rate
measure of the value of one currency in terms of more than one other currency
Relative exchange rate
ratio of ER in a particular period to the value of the same ER in a base period
Vt = St/S0
Nominal exchange rate
exchange rate to reflect geographical distribution of trade
Real exchange rate
nominal ER adjusted for relative international prices
Comparative statics
looking at change in variables underlying models and how it affects equilibrium
Flexible/floating ER
determined in a market without intervention or regulation by the government or monetary authority
Fixed/pegged ER
government or monetary authority sets the price of domestic currency in terms of foreign currency and stands ready to support the fixed price
Arbitrage
buying and selling some goods or assets in different markets to profit from price differences or returns
Purchasing power parity
equality of general price levels in 2 countries once the countries’ different currencies have been taken into account using the ER
Law of one price
the same commodity sales for the same price in 2 different countries once prices has been converted to a common currency
Relative purchasing power parity
rate of change in the exchange rate depends on relative inflation rate
Quantity theory
change in price corresponds to a change in monetary supply
Forward contract
contract between 2 people who agree to exchange a certain amount of one currency for a certain amount of another currency on a particular future date
Covered interest parity
the returns on similar assets in 2 different countries are equal after the associated foreign exchange risk has been covered in the forward market
Inward arbitrage
borrowing foreign (short foreign) invest domestic (long domestic) (1 + i) > F/S (1 + i*)
Forward margin
proportional difference between forced and current spot rate
Uncovered interest parity
condition on which the returns on similar assets in 2 different countries are the same after you take into account the expected exchange in the exchange rate with no forward cover
Forward market efficiency
forward exchange rate is an unbiased and efficient estimator of the future spot exchange rate
Forward premium puzzle
forward premium doesn’t respond one-for-one with proportional changes in the actual exchange rate
Efficient market hypothesis
asset price fully reflects al relevant information as soon as it becomes readily available
Speculation
buying or selling of a commodity in anticipation from making a profit or avoiding a loss from future price change
Stabilizing speculation
buying a currency when it’s weak selling when it’s strong and reducing ER volatility
Destabilizing speculation
buying when a currency is strong, selling when it is weak and accentuating exchange rate fluctuations
Forecast
statement about the value or range of values that a variable will take on at a specific future date where the future value is unknown when the forecast is made
Risk
measure of the probability and magnitude of deviation from some expected outcome
FX risk
risk arising from fluctuations in the ER
Forward market
market in which forward contracts are traded
Forward contract
contract for the exchange of a specific amount of one currency for a specific amount of another currency at a specific date at a particular rate
- traded OTC
- can be traded with any counter party
- tailor-made
- settled at delivery
Forward spread
proportional difference between forward rate and current spot rate
Futures market
market at which futures contracts are traded
Futures contract
contract to buy or sell specific amount of foreign currency for a specific amount of domestic currency at a specific date at a specific rate.
- traded on an organised exchange
- traded with the exchange
- limited and specified by size, delivery date, settlement date
- marked to market
Currency swap
transaction in which 2 counter-parties exchange cash flows denominated in 2 different currencies at a pre-specified ER
Interest-rate swaps
swap of interest payments streams - one at a fixed rate, one at a variable rate - computed on the same notational principle denominated in the same currency
Cross-currency interest rate swaps
swap involving the exchange of fixed and variable interest payments denominated in 2 currencies
Swap risk
the risk that one party reneges on the agreement
Option contract
contract between 2 parties where one party has the right but not the obligation to buy (or sell) a specific amount of one currency for another currency at a particular exchange rate on (or on or before) a particular future date
Call option
gives the holder the right to buy the underlying asset/currency
Put option
gives the holder the right to sell the underlying asset/currency
Exposure
measure of the sensitivity to what is at risk to the source of risk
Long exposure
exposure to foreign exchange risk resulting from the effect of changes in ER on the domestic currency value of foreign assets
Short exposure
exposure to foreign exchange risk resulting from the effect of changes in ER on the domestic currency value of foreign liabilities
Transactions exposure
foreign currency value of a payable/receivable asset/liability independent of the ER
change in ER changes the domestic currency value of a foreign currency value of a payable/receivable asset/liability at the due date
Economic exposure
any form of exposure of the value of the firm to the ER
Translation exposure
exposure of consolidated accounts of a multinational firm to changes in the ER
Hedging
covering of FX risk to eliminate or reduce the variability of the domestic currency value of the foreign currency position
securing against loss by compensating transactions on the other side
Money-market hedging
creation of a synthetic forward contract by borrowing and lending domestic and foreign currencies
Contingent exposure
exposure that arises only if a certain outcome materialises, such as winning a contract
Financial hedging
hedging using derivative products (forwards, futures, options)
Operational hedging
changing operations/techniques to decrease risk
Exposure netting
calculating net value of payable and receivables
