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International Finance > Definitions > Flashcards

Definitions Flashcards

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1
Q

International Finance

A

is concerned with the determination of income, consumption over time, and linking 2 or more international markets.

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2
Q

Balance of Payment

A

statistical statements of all economic transactions between Australian residents and the world over a particular period.

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3
Q

FX Market

A

market in which one currency is bought and sold for another currency.

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4
Q

Interbank operations

A

buying and selling of currencies between banks.

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5
Q

Eurocurrency market

A

market for short term assets and liabilities that are denominated in currencies other than that of the country in which they are held.

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6
Q

Eurocurrencies

A

short term assets and liabilities denominated in currencies other than that of the country where they are issued.

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7
Q

Eurobanks

A

banks dealing in short term assets and liabilities denominated in currencies other than that of the country where they are located.

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8
Q

International banking

A

banks operations with non-residents in both domestic and foreign currency, and residents in foreign currency.

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9
Q

Euro Commercial Paper

A

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
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10
Q

Euro Notes

A

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
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11
Q

Bond

A

fixed interest securities

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12
Q

Foreign bond

A

fixed interest securities that are issued in a foreign market denominated in the currency of the country of issue

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13
Q

Euro bond

A

fixed interest securities that are issued in a foreign market denominated in the currency other than that of the country of issue.

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14
Q

Equity market

A

market in which shares are traded and issued

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15
Q

International equity market

A

primary and secondary markets for international equities

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16
Q

Equity

A

value of the shares issued by a company

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17
Q

Euro equity market

A

market in which euroequity is issued and traded

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18
Q

Euroequity

A

an equity sold to investors in more than one national market other than the country where the company is domiciled

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19
Q

American Depository Receipts (ADR)

A

negotiable certificate issued by a US bank representing a specified number of shares in a foreign stock traded on the US exchange

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20
Q

Exchange rate

A

price of one currency in terms of another

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21
Q

Spot rate

A

exchange rate for immediate delivery

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22
Q

Forward rate

A

agreement you make for delivery at some specific future rate

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23
Q

Indirect ER

A
  • S(f/d)
  • buy > sell
  • increase S = appreciation of domestic
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24
Q

Direct ER

A
  • S(d/f)
  • sell > buy
  • increase S = depreciation of domestic
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25
Q

Buy/sell rates

A

the rates at which the bank buys/sells

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26
Q

Buy/sell margin

A

(spread) difference between buy and sell rates

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27
Q

Cross rate

A

ER between two currencies computed by reference to a third currency

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28
Q

Effective exchange rate

A

measure of the value of one currency in terms of more than one other currency

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29
Q

Relative exchange rate

A

ratio of ER in a particular period to the value of the same ER in a base period
Vt = St/S0

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30
Q

Nominal exchange rate

A

exchange rate to reflect geographical distribution of trade

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31
Q

Real exchange rate

A

nominal ER adjusted for relative international prices

32
Q

Comparative statics

A

looking at change in variables underlying models and how it affects equilibrium

33
Q

Flexible/floating ER

A

determined in a market without intervention or regulation by the government or monetary authority

34
Q

Fixed/pegged ER

A

government or monetary authority sets the price of domestic currency in terms of foreign currency and stands ready to support the fixed price

35
Q

Arbitrage

A

buying and selling some goods or assets in different markets to profit from price differences or returns

36
Q

Purchasing power parity

A

equality of general price levels in 2 countries once the countries’ different currencies have been taken into account using the ER

37
Q

Law of one price

A

the same commodity sales for the same price in 2 different countries once prices has been converted to a common currency

38
Q

Relative purchasing power parity

A

rate of change in the exchange rate depends on relative inflation rate

39
Q

Quantity theory

A

change in price corresponds to a change in monetary supply

40
Q

Forward contract

A

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

41
Q

Covered interest parity

A

the returns on similar assets in 2 different countries are equal after the associated foreign exchange risk has been covered in the forward market

42
Q

Inward arbitrage

A 
borrowing foreign (short foreign)
invest domestic (long domestic)
(1 + i) > F/S (1 + i*)
43
Q

Forward margin

A

proportional difference between forced and current spot rate

44
Q

Uncovered interest parity

A

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

45
Q

Forward market efficiency

A

forward exchange rate is an unbiased and efficient estimator of the future spot exchange rate

46
Q

Forward premium puzzle

A

forward premium doesn’t respond one-for-one with proportional changes in the actual exchange rate

47
Q

Efficient market hypothesis

A

asset price fully reflects al relevant information as soon as it becomes readily available

48
Q

Speculation

A

buying or selling of a commodity in anticipation from making a profit or avoiding a loss from future price change

49
Q

Stabilizing speculation

A

buying a currency when it’s weak selling when it’s strong and reducing ER volatility

50
Q

Destabilizing speculation

A

buying when a currency is strong, selling when it is weak and accentuating exchange rate fluctuations

51
Q

Forecast

A

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

52
Q

Risk

A

measure of the probability and magnitude of deviation from some expected outcome

53
Q

FX risk

A

risk arising from fluctuations in the ER

54
Q

Forward market

A

market in which forward contracts are traded

55
Q

Forward contract

A

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
56
Q

Forward spread

A

proportional difference between forward rate and current spot rate

57
Q

Futures market

A

market at which futures contracts are traded

58
Q

Futures contract

A

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
59
Q

Currency swap

A

transaction in which 2 counter-parties exchange cash flows denominated in 2 different currencies at a pre-specified ER

60
Q

Interest-rate swaps

A

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

61
Q

Cross-currency interest rate swaps

A

swap involving the exchange of fixed and variable interest payments denominated in 2 currencies

62
Q

Swap risk

A

the risk that one party reneges on the agreement

63
Q

Option contract

A

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

64
Q

Call option

A

gives the holder the right to buy the underlying asset/currency

65
Q

Put option

A

gives the holder the right to sell the underlying asset/currency

66
Q

Exposure

A

measure of the sensitivity to what is at risk to the source of risk

67
Q

Long exposure

A

exposure to foreign exchange risk resulting from the effect of changes in ER on the domestic currency value of foreign assets

68
Q

Short exposure

A

exposure to foreign exchange risk resulting from the effect of changes in ER on the domestic currency value of foreign liabilities

69
Q

Transactions exposure

A

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

70
Q

Economic exposure

A

any form of exposure of the value of the firm to the ER

71
Q

Translation exposure

A

exposure of consolidated accounts of a multinational firm to changes in the ER

72
Q

Hedging

A

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

73
Q

Money-market hedging

A

creation of a synthetic forward contract by borrowing and lending domestic and foreign currencies

74
Q

Contingent exposure

A

exposure that arises only if a certain outcome materialises, such as winning a contract

75
Q

Financial hedging

A

hedging using derivative products (forwards, futures, options)

76
Q

Operational hedging

A

changing operations/techniques to decrease risk

77
Q

Exposure netting

A

calculating net value of payable and receivables

International Finance (2 decks)

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