Week seven - Currencies and the market Flashcards
what is a currency
foreign money in terms of bank notes, cheques, payments etc
what is a currency market
a mechanism that operates 24 hours a day and allows buying any currency with another currency
what is convertibility
the capacity to exchange a currency for another
what is LIBOR
the London interbank basic offered rate, is the interbank interest rate for a currency in a determined period
what is EURIBOR
similar to LIBOR, interest rate for the euro
what is the exchange rate risk
the risk associated with an increase or decrease of the exchange rate, in the time period between the contract signing and payment, in international trade sales
what are some coverage systems for exchange rate risk
- forex hedging (forex insurance)
- currency options
- currency bank account
- currency futures
- price revision clause
- compensation
- swaps
what is the change rate insurance
contract between an exporter and financial entity (commercial bank) whereby the exchange rate is fixed for a period of time (forward exchange rate)
what are some characteristics of exchange rate insurance
- can be contracted for all or part of the commercial operation
- can be agreed in any moment between the starting date of the contract and the date of payment
- forward quotes are calculated by the banks (calculated using the difference between interest rates of the currencies involved)
- a bank commission or fee is paid
what are the two recommended options of advance payment
- negotiate the anticipated cancellation of the insurance
- put the currency in a paid interest deposit for the days leading up to the deadline
what is meant by a delayed payment
if the exporter is certain that they will be paid, they can negotiate an extension of the insurance
what is non-payment
the exporter will have to buy the currency in the spot currency market and cancel the insurance contract (implies a loss)
define ‘option on a foreign currency’
right to buy or sell a foreign currency at a previously established rate on a given date in the future
what is strike price
the exporter negotiates and fixes an exchange rate with the bank at which the firm wishes to buy or sell a currency on a given date
when is the premium paid on an option on a foreign currency
at the time of purchasing the option, the amount is based on the exchange rate determined
what are foreign currency accounts
when a company has to make future payments in a foreign currency, they can buy the foreign currency in the market and deposit those funds in an account until the deadline of the payment
what are futures
contracts in which a future quote is agreed for a prefixed amount of a foreign currency
what is a price revision clause
self-insurance
what is compensation
compensate payments a firm has to make and has to receive in the same currencies
what are swaps
sell spare currency to acquire the currency required to make payments
when may the risk of order cancellation occur
between the exporter receiving the order until shipment of goods
what are the coverage methods of risk of order cancellation
advanced payment, guarantee of compliance, letter credit, insurance policy
what causes more harm than order cancellation to the exporter
if the importer doesn’t collect or claim responsibility of the good when they arrive at their destination
what are the coverage methods of risk of non-acceptance/non-collection of goods
guarantee of compliance, letter of credit, insurance policy, recovery of goods
what are the coverage methods of non-payment risk
letter of credit, documentary payment order, insurance policy, factoring
what is political risk in this context
when the political or economic circumstances of the designation country prevent the punctual completion of payment or the correct completion of contracts
what are the coverage methods of political risk and unforeseeable risk
insurance policy, confirmed letter of credit, officially supported export credits, forfeiting, factoring
what is unforeseeable risk in this context
catastrophic events whose consequences limit the ability of the affected country to obtain the necessary currency to pay for its foreign orders
what is the CESCE
spanish insurance institution (1971)
what is the main task of the CESCE
manage political and unforeseeable risks exclusively, representing the state
what is factoring
a specialised company that offers administrative services and/or financial support for exporters in relation to short-term trade credits related to foreign sales
what are the types of factoring
- without recourse: factoring company assumes the non-payment risk (can be used as payment insurance)
- with recourse: factoring company does not assume the non-payment risk, only provides services
what are the administrative and financial services of factoring companies
- study of the degree of solvency of an importing client
- invoice collection management
- management of the exporter debtors portfolio
- ensure 100% of payment
- advance funds to the exporter
what are the advantages of SMEs using factoring companies
- security and comfort in payments
- management of firm risk
- possibility to obtain advance payments
main risks and coverage for export and importer
check last slide of topic 7
