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2022-23 International finance Gr.AR (35894) > Word quiz > Flashcards

Word quiz Flashcards

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1
Q

Dealers

A

make money on currency exchanges by the differences between the bid (price they offer for the currency) and the ask (the price they offer to sell the currency).

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2
Q

Brokers

A

agents who facilitate trading between dealers without themselves becoming principals in the transaction

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3
Q

Speculators

A

seek profit from exchange rates changes

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4
Q

Arbitragers

A

seek profits from simultaneous exchange rate differences in different markets

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5
Q

Speculators+ and arbitragers

A

seek to profit from trading in the market itself rather than having the foreign exchange transaction being incidental to the execution of a commercial or investment transaction.

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6
Q

A spot transaction

A

in the foreign exchange market requires an almost immediate delivery of foreign exchange. (normally on the second following business day)

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7
Q

A forward transaction

A

in the foreign exchange market requires delivery of foreign exchange at some future date

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8
Q

Buying or selling forward

A

describe the same transaction, just which currency is referenced

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9
Q

Swap transaction

A

Simultaneous purchase and sale of a given amount of fx for two different value dates.
Well known: spot against forward, forward-forward, nondeliverable forward.

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10
Q

Foreign exchange rate

A

price of one currency expressed in terms of another

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11
Q

(Foreign exchange rate) quotation

A

is a statement of willingness to buy or sell at an announced rate

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12
Q

Forward premium or discount

A

is the percentage difference between the spot and forward exchange rate stated in annual percentage terms.

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13
Q

Bid

A

is the price in one currency which a dealer will buy another currency

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14
Q

Ask

A

is the price at which a dealer will sell the other currency

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15
Q

Devaluation of a currency

A

drop in foreign exchange value of a currency that is pegged to another currency

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16
Q

Depreciation of a currency

A

drop in the foreign exchange value of a floating currency

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17
Q

Bank and nonbank traders

A

profit from buying foreign exchange at a bid price and reselling it at a slightly higher ask or offer price

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18
Q

Operating exposure

A

a type of international risk exposure that measure the change in present value of a firm resulting from changes in future operating cash flows caused by unexpected changes in exchange rates.

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19
Q

The fisher effect

A

states that nominal interest rates in each country are equal to the required rate of return plus compensation for expected inflation.
i=r+π
Where i= nominal interest rate, r= real interest rate and π= expected inflation.

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20
Q

International fisher effect

A

the relationship between the percentage change in the spot rate over time and the differential between the comparable interest rates.

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21
Q

Fisher open

A

states that the spot exchange rate should change in an equal amount but in the opposite direction to the difference in interest rates between two countries.

(S_2 - S_1) / S_1 * 100 = i_¥ - i_$

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22
Q

The theory of interest rate parity

A

states that the difference in the national interest rates for securities of similar risk and maturity should be equal to but opposite in sign to the forward rate discount or premium for the foreign currency, except for transaction costs.

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23
Q

Arbitrage Rule of Thumb

A

If the difference in interest rates is greater than the forward premium/discount, or expected change in the spot rate for UIA, invest in the higher interest yielding currency. If the difference in interest rates is less than the forward premium (or expected change in the spot rate), invest in the lower yielding currency.

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24
Q

Uncovered interest arbitrage

A

investors borrow in countries and currencies exhibiting low interest rates and convert the proceed into currencies that offer much higher interest rates. Uncovered because the investor does not sell the higher yielding currency proceeds forward, choosing to remain uncoered and accept the currency risk of exchanging the higher yield currency into the lower yielding currency at the end of the period.

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25
Q

Speculation

A

the financial manager takes a position in the expectation of profit

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26
Q

Hedging

A

the financial manager uses the intstruments to reduce the risks of the corporations cash flow

27
Q

Foreign currency future contract

A

is an alternative to a forward contract, it calls for future delivery of a standard amount of currency at a fixed time and price. Can either be a short position or a long s´position.

28
Q

Foreign currency option

A

contract giving the purchaser of the option the right to buy or sell a given amount of currency at a fixed price per unit for a specified time period. “right, but not the obligation” to take an action. The buyer of the option is the holder and the seller of the option is the writer.

29
Q

Call

A

buyer has right to purchase the currency

30
Q

Put

A

buyer has the right to sell currency

31
Q

Option’s three different price elements

A
  • The strike price is the exchange rate at which the foreign currency can be bought or sold
  • The premium is the cost of the option itself paid when the option is purchased
  • The underlying spot rate in the market
32
Q

Call profit

A

Call profit =spot rate-(strikep price+premium)

The writer of a call option has limited profit and unlimited losses if uncovered. The holder of a call has limited losses (premium) and unlimited profit.

33
Q

Break-even price

A

Call: Strikeprice + premium
Put: Strikeprice - premium

34
Q

Put profit

A

Put profit =strike price-(spot rate+premium)

Limited loss for a holder, unlimited loss for a writer of a put.

35
Q

The pricing of any option consists of 5 elements

A
  • present spot rate
  • time to maturity
  • forward rate
  • interest rate
  • volatility (standard deviation of daily spot movement).
36
Q

Credit Risk or roll-over risk

A

is the possibility that a borrower’s creditworthiness at the time of renewing a credit, is reclassified by the lender

37
Q

Repricing risk

A

is the risk of changes in interest rates charged (earned) at the time a financial contract’s rate is being reset

38
Q

Long positition future

A

buy – believe price of the currency is going to rise in the future

39
Q

Short position future

A

sell - believe price of the currency is going to fall in the future

40
Q

has standardized contracts per currency

A

future

41
Q

has any contract size desired

A

forward

42
Q

has a fixed maturity, typically longest a year.

A

future

43
Q

, trading occurs on an organized exchange

A

future

44
Q

bill of lading

A

is issued to the exporter by a common carrier transporting the merchandise

45
Q

provides that the carrier deliver the merchandise to the designated consignee only

A

Straight B/L (bill of lading)

46
Q

directs the carrier to deliver the goods to the order of a designated party, usually the shipper

A

Order B/L (bill of lading)

47
Q

A draft

A

sometimes called a bill of exchange (B/E), is the instrument normally used in international commerce to effect payment

48
Q

is payable on presentation to the drawee

A

sight draft

49
Q

also called usance draft, allows a delay in payment. It is presented to the drawee who acce

A

time draft

50
Q

Forfaiting

A

is an international trade technique that can provide medium and long-term financing

51
Q

Letter of Credit (L/C)

A

) is a bank’s conditional promise to pay issued by a bank at the request of an importer in which the bank promises to pay an exporter upon presentation of documents specified in the L/C

52
Q

A back-to-back loan

A

also referred to as a parallel loan or credit swap, occurs when two firms in different countries arrange to borrow each other’s currency for a specific period of time

53
Q

Risk-sharing

A

is a contractual arrangement in which the buyer and seller agree to “share” or split currency movement impacts on payments

54
Q

Financing cash flows

A

are payments for the use of inter and intracompany loans and stockholder equity

55
Q

—— is far more important for the long-run health of a business than changes caused by transaction or translation exposure

A

Operating exposure

56
Q

Operating cash flows

A

arise from intercompany and intracompany receivables and payables, rent and lease payments, royalty and licensing fees, and other associated fees

57
Q

Foreign exchange exposure

A

measure of the potential for a firm’s profitability, net cash flow and market value to change because of a change in exchange rates

58
Q

Transaction exposure

A

measures the changes in the value of outstanding financial obligation incurred prior to a change in exchange rate but not due to be settled until after the exchange rate changes

59
Q

Translation exposure

A

accounting exposure, is the potential for accounting derived changes in owners equity to occur because of the need to translate financial statements of foreign subsidiaries into a single reporting currency for consolidated financial statements.

60
Q

Intrinsic value

A

is the financial gain if the option is exercised immediately

61
Q

Call profit:

A

spot rate-(strike price+premium)

62
Q

Put profit:

A

strike price-(spot rate+premium)

63
Q

Foreign currency future contract

A

is an alternative to a forward contract, it calls for future delivery of a standard amount of currency at a fixed time and price. Can either be a short position or a long s´position.

2022-23 International finance Gr.AR (35894) (2 decks)

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