International Finance Midterm

Front 1

Multinational corporations

Back 1

Firms that engage in some form of international business

Front 2

Agency problem

Back 2

Conflict of goals between a firm's managers and shareholders

Front 3

Comparative advantage

Back 3

Theory suggesting that specialization by countries can increase worldwide production

Front 4

Imperfect market

Back 4

The condition where, due to the costs of transfer labor and other resources used for production, firms may attempt to use foreign factors of production when they are less costly than local factors

Front 5

Product cycle theory

Back 5

Theory suggesting that a firm initially establish itself locally and expand into foreign markets in response to foreign demand for its product; over time, the MNC will grow in foreign markets; after some point, its foreign business may decline unless it can differentiate its product from competitors

Front 6

Licensing

Back 6

Arrangement in which a local firm in the host country produces goods in accordance with another firm's (the licensing firm's) specifications; as the goods are sold, the local firm can retain part of the earnings

Front 7

Franchising

Back 7

Agreement by which a firm provides a specialized sales or service strategy, support assistance, and possibly an initial investment in the franchise in exchange for periodic fees

Front 8

Joint venture

Back 8

A venture that is jointly owned and operated by two or more firms

Front 9

Direct foreign investment

Back 9

Any method of increasing international business that requires a direct investment in foreign operations

Front 10

Balance of payments

Back 10

Statement of inflow and outflow payments for a particular country

Front 11

Current account

Back 11

Broad measure of a country's international trade in goods and services

Front 12

Capital account

Back 12

Account reflecting changes in a country's ownership of long-term and short-term financial assets

Front 13

Balance of trade

Back 13

Difference between the value of merchandise exports and merchandise imports

Front 14

Factor income

Back 14

Income received by investors on foreign investments in financial assets

Front 15

Dumping

Back 15

Selling products overseas at unfairly low prices (a practice perceived to result from subsidies provided to the firm by its government)

Front 16

Tariff

Back 16

A tax on imported goods

Front 17

Quota

Back 17

A maximum limit that can be imported

Front 18

J-curve effect

Back 18

Effect of a weaker dollar on the U.S. trade balance in which the trade balance initially deteriorates; it only improves once U.S. and non-U.S. importers respond to the change in purchasing power that is caused by the weaker dollar

Front 19

Intracompany trade

Back 19

International trade between subsidiaries that are under the same ownership

Front 20

International Monetary Fund

Back 20

Agency established in 1944 to promote and facilitate international trade and financing

Front 21

Compensatory financing facility

Back 21

Facility that attempts to reduce the impact of export instability on country economies

Front 22

Special drawing rights

Back 22

An international reserve asset created by the IMF and allocated to member countries to supplement currency reserves

Front 23

International Bank for Reconstruction and Development (World Bank)

Back 23

Bank established in 1944 to enhance economic development by providing loans to countries

Front 24

Structural Adjustment Loan

Back 24

Established in 1980 by the World Bank to enhance a country's long-term economic growth through financing projects

Front 25

Cofinancing agreements

Back 25

Arrangement in which the World Bank participates along with other agencies or lenders in providing funds to developing countries

Front 26

Multilateral investment guarantee agency

Back 26

Agency established by the World Bank that offers various forms of political risk insurance to corporations

Front 27

World Trade Organization

Back 27

Organization established to provide a forum for multilateral trade negotiations and to settle trade disputes related to the GATT accord

Front 28

International Financial Corporation

Back 28

Firm established to promote private enterprise within countries; it can provide loans to and purchase stock of corporations

Front 29

International Development Association

Back 29

Association established to stimulate country development; it is especially suited for less prosperous nations, since it provides loans at low interest rates

Front 30

Bank for International Settlements

Back 30

Institution that facilitates cooperation among countries involved in international transactions and provides assistance to countries experiencing international payment problems

Front 31

Foreign exchange market

Back 31

Market composed primarily of banks, serving firms and consumers who wish to buy or sell various currencies

Front 32

Bretton Woods Agreement

Back 32

Conference held in Bretton Woods, New Hampshire, in 1944, resulting in an agreement to maintain exchange rates of currencies within very narrow boundaries; this agreement lasted until 1971

Front 33

Smithsonian Agreement

Back 33

Conference between nations in 1971 that resulted in a devaluation of the dollar against major currencies and a widening of boundaries around the newly established exchange rates

Front 34

Foreign exchange dealers

Back 34

Dealers who serve as intermediaries in the foreign exchange market by exchanging currencies desired by MNCs or individuals

Front 35

Spot market

Back 35

Market in which exchange transactions occur for immediate exchange

Front 36

Spot rate

Back 36

The exchange rate at which one currency is traded for another in the spot market

Front 37

Interbank market

Back 37

Market that facilitates the exchange of currencies between banks

Front 38

Direct quotations

Back 38

Quotations that represent the value of a foreign currency in dollars

Front 39

Indirect quotation

Back 39

Exchange rate quotations representing the value measured by numbers of units per dollar

Front 40

Forward contract

Back 40

An agreement between a foreign exchange dealer and an MNC that specifies the currencies to be exchanged, the exchange rate, and the date at which the transaction will occur

Front 41

Forward rate

Back 41

The exchange rate specified within the forward contract at which the currencies will be exchanged

Front 42

Forward market

Back 42

The market in which the forward contracts are traded

Front 43

Currency futures contract

Back 43

Contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date

Front 44

Futures rate

Back 44

The exchange rate at which one can purchase or sell a specified currency on the settlement date in accordance with the futures contract

Front 45

Currency call option

Back 45

Contract that grants the right to purchase a specific currency at a specific price (exchange rate) within a specific period of time

Front 46

Strike price (exercise price)

Back 46

Exchange rate at which the owner of a currency call option is allowed to buy a specified currency; or the exchange rate at which the owner of a currency put option is allowed to sell a specified currency

Front 47

Currency put option

Back 47

Contract granting the right to sell a particular currency at a specified price (exchange rate) within a specified period of time

Front 48

Eurodollars

Back 48

Term used to describe U.S. dollar deposits placed in banks located in Europe

Front 49

Eurocurrency market

Back 49

Collection of banks that accept deposits and provide loans in large denominations and in a variety of currencies

Front 50

Petrodollars

Back 50

Deposits of dollars by countries that receive dollar revenues due to the sale of petroleum to other countries; the term commonly refers to OPEC deposits of dollars in the Eurocurrency market

Front 51

Asian dollar market

Back 51

Market in Asia in which banks collect deposits and make loans denominated in U.S. dollars

Front 52

Single European Act

Back 52

Act intended to remove numerous barriers imposed on trade and capital flows between European countries

Front 53

Basel Accord

Back 53

Agreement among country representatives in 1988 to establish standardized risk-based capital requirements for banks across countries

Front 54

Eurocredit loans

Back 54

Loans of one year or longer extended by Eurobanks

Front 55

Eurocredit market

Back 55

Collection of banks that accept deposits and provides loans in large denominations and in a variety of currencies; Eurocredit loans are longer term than so-called Eurocurrency loans

Front 56

London Interbank Offer Rate

Back 56

Interest rate commonly charged for loans between Eurobanks

Front 57

Syndicate

Back 57

Group of banks that participate in loans

Front 58

Foreign bond

Back 58

Bond issued by a borrower foreign to the country where the bond is placed

Front 59

Parallel bonds

Back 59

Bonds placed in different countries and denominated in the respective currencies of the countries where they are placed

Front 60

Eurobonds

Back 60

Bonds that are sold in countries other than the country of the currency denominating the bonds

Front 61

Interest Equalization Tax

Back 61

Tax imposed by the U.S. government in 1963 to discourage U.S. investors from investing in foreign securities

Front 62

Floating rate notes

Back 62

Provisions of some Eurobonds in which the coupon rate is adjusted over time according to prevailing market rates

Front 63

Euro-clear

Back 63

Telecommunications network that informs all traders about outstanding issues of Eurobonds for sale

Front 64

Yankee stock offerings

Back 64

Offerings of stock by non-U.S. firms in the U.S. markets

Front 65

American depository receipts

Back 65

Certificates representing ownership of foreign stocks, which are traded on stock exchanges in the U.S.

Front 66

Equilibrium exchange rate

Back 66

Exchange rate at which demand for a currency is equal to the supply of the currency for sale

Front 67

Arbitrage

Back 67

Action to capitalize on a discrepancy in quoted prices; in many cases, there is no investment of funds tied up for any length of time

Front 68

Non-deliverable forward contract

Back 68

Like a forward contract, represents an agreement regarding a position in a specified currency, a specified exchange rate, and a specified future settlement date, but does not result in delivery of currencies. Instead, a payment is made by one party in the agreement to the other party based on the exchange rate at the future date

Front 69

Currency futures contracts

Back 69

Contracts specifying a standard volume of a particular currency to be exchanged on a specific settlement date

Front 70

Margin requirements

Back 70

Deposit placed on a contract (such as a currency futures contract) to cover the fluctuations in the value of the contract to the counterparty

Front 71

Hedge

Back 71

To insulate a firm from exposure to exchange rate fluctuations

Front 72

Writer

Back 72

Seller of an option

Front 73

Straddle

Back 73

Combination of a put option and a call option

Front 74

Contingency graph

Back 74

fill in

Front 75

Fixed exchange rate system

Back 75

Monetary system in which exchange rates are either held constant or allowed to fluctuate only within very narrow boundaries

Front 76

Devalue

Back 76

To reduce the value of a currency against the value of other currencies

Front 77

Devaluation

Back 77

A downward adjustment of the exchange rate by a central bank

Front 78

Revalue

Back 78

To increase the value of a currency against the value of other currencies

Front 79

Revaluation

Back 79

An upward adjustment of the exchange rate by a central bank

Front 80

Freely floating exchange rate system

Back 80

Monetary system in which exchange rates are allowed to move due to market forces without intervention by country governments

Front 81

Managed float

Back 81

Exchange rate system in which currencies have no explicit boundaries, but central banks may intervene to influence exchange rate movements

Front 82

Pegged exchange rate

Back 82

Exchange rate whose value is pegged to another currency's value or to a unit of account

Front 83

Exchange rate mechanism

Back 83

Method of linking European currency values with the European Currency Unit

Front 84

Dollarization

Back 84

The replacement of a foreign currency with U.S. dollars.

Front 85

Nonsterilized intervention

Back 85

Intervention in the foreign exchange market without adjusting for the change in money supply

Front 86

Sterilized intervention

Back 86

Intervention by the Federal Reserve in the foreign exchange market, with simultaneous intervention in the Treasury securities markets to offset any effects on the dollar money supply; thus, the intervention in the foreign exchange market is achieved without affecting the existing dollar money supply

Front 87

Locational arbitrage

Back 87

Action to capitalize on a discrepancy in quoted exchange rates between banks

Front 88

Cross-exchange rates

Back 88

Exchange rate between currency A and currency B, given the values of currencies A and B with respect to a third currency

Front 89

Triangular arbitrage

Back 89

Action to capitalize on a discrepancy where the quoted cross exchange rate is not equal to the rate that should exist at equilibrium

Front 90

Covered interest arbitrage

Back 90

Investment in foreign money market security with a simultaneous forward sale of the currency denominating that security

Front 91

Interest rate parity

Back 91

Theory specifying that the forward premium (or discount) is equal to the interest rate differential between the two currencies of concern

Front 92

Interest rate parity line

Back 92

Diagonal line depicting all points on a four-quadrant graph that represent a state of interest rate parity