Fundamentals of Finance - Chapter 6
Terms
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- Currency Exchange Markets
- Electronic markets where banks and institutional traders buy and sell various currencies on behalf of businesses and other clients.
- Currency Exchange Rate
- Value of one currency relative to another currency.
- Spot Exchange Rate
- Rate being quoted for current delivery of the currency.
- Forward Exchange Rate
- Rate for the purchase or sale of a currency where delivery will take place at future date.
- Purchasing Power Parity (PPP)
- Currency of a country with relatively higher inflation rate will depreciate relative to the currency of a country with a relatively lower inflation rate.
- Interest Rate Parity (IRP)
- Currency of a country with a relatively higher interest rate will depreciate relative to the currency a country with a relatively lower interest rate.
- Political Risk
- Actions by a sovereign nation to interrupt or change the value of cash flows accruing to foreign investors.
- Economic Risk
- Risk associated with possible slow or negative economic growth, as well as with the likelihood of variability.
- Arbitrage
- Buying commodities, securities, or bills of exchange in one market and immediately selling them in another to make a profit from price differences in the two markets.
- Draft (bill of exchange)
- An unconditional order for the payment of money from one person to another.
- Sight Draft
- Draft requiring immediate payment.
- Time Draft
- Draft that is payable at a specified future date.
- Documentary Draft
- Draft that is accompanied by an order bill of lading and other documents.
- Order Bill of Lading
- Document given by a transportation company that lists goods to be transported and terms of the shipping agreement.
- Clean Draft
- A draft that is not accompanied by any special documents.
- Commercial Letter of Credit
- Statement by a bank guaranteeing acceptance and payment of a draft up to a stated amount.
- Trust Receipt
- An instrument through which a bank retains title to goods until they are paid for.
- Banker's Acceptance
- A promise of future payment issued by a firm and guaranteed by a bank.
- Export-Import Bank
- Bank established to aid in financing and facilitating trade between the U.S. and other countries.
- Traveler's Letter of Credit
- Issued by a bank to banks in other countries authorizing them to cash checks or purchase drafts presented by the bearer.
- Flexible Exchange Rates
- A system in which international exchange rates are determined by supply and demand.
- Balance of Payments
- A summary of all economic transactions between one country and the rest of the world.
- Balance of Trade
- The net value of a country's exports of goods and services compared to its imports.
- Merchandise Trade Balance
- The net difference between a country's import and export of goods.
- Current Account Balance
- The flow of income into and out of the United States during a specified time period.
- Capital Account Balance
- Foreign government and private investment in the United States netted against similar U.S. investment in foreign countries.
- Dirty Float
- Intervention by central banks to control exchange rates in the foreign exchange market's flexible exchange system.
- Special Drawing Rights (SDRs)
- International reserve assets created by the International Monetary Fund that can be drawn upon by member nations.