Module 10 (Textbook) / 11 (Canvas)

Capital market

A system that allocates financial resources in the form of debt and equity according to their most efficient uses

Equity

Partial ownership of a company in which the equity holder participates with other owners in the company’s financial gains and losses, normally in the form of stock ownership

International capital market

A network of individuals, companies, financial institutions, and governments that invest and borrow across national boundaries

Benefits of the international capital market

Expands opportunities for borrowers and reduces risk for lenders

International bond market

The market consisting of all bonds sold by issuing companies, governments, or other organizations outside their own countries

Eurobond

A bond issued outside the country in whose currency it is denominated

Foreign bond

A bond sold outside the borrower’s country and denominated in the currency of the country in which it is sold

International equity market

The market consisting of all stocks bought and sold outside the issuer’s home country

Factors responsible for growth in the international equity market

Privatization, emerging markets, investment banks, and electronic trading

Eurocurrency market

Market consisting of all the world’s currencies that are banked outside their countries of origin

Interbank interest rates

Interest rates that the world’s largest banks charge one another for loans

Foreign exchange market

A market in which currencies are bought and sold and their prices are determined

Exchange rate

The rate at which one currency is exchanged for another

Bid quote

The price at which a bank will buy a certain currency

Ask quote

The price at which a bank will sell a certain currency

Currency hedging

The practice of insuring against potential losses that result from adverse changes in exchange rates

Currency arbitrage

The instantaneous purchase and sale of a currency in different markets for profit

Interest arbitrage

The profit-motivated purchase and sale of interest-paying securities denominated in different currencies

Currency speculation

The purchase or sale of a currency with the expectation that its value will change and generate a profit

Exchange-rate risk

The potential for adverse changes in exchange rates that could harm a business

Transaction exposure

The risk that an exchange rate change will affect the value of a business transaction

Translation exposure

The risk that an exchange rate change will affect a company’s financial statements

Economic exposure

The risk that an exchange rate change will affect a company’s longer-term earnings potential from international operations

Spot rate

Exchange rate requiring delivery of the traded currency within two business days

Spot market

The market for currency transactions at spot rates

Forward rate

An exchange rate at which two parties agree to exchange currencies on a specified future date

Forward market

The market for currency transactions at forward rates

Forward contract

A contract that requires the exchange of an agreed-on amount of a currency on an agreed-on date at a specified exchange rate

Currency swap

The simultaneous purchase and sale of a currency for two different dates

Currency option

A right, or option, to exchange a specified amount of a currency on a specified date at a specified rate