International Monetary System and Finance Vocabulary

Comprehensive flashcard deck containing definitions and concepts of international monetary systems, balance of payments, corporate governance, and foreign exchange markets.

International monetary system

Defines the overall financial environment in which multinational corporations and international investors operate, serving as the institutional framework within which international payments are made, movements of capital are accommodated, and exchange rates among currencies are determined.

Euro

The common European currency introduced in 1999 of the 11 countries of the European Union that make up the European Monetary Union.

Bimetallism

a monetary standard where a country's unit of value is legally defined by fixed quantities of two metals, typically gold and silver.

Bretton Woods system

An international monetary system created in 1944 to promote postwar exchange rate stability and coordinate international monetary policies, otherwise known as the gold-exchange system.

Bitcoin

The most important digital currency launched by Satoshi Nakamoto, an apparent pseudonym, in 2008, designed to function on a decentralized network of computers without involvement of the government or central bank authorities.

Central Bank Digital Currency (CBDC)

Digital version of the fiat currency issued by the central bank that is currently under consideration by many central banks of the world.

Cryptocurrency

Digital currency designed to function through a decentralized network of computers that keep public records of transaction data using distributed ledger, mostly cryptographic, technology, without involvement of the government or central bank.

Currency board

An extreme form of the fixed exchange rate regime under which local currency is fully backed by the U.S. dollar or another chosen standard currency.

European Central Bank (ECB)

The central bank of the 20 European Union countries that use the euro, responsible for maintaining price stability via monetary policy.

European Currency Unit (ECU)

A basket currency made up of a weighted average of the currencies of the 12 members of the European Union, serving as the precursor of the euro.

European Monetary System (EMS)

A system established in 1979 to replace the snake, created to establish monetary stability in Europe and promote European economic and political unification.

European Monetary Union (EMU)

The monetary union of 11 countries of the European Union that irrevocably fixed their exchange rates and use the common euro currency.

Exchange Rate Mechanism (ERM)

The procedure, prior to the introduction of the euro, by which European Monetary System member countries collectively manage their exchange rates based on a parity grid system of par values between ERM countries.

Eurosystem

The monetary authority composed of the European Central Bank (ECB) and the central banks of euro-zone countries responsible for implementing the common monetary policy.

Gold-exchange standard

A monetary system in which countries hold most of their reserves in the form of a currency of a particular country that is on the gold standard.

Gold standard

A monetary system in which currencies are defined in terms of their gold content, and the exchange rate between a pair of currencies is determined by their relative gold contents.

Gresham's law

Under the bimetallic standard, the principle that the abundant metal was used as money while the scarce metal was driven out of circulation, based on the fact that the ratio of the two metals was officially fixed.

Incompatible trinity

The doctrine stating that a country can attain only two of three conditions: a fixed exchange rate, free international capital flows, and an independent monetary policy.

Jamaica Agreement

An international monetary agreement in January 1976 by which flexible exchange rates were accepted and gold was abandoned as an international reserve asset.

Louvre Accord

An agreement in 1987, prompted by the dollar's decline, in which the G-7 countries cooperate to achieve greater exchange rate stability and consult and coordinate their macroeconomic policies.

Maastricht Treaty

Treaty signed in December 1991 stating that the European Union will irrevocably fix exchange rates among member countries by January 1999 and introduce a common European currency to replace individual national currencies.

Managed-float system

Established by the Louvre Accord in 1987, a system that allows G-7 countries to jointly intervene in the exchange market to correct over- or undervaluation of currencies.

Optimum currency areas

A geographical area that is suitable for sharing a common currency by virtue of a high degree of factor mobility within the area.

Par value

The nominal or face value of stocks or bonds.

Plaza Accord

A G-5 agreement in 1985 declaring that depreciation of the dollar is desirable to correct U.S. trade deficits.

Price-specie-flow mechanism

Under the gold standard, the automatic correction of payment imbalances between countries based on domestic money stock rising or falling as a country experiences inflows or outflows of gold.

Smithsonian Agreement

An agreement in December 1971 in which G-10 countries agreed to devalue the U.S. dollar against gold and most major currencies in an attempt to save the Bretton Woods system.

Snake

The European version of a fixed exchange rate system that appeared as the Bretton Woods system declined.

Special drawing rights (SDRs)

An artificial international reserve created by the International Monetary Fund (IMF) that is a currency basket currently composed of four major currencies.

Sterilization of gold

Domestic monetary policies, used especially during the 1920s, to offset the effects of international flows of gold to keep domestic money and credit stable, which prevented the gold standard from working properly.

Tobin tax

A tax on the international flow of hot money proposed by Professor Tobin for the purpose of discouraging cross-border financial speculation.

Triffin paradox

The dilemma under the gold exchange standard where the reserve-currency country should run a balance of payments deficit, which can decrease confidence in the reserve currency and lead to the downfall of the system.

Balance of payments

A country's record of international transactions presented in a double-entry bookkeeping form.

Balance of payments identity (BOPI)

The equation showing that when balance of payments accounts are recorded correctly, the combined balance of the current account, capital account, financial account, and reserves account must equal zero.

Capital account

A balance of payments entry capturing capital transfers and the cross-border acquisition and disposal of nonproduced nonfinancial assets, such as natural resources and marketing assets.

Current account

A balance of payments entry representing the exports and imports of goods and services, and unilateral transfer.

Financial account

A balance of payments entry capturing all sales and purchases of financial assets, real estate, and businesses.

Goods trade

Exports and imports of tangible goods, such as oil, wheat, clothes, automobiles, and computers, recorded under the current account in the balance of payments.

Invisible trade

A term referring to trade in services.

J-curve effect

The initial deterioration and eventual improvement of a country's trade balance following the depreciation of its currency.

Mercantilism

The idea originated in Europe during absolute monarchies stating that precious metals like gold and silver are key components of national wealth, advocating trade surpluses and import restrictions to ensure a continuous inflow of precious metals.

Official reserve account

Transactions undertaken by a country's monetary authorities or central banks to finance the overall balance and intervene in the foreign exchange market.

Official reserve assets

Assets held by a country's monetary authorities or central banks, such as gold, foreign exchange, and special drawing rights (SDRs).

Official settlement balance

A country's balance of payments gap that must be accommodated by official reserve transactions, obtained by computing the cumulative balance of current, capital, and financial accounts plus statistical discrepancies.

Other investment

International transactions in currency, bank deposits, trade credits, and so forth that are not considered direct investment or portfolio investment, recorded in the financial account of the balance of payments.

Overall balance

Another term for official settlement balance.

Portfolio investment

Sales and purchases of foreign financial assets, such as stocks and bonds, that do not involve a transfer of control, recorded under the financial account in the balance of payments.

Primary income

Payments and receipts of interest, dividends, and other income on foreign investments that were previously made, recorded under the current account of the balance of payments.

Services trade

Payments and receipts between residents of different countries for legal, consulting, financial, engineering, and other services, patent and intellectual property royalties, shipping fees, and tourist expenditures.

Secondary income

Unrequited payments, also known as current transfers, that have one-directional flows without offsetting flows between residents of different countries, such as foreign aid, remittances, reparations, grants, and gifts.

Trade balance

The difference between a country's exports of goods and its imports of goods, functioning as a component of the current account in the balance of payments.

Agency problem

Conflicts of interest that occur when managers hired as agents for shareholders pursue their own interests at the expense of shareholders, especially acute in firms with diffused share ownership.

Complete contract

A contract that specifies exactly what each party will do under all possible future contingencies.

Concentrated ownership

An ownership structure where company ownership is concentrated in a few large shareholders, providing them with strong incentives to closely monitor management and mitigate the agency problem.

Corporate governance

The economic, legal, and institutional framework in which corporate control and cash flow rights are distributed among shareholders, managers, and other stakeholders of a company.

Dodd-Frank Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that aims to identify and reduce systemic risk of the financial system by regulating Wall Street and big banks.

English common law

A legal tradition adopted in countries such as the UK, US, Canada, Australia, India, and South Africa, formed by independent judicial precedents and providing the strongest protection of property and shareholder rights.

Equity cross-holdings

The practice of mutually holding shares of other companies to concentrate and leverage voting rights to acquire and maintain control, most prevalent in Japan.

Free cash flows

A firm's internally generated funds in excess of the amount needed to finance all investment projects with positive net present values.

French civil law

A legal tradition based on the Justinian code and Code Napoleon where state-appointed judges apply legal codes, offering relatively weak protection of property and shareholder rights.

Incentive contracts

Contracts, such as stocks and stock options, offered to managers to align their interests with those of shareholders and reduce the incentive to engage in self-dealing.

Legal origins

The historical origins of commercial legal systems in most countries, deriving primarily from English common law and French, German, or Scandinavian civil laws.

Managerial entrenchment

The self-serving behavior of managers with control rights who pursue exorbitant perquisites, unprofitable projects, and antitakeover measures to ensure personal job security and private benefits.

Private benefits of control

Benefits of control extracted by large shareholders for themselves that are not shared by other shareholders when their control rights exceed their cash flow rights.

Public corporation

A company jointly owned by a multitude of shareholders protected by limited liability, allowing large capital pooling and risk diversification, first exemplified by the Dutch East India Company.

Pyramidal ownership

An ownership structure in which shareholders own a holding company that controls another company, which controls another, allowing them to acquire controlling interests beyond their cash flow rights.

Residual control rights

The right to make discretionary decisions under contingencies that are not specifically covered by an existing contract.

Sarbanes-Oxley Act

A law passed by the U.S. Congress in 2002 to strengthen corporate governance by requiring a public accounting oversight board and executive (CEO/CFO) sign-offs on financial statements.

Shareholder rights

Basic rights granted to investors in return for equity, including the rights to elect the board of directors, receive pro-rata dividends, and participate in shareholders' meetings.

American terms

An exchange rate quotation where a foreign currency is priced in terms of the U.S. dollar.

Appreciate

In the context of a domestic currency, an increase in a foreign exchange rate relative to another currency when stated in terms of the domestic currency, or a decrease when stated in foreign currency terms.

Bid price

The price at which dealers will buy a financial asset.

Client market

The market where international banks service customers who need foreign exchange to conduct international commerce or trade in international financial assets; also known as the retail market.

Correspondent banking relationships

A network of demand deposit accounts that large commercial banks maintain with one another, facilitating the efficient functioning of the foreign exchange interbank market.

Cross-exchange rate

An exchange rate between a currency pair where neither currency is the U.S. dollar.

Currency against currency

A foreign exchange transaction in which neither currency involved is the U.S. dollar.

Depreciate

In the context of a domestic currency, a decrease in a foreign exchange rate relative to another currency when stated in terms of the domestic currency, or an increase when stated in foreign currency terms.

Direct quotation

The price of one unit of a foreign currency stated in terms of the domestic currency.

European terms

An exchange rate quotation where the U.S. dollar is priced in terms of a foreign currency.

Foreign exchange (FX) market

The market encompassing the conversion of purchasing power between currencies, foreign currency bank deposits, and trading in spot, forward, futures, swap, and options contracts.

Forward market

A market for trading foreign exchange contracts initiated today but settled at a specified future date.

Forward premium/discount

The amount over or under the spot exchange rate for a forward rate, often expressed as an annualized percent deviation from the spot rate.

Forward rate

The contractual exchange rate determined in the forward market for a currency trade that will take place at a specified future date.

Indirect quotation

The price of one unit of a domestic currency stated in terms of a foreign currency.

Interbank market

The wholesale market where international banks and financial institutions trade currencies with each other, accounting for the vast majority of FX trading.

Offer price

The price at which a dealer will sell a financial asset; also referred to as the ask price.

Outright forward transaction

An uncovered speculative position taken in a currency.

Spot market

The foreign exchange market where nearly immediate purchase and sale of currencies take place.

Spot rate

The price at which foreign exchange can be sold or purchased for immediate delivery, typically within two business days.

Swap transactions

The simultaneous spot sale or purchase of an asset against a forward purchase or sale of an approximately equal amount of the asset.

Triangular arbitrage

The process of trading U.S. dollars for a second currency, trading that for a third currency, and finally trading back to U.S. dollars to earn an arbitrage profit from the intermediate exchange rates.