FM Pre-finals (IDENTIFICATION)

Exchange Rates

The relationships among the values of currencies.

Devaluation

The adjustment when the currency was made cheaper with respect to the dollar.

**Upvaluation** or **Revaluation**

When a currency became more expensive with respect to the dollar.

Supply and demand conditions

The cause of short-term, day-to-day fluctuations in exchange rates.

Forex Market

Provides a service to individuals, businesses, and governments who need to buy or sell currencies other than that used in their country

Forex Market

A marketplace in which __currencies are bought__ and sold purely to make profit via speculation.

Forex Market

Provides a mechanism for the transfer of purchasing power from one currency to another.

Exchange Rate

The price of one country’s currency expressed in terms of another country’s currency.

Appreciates

A term for “rises in value relative to other currencies”

1973

Since when does the **floating rate** ***i****nternational currency system* has been operating?

It is organized as an over-the-counter market in which several hundred dealers stand ready to buy and sell deposits denominated in foreign currencies.

How is Foreign Exchange Traded?

Managed Float

Current method of exchange rate determination (wherein during periods of extreme fluctuation in the value of a nation’s currency, intervention by the governments or central banks may occur to maintain fairly stable exchange rates.)

Theory of Purchasing Power Parity (PPP)

One of the most prominent theories of how exchange rates are determined

It states that exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries.

State the PPP

Spot Transactions

Involve **immediate (two-day)** exchange of bank deposits.

Forward Transactions

Involve the exchange of bank deposits at some **specified future date.**

Spot Exchange Rate

Exchange rate for spot transactions

Forward Exchange Rate

Exchange rate for forward transactions

Spot Rate

Exchange rate at which the currency is traded for immediate delivery

Direct Quote

Refers to the number of units of the home currency required to buy one unit of the foreign currency.

Indirect Quote

Refers to the number of units of foreign currency that can be bought for one unit of home currency.

Cross Rate

The **indirect computation** of the exchange rate of one currency from the exchange rates of 2 other currencies.

Triangular Arbitrage

The arbitrage condition for cross rates.

Arbitrage

Process of buying and selling in more than one market to make a riskless profit.

Arbitrageur

The person who tackles about arbitrage

Forward Rates

The exchange rate at which the currency for future delivery is quoted.

Premium

Forward rates may be greater than the current spot rate

Discount

Forward rates may be less than the current spot rate

Foreign Exchange Risk

refer to the possibility of a drop in revenue or an increase in cost in a transactional transaction due to a change in foreign exchange rates.

Money Market

The markets for short-term funds

Capital markets

The markets for long-term funds

Mortgage Markets

Where borrowers/individual businesses and governments can obtain long-term collaterized loans

Mortgages

Long-term loan secured by real estate.

Amortized

The process of gradually reducing or paying off debt with regular payments

Interest rate on the loan

One of the most important factors in the decision of the borrower of how much and from whom to borrow

Discount points (Simply points)

Interest payments made at the beginning of a loan.

Down payment

Pay a portion of the purchase price.

Loan proceeds

The balance of the purchase price is paid by this.

Private Mortgage Insurance (PMI)

An insurance policy that guarantees to make up any discrepancy between the value of the property and the loan amount, should a default occur.

Fully Amortized

This means that the payments will pay off the outstanding indebtedness by the time the loan matures.

Insured Mortgages

These mortgages are **originated by banks** or other mortgage lenders but are guaranteed by either government or government-controlled entities

Caps

The **limits** in Adjustable-Rate Mortgages.

Second Mortgages

These are loans that are secured by the same real estate that is used to secure the first mortgage.

Mortgage-backed security

Security that is collateralized by a pool of mortgage loans

Securitization

The process of transforming illiquid financial assets into marketable capital market instruments.

Mortgage Pass Through

The most common type of mortgage-backed security

Mortgage Pass Through

A security that has the borrower’s mortgages pass through the trustee before being disbursed to the investors in the mortgage-pass through.

Securitized Mortgage

Low-risk securites that have higher yield than comparable government bond and attract funds from around the world.

Derivatives

Financial instruments that “derive” their value on contractually required cash flows from some other security or index.

Hedge

Protection of buyers against unexpected rises or falls in.

Derivatives for Hedging

Companies use derivatives to protect against cost fluctuations by fixing a price for a future deal in advance.

Derivatives for Speculation

Investors may buy or sell an asset in the hope of generating a profit from the asset’s price fluctuations

Fluctuation - an irregular rising and falling in number or amount

Futures Contracts

This is an agreement between a seller and buyer that requires that seller to deliver a particular commodity at a designated future date, at a predetermined price.

Options

The option holder has no obligation to exercise the option.

Interest Rate Swaps

These contracts exchanged fixed interest payments for floating rate payments, or vice versa, without exchanging the underlying principal amounts.

Stock market

Places where individual as well as institutional (corporations) investors can trade currencies, invest in companies and arrange loans.

Cross border financing

Another way of measuring the growth of finance

Foreign Bonds

The traditional instruments in the international bond market

Yield

The income the investor receives while owning an investment

Capital Gains

Increases in the value of the investment itself, and are often not available to the owner until the investment is sold.

Individuals

Own a small proportion of financial assets.

Mutual funds

Investment companies that typically accept an unlimited number of individual investment.

Hedge Funds

Can accept investments from only a small number of wealthy individuals or big institutions.

Insurance Companies

The most important type of institutional investor.

Annuities

Guarantee policy holders a sum of money each year as long as they live.

Algorithmic Traders

Investors specializing in this type of trading program computers to enter buy and sell orders automatically in an effort to exploit tiny price differences in securities and currency markets.

Eurocredits

The market for floating-rate bank loans whose rates are tied to LIBOR

London Interbank Offer Rate

Meaning of LIBOR

Eurobond

An international bond underwritten by an international syndicate of banks and sold to investors in countries other than the one in whose money unit the bond is denominated.

Foreign Bonds

International bonds issued in the country in whose currency the bond is denominated, and they are underwritten by investment bank in that country

Yankee Bonds

Foreign bonds issued in the USA

Samurai Bonds

Foreign bonds issued in Tokyo

Financial Institution

A company engaged in the business of dealing with financial and monetary transactions.

1. **Directly** through financial markets (such as New York Stock Exchange)
2. **Indirectly** through financial intermediaries (such as banks)

Describe the flow of funds from lenders to borrowers

Financial Intermediary

A financial firm, such as bank, that borrows funds from savers and lends them to borrowers

Commercial Banks

* The most important intermediaries
* Play a key role in the financial system by taking deposits from households and firms and investing most of those deposits

Universal Bank

Provides a large array of service including those of commercial banks and investment banks

Contractual Savings Institutions

Financial intermediaries that receive payments from individuals as a result of a contract and uses the funds to make investments.

Mutual Funds

Corporations which accept money from savers and then use these funds to buy stocks, long-term bonds, or short-term debt instruments **issued by business or government units.**

Credit Unions

Cooperative associations whose members have a common bond, such as being employees of the same firm.

Insurance Companies

Companies that specialize in writing contracts to protect their policyholders from the risk of financial losses associated with particular events, such as automobile accident or fires

Premiums

These are what insurance companies collect from their policyholders

Life Insurance Companies

Sell policies to protect households against loss of earnings from disability; retirement or death of the insurance persons.

Property and Casualty Companies

Sell policies to protect households and firms from the risks of illness, theft, fire, accidents and natural disasters.

Pension Funds

A financial intermediary that invests contributions of workers and firms in stocks, bonds, mortgages to provide pension benefit payments during workers’ retirements.

Investment Intermediaries

Financial firms that raise funds to invest in loans and securities

Investment Banks

They concentrate on providing advice to firms issuing stocks and bonds or considering mergers with other firms.

Underwriting

They guarantee a price to a firm issuing stocks or bonds and then make a profit by selling the stocks or bonds at a higher price.

Propriety Trading

Involves earning profits by buying and selling securities.

Mutual Funds

These allow savers to purchase shares in portfolio of financial assets, including stocks, bonds, mortgages, and money market securities

Closed-end mutual funds

This mutual fund issues a fixed number of non-redeemable shares

Open-end mutual funds

This mutual fund issues share that investors can redeem each day after the markets close for a price tied to the NAV

No-load funds

A mutual funds that do not charge commission

Load funds

A mutual fund that charge buyers a commission to both buy and sell shares.

Hedge funds

Financial firms organized as a partnership of wealthy investors that make relatively high risk, speculative investments

Finance Companies

Non-bank financial intermediaries that raise funds through sales of commercial paper and other securities and use the funds to make small loans to households and firms.

Consumer finance companies

These companies make loans to enable consumers to buy cars, furniture and appliances, to finance home improvement and to refinance household debts.

Business finance companies

These companies are engaged in factoring that is, purchasing at a discount the accounts receivable of small business firms.

Sales finance companies

These companies are affiliated with department stores and companies that manufacture and sell high-priced goods.

Money Market Mutual Funds

Relatively new financial institutions that have the attributes of a mutual fund but also function to some extent as a depositing institution because they offer deposit-type accounts.