Chapter 7 Foreign Exchange and International Finance

Money

Anything people will accept for the exchange of goods and services.

Characteristics of Money

Acceptability, Scarcity, Durability, Divisibility, Portability.

Why is money used?

Medium of exchange, measure of value, store of value (money deposited in a bank for future use

Foreign Exchange

The process of converting the currency of one country into that of another.

Exchange Rate

Amount of currency of one country that can be traded for one unit of another currency.

Balance of Payment

Measure of total flow of money coming in minus money going out.If unfavorable, usually results in decline in value of nation’s currency.

Economic Conditions

Factors such as inflation and changing interest rates that affect all countries.

Interest Rate

The cost of using someone else's money.

What affects interest rates?

1. Money supply and demand-more borrowers, higher rates.

2. Risk-higher risk, higher interest rate

3. Inflation - prices rise, buying power declines

Dollarization

When a country uses the currency of a more stable country.

Soft Currency

Currency that is not easy to exchange for other currencies. Usually developing countries

Hard Currency

A monetary unit that can be easily converted into other currencies. Usually indusrialized countries

Floating Exchange Rate

Currency values based on supply and demand.

Foreign Exchange Market

A network of banks and financial institutions that buy and sell different currencies.

Exchange Controls

Government restrictions to regulate the amount and value of a nation's currency.

World Bank

An institution that provides economic assistance to less developed countries.

International Monetary Fund (IMF)

An agency that promotes economic cooperation and maintains order in world trade.

IMF Functions

Analyze economic situations, suggest policies, and provide loans.

Cash in Advance

A payment method requiring payment before goods are received.

Letter of Credit

A financial document guaranteeing payment for goods after they are shipped.

Bill of Lading

A document proving that goods have been shipped.

Credit Terms

The conditions of sale regarding time and payment requirements.

Promissory Note

A document stating a promise to pay a specific amount by a certain date.

Commercial Invoice

Document that includes details about the buyer, seller, merchandise, and terms of payment.

Trade Credit

Buying or selling on account.

Accounts Receivable

Amount due from a customer to a company that sells on credit.

Accounts Payable

Amount owed to a supplier.

Bill of Exchange

Written order for payment from an exporter to an importer.

Electronic Funds Transfer (EFT)

A method for transferring payment after receiving goods.

Wire Transfer

A process of moving money between different countries' bank accounts.

Bond

A long-term financial instrument for borrowing money.

Insurance Certificate

Explains the amount of insurance coverage during shipment.

High Foreign Demand

Causes a strong currency and rising prices in a country.

Supply/Demand Relationship

Low supply with rising demand leads to higher prices and interest rates.

Currency Debt Relationship

As a country's debt increases, its currency value typically declines.

Low Inflation

A factor that can increase the value of a currency.

Historical Money System

Shells were historically used as money but were impractical.

Causes of Increased Interest Rates

Factors such as political uncertainty and rising inflation.

Short-Term Financing

Financing typically lasting around 30 days.

Long-Term Financing

Financing used for capital projects over an extended period.

Capital Projects

Expensive, long-term financial activities like purchasing new computers.

Credit Terms Example

2/10, n/30 means a 2% discount if paid within 10 days or they may pay the full amount in 30 days with no interest.

Manufacturing Robotics

An example of an expensive capital project for long-term financing.

Delivery Vehicle Purchase

Another example of a capital project requiring long-term financing.

trade credit

buying or selling on account

accounts receivable

Amount due from a customer to a company that sells on credit

Amounts payable

Amount owed to a supplier