International Finance

Balance of Payments

The summary of all international transactions for a particular country over a period of time.

Balance of Trade

Exports minus imports.

Current Account Effect of Increased Quotas

If quotas are increased, the current account is expected to improve.

Effect of Tariff Removal on Current Account

The current account will decline if tariffs on imported goods are removed.

Direct Foreign Investment

Investment in fixed assets in foreign countries used to conduct business operations.

Outsourcing

Subcontracting to a third party to provide supplies or services previously obtained internally.

Controversial Nature of Outsourcing

Outsourcing can reduce costs but may involve shipping jobs to other countries.

General Agreements on Tariffs and Trade

The trade agreement between 117 countries that calls for lower tariffs worldwide, part of which is the World Trade Organization.

SPOT Rate

The exchange rate used for the immediate exchange of currencies.

Bid-Ask Spread Percentage

The percentage difference between the asking rate and bidding rate.

Exercise Price

The strike price in the currency option.

Bond Market

An alternative source for companies to obtain long-term funds when they cannot rely on the stock market.

Contagion Effects

A decline in the stock market that is not isolated and affects other markets.

Currency Supply Change Factors

Inflation, interest rates, national income, government controls, and expectations of future exchange rates.

Downward Pressure from Inflation

Expected surge in U.S. inflation relative to other currencies causes downward pressure.

Liquidity's Effect on Speculation

A currency's liquidity affects how speculation can impact its value.

Forward Contract

A type of contract used by corporations for hedging specialized needs.

Forward Premium or Discount

If the forward rate is lower than the spot rate, it's a forward discount.

Obligation of Call Option Seller

The seller is obligated to sell the underlying currency if the option is exercised.

Factors Increasing Put Option Premiums

Increased currency volatility, longer time until expiration, and smaller spot-strike price difference.

Impact of Spot Rate Increase on Futures Price

A substantial increase in the spot rate of the Euro would likely lead to an increase in futures price.