International Finance Final Exam Prep

Flashcards covering vocabulary, formulas, and key concepts of international finance, including Balance of Payments, exchange rate quotes, parity theories, derivatives, and international capital markets.

Balance of Payments

The statistical record of a country's international transactions over a certain period of time presented in the form of a double-entry bookkeeping.

Credit Transaction

Any transaction that results in a receipt from foreigners, recorded with a positive sign in the U.S. balance of payments.

Debit Transaction

Any transaction resulting in a payment to foreigners, recorded with a negative sign.

Current Account

A component of the balance of payments that includes the export and import of goods and services.

Official Reserve Account

Includes all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs).

Financial Account

Measures the difference between U.S. sales of assets to foreigners and U.S. purchases of foreign assets.

J-curve Effect

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

Balance-of-Payments Identity

The equation stating that the combined balance of the current, capital, financial, and reserves accounts must be zero: $BCA + BKA + BFA + BRA = 0$.

Direct Quote

From the U.S. perspective, the price of one unit of foreign currency in terms of U.S. dollars.

Indirect Quote

From the U.S. perspective, the amount of foreign currency that is equal to one U.S. dollar.

Bid Price

The price that a dealer stands ready to pay for a currency.

Ask Price

The price at which a dealer stands ready to sell a currency.

Triangular Arbitrage

A process of earning profit by trading among three currencies when the direct cross-exchange rate is not in alignment with the implied cross-exchange rate.

Forward Premium

In American terms, this occurs when the forward rate is higher than the spot rate.

Law of One Price (LOP)

The principle that the same or equivalent things should trade at the same price across different locations, precluding profitable arbitrage.

Arbitrage

The act of simultaneously buying and selling the same or equivalent assets for the purpose of making certain guaranteed profits.

Interest Rate Parity (IRP)

An arbitrage condition that must hold when international financial markets are in equilibrium, relating interest rates to spot and forward exchange rates.

Purchasing Power Parity (PPP)

The theory that the exchange rate between currencies of two countries should be equal to the ratio of the countries' price levels.

Random Walk Hypothesis

Suggests that the best predictor of the future exchange rate is the current exchange rate.

Hedger

A market participant who wants to avoid price variation by locking in a purchase or sales price through a position in a futures or forward contract.

Futures Contract

A standardized, exchange-traded contract to buy or sell an asset at a future date, which is marked-to-market daily.

Open Interest

In currency futures, it tends to be greatest for near-term contracts and typically decreases as the term to maturity increases.

At-the-money

An option where the strike price is exactly equal to the current spot exchange rate.

American Option

An option that can be exercised early, at any time up until the expiration date.

European Option

An option that can only be exercised at its maturity date.

Eurobond

A bond denominated in a particular currency but sold to investors in national capital markets other than the country that issued the denominating currency.

Samurai Bonds

Yen-denominated foreign bonds originally sold in Japan.

Registered Bond

A bond where the owner's name is recorded by the issuer or assigned to a serial number.

Bearer Bond

A bond that does not have the owner's name recorded; possession of the bond is evidence of ownership.

Floating-rate Notes (FRN)

Medium-term bonds with coupon payments indexed to a reference rate such as SOFR.

Zero Coupon Bonds

Bonds that pay interest at zero percent and are sold at a discount from par value.

Dual Currency Bond

A bond that is issued in one currency but pays interest and/or principal in another currency.

Turnover Ratio

A measure where relatively low values indicate poor liquidity in an equity market.

Limit Order

An order placed to buy or sell a stock at a specific price to avoid buying at a higher price than intended.

Sponsored ADR

American Depository Receipts created by a bank at the request of the foreign company that issued the underlying security.

Interest Rate Swap

A contractual agreement to exchange cash flows (fixed-for-floating or floating-for-floating) at periodic intervals.

Notional Principal

A reference amount of principal used to determine interest payments in a swap market.

Swap Bank

A generic term for a financial institution, such as a commercial or investment bank, that facilitates swaps between counterparties.

Cost of Capital

The minimum rate of return an investment project must generate to pay its financing costs.

Cost of Equity Capital

The expected return on the firm's stock that investors require, frequently estimated using the Capital Asset Pricing Model (CAPM).