International

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Futures

Back 1

Future delivery of a standard amount of foreign exchange at a fixed time, place, and price.

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Short positions in futures

Back 2

Selling, you are thinking that the pesos will fall compared to US

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Long positions in futures

Back 3

Buying, you are thinking that the peso will rise in value compare

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Foreign Currency options

Back 4

Gives the buyer the right but not the obligation to buy or sell a given amount of foreign exchange at a fixed price per until the maturity date.

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"Call" in options

Back 5

Options to buy foreign currency

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"Put" in options

Back 6

Options to sell foreign currency

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In the money Options

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A option that is profitable, excluding the cost of the premium, if exercised immediately.

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Out of the money Options

Back 8

Not profitable, excluding the cost of the premium if exercised immediately.

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Intrinsic value

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The financial gain of the option if it's exercised immediately.(If out of money its 0)

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interest rate swap

Back 10

If the agreement is for one party to swap its fixed interest payment for a floating rate payment, its is termed

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Natural advantage of interest rate swaps

Back 11

change floating rate into fixed interest rate

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Fixed rate debtRates go up

Back 12

Do nothing

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Fixed rate debtRates go down

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Pay floating/ Receive fixed

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Floating-rate debtRates go up

Back 14

Pay fixed/ receive floating

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Floating rate debtrates go down

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Do nothing

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Transaction exposures

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measures changes in the value of outstanding financial obligations

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Alternatives in positions

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Remain unhedged Hedge in the forward market Hedge in the money market Hedge in the options market

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Pros of hedging

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Reduction in risk in future cash flows improves the planning capability of the firm

Reduction of risk in future cash flows reduces the likelihood that the firm’s cash flows will fall below a necessary minimum

Management has a comparative advantage over the individual investor in knowing the actual currency risk of the firm

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Cons of hedging

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Shareholders are more capable of diversifying risk than the management of a firm;

if stockholders do not accept the currency risk of any specific firm, they can diversify their portfolios

Currency risk management does not increase the expected cash flows of a firm;

currency risk management normally consumes resources thus reducing cash flow

Management’s motivation to reduce variability is sometimes driven by accounting reasons;

management may believe that it will be criticized more severely for incurring foreign exchange losses than for incurring cash cost to avoid the foreign exchange loss

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Advantages of Foreign Direct Investments

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additional equity capital from whose profits yield tax revenues; transfer of patented technologies

; access to scarce managerial skills;

creation of new jobs;

access to overseas market networks and marketing expertise;

reduced flight of domestic capital abroad;

more rigorous appraisal of investment proposals, which reduces the number of inappro­priate or nonfeasible projects; diffusion of improved techniques and better business practices;

a catalyst for associated lending for specific projects, thus increasing the availability of external funding.

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foreign direct investment (FDI)

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is a controlling ownership in a business enterprise in one country by an entity based in another country. 10 percent stake

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American Depositary Receipts (ADRs)

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is a stock that trades in the United States but represents a specified number of shares in a foreign corporation. sare bought and sold on American markets just like regular stocks, and are issued/sponsored in the U.S. by a bank or brokerage.

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capital adequacy

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is the amount of capital a bank or other financial institution has to hold as required by its financial regulator. This is usually expressed as a capital adequacy ratio of equity that must be held as a percentage of risk-weighted assets.

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Glass-Stegall act

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Prohibited commercials banks from underwriting corporate securities or engaging in brokerage activities. Split the banks, either Investment banking or deposit /loan banking

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Gramm-Leach Bliliy act

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Abolishes the Glass Stegall act.

States regulate insurance activities SEC keeps oversight of securities activities

Office of the controller of the Comptroller of the Currency 
regulates bank subsidiaries engaged in 
securities underwriting

Federal Reserve oversees bank holding companiesMade so that the banks could use Investment and loan again