International Finance Exam 2

Front 1

Eurobonds

Back 1

underwritten by a multinational syndicate of banks and sold simultaneously in many countries other than the country of the issuing entity.

Front 2

Foreign Bonds

Back 2

sold in a particular country by a foreign borrower, and underwritten by a syndicate of members from that country; denominated in the currency of that country

Front 3

Global Bonds

Back 3

sold inside as well as outside the country in whose currency they are denominated. (ei. dollar denominated sold in New York and Tokyo)

Front 4

Currency-Option Bonds

Back 4

bonds that allow the holders to receive their interest income in the currency of their option from among a number of predetermined currencies at a predetermined exchange rate.

Front 5

Currency-cocktail Bonds

Back 5

bonds denoted in a standard "currency basket" of several different currencies.

Front 6

floating rate notes

Back 6

set at some fixed rate over LIBOR so that it has a variable base.
Can shift the interest rate risk from lender to borrower by floating rate.
normally paid semiannually.

Front 7

straight fixed rate notes

Back 7

like a domestic bond with fixed coupon rate, fixed maturity, and fulfill redemtion.
normally paid annually because of convenience.

Front 8

syndicated loan

Back 8

it has enabled banks to diversify the risk of very large loan among a number of banks.
it is important because many MNC's need loans which one bank can not provide.
Banks from different countries that combine funds to issue a large loan. They share the risk.

Front 9

euro currencies

Back 9

money deposited by companies and governments in banks outside the country in which currency is stated.

Front 10

why are euro markets more efficient than domestic markets?

Back 10

The euro market is not under the juridiction of the federal reserve.

The spread of the Euro rate is below the spread of the of the US rate due to:
1.No FDIC in Euro dollar
2.No reserve requirement in bank regulation
3.No ceiling (other regulation)
4.US bank has no economy of scale (high operation cost)

Front 11

loan from consortium

Back 11

banks from different countries that form a single bank and that bank will issue the loan

Front 12

representative office

Back 12

Do not accept deposits or make loans; foreign office established when parent bank does business in that country; give advice and collect info; usually to simply do preliminary work before the formal office is opened; liason between parent bank and local banks.

Front 13

correspondent banks

Back 13

Informal arrangement in which a bank maintains deposite balances with banks in other countries.

Front 14

international banking facilities

Back 14

enable bank offices in the US to accept time deposits in either dollars or foreign currency from foreign (only) customers deposits & loans can not support us based activities; no reserve requirement or local taxes; foreign customers can borrow also in order to finance foreign projects ; similar to any euroccurency met; it ' s an easier way for small banks to enter the eurocurrency market.

Front 15

interbank clearing house systems

Back 15

1. The clearing house interbank payments system(CHIPS)--> USA
2. The clearing house payments assistance system(CHPAS)--> UK
3. The society for worldwide interbank financial telecomunications ( SWIFT)--> international

Front 16

futures

Back 16

available in a predetermined amount and for one of four specified maturity dates; handled by exchanges

Front 17

forwards

Back 17

can involve any amount of currency tailored to particular needs and can mature on any date; handled by banks

Front 18

strike price

Back 18

The exercise price or strike price is the price at which the underlying security can be purchased (call option) or sold ( put options). The strike price is determined at the time of the option contract

Front 19

premium

Back 19

The higher the difference between the strike price and market price at the time an option contract is written , the higher the premium required to purchase the option.

Front 20

interest rate

Back 20

The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Interest rates are typically noted on an annual basis, known as the annual percentage rate (APR). The assets borrowed could include, cash, consumer goods, large assets, such as a vehicle or building. Interest is essentially a rental, or leasing charge to the borrower, for the asset's use. In the case of a large asset, like a vehicle or building, the interest rate is sometimes known as the “lease rate”.
When the borrower is a low risk party, they will usually be charged a low interest rate; if the borrower is considered high risk, the interest rate that they are charged will be higher.

Front 21

currency swaps

Back 21

A swap that involves the exchange of principal and interest in one currency for the same in another currency. It is considered to be a foreign exchange transaction and is not required by law to be shown on a company's balance sheet.

Front 22

translation exposure

Back 22

measures the effect of an exchange rate change on the published financial statements of a firm. It is the accounting-based change in consolidated financial statements caused by a change in exchange rates.
Does not involve actual cash flows

Front 23

economic exposure

Back 23

measures the impact of an exchange-rate change on the net present value of expected future-cash flows from a foreign investment project.
involves cash flows

Front 24

transaction exposure

Back 24

measures the effect of an exchange-rate change on outstanding obligations which existed before exchange rates changed, but were settled after the exchange rate change. The change in expected cash flows arising because of an unexpected change in exchange rates. Occurs if there is a change in an exchange rate and non-settled obligations (credit sales) denominated in a foreign country.

Front 25

hedging translation exposure

Back 25

increase hard-currency assets and decrease hard-currency liabilities.
decrease soft-currency assets and increase soft currency liabilities.
Balance sheet hedge.

Front 26

hedging economic exposure

Back 26

A firm hedge to reduce some of the variance in the value of its future expected cash flow. The basic purpose of economic exposure management is to neutralize the impact of unexpected exchange-­‐rate changes on net cash flows because there are no economically justifiable hedging methods.

Front 27

hedging transaction exposure

Back 27

hedge in the forward market
hedge in money market
hedge in the options market
swap agreement.
(view notes for examples)

Front 28

net transaction exposure equations

Back 28

?

Front 29

exchange rates used in forward market

Back 29

?

Front 30

exchange rates used in money market

Back 30

?

Front 31

exchange rates used in options market

Back 31

?