Finance Chapter 21
American Depository Receipt (ADR)
A security issued in the united state representing shares of a foreign stock and allowing the stock to be traded in the US
gilts
British and Irish government securities
forward exchage trade
Exchange to take place in the future
Eurobonds
International bonds issued in multiple countries but denominated in a single currency (usually the issuer's currency)
Euro-currency
Money deposited in a financial center outside of the country whose currency is involved
Interest rate parity (IRP)
The condition stating that the interest rate differential between two countries is equal to the percentage difference between the forward exchange rate and the spot exchange rate
Purchasing power parity (PPP)
The idea that the exchange rate adjusts to keep purchasing power constant among currencies
Cross-rate
The implicit exchange rate between two currencies (usually non-US) quoted in some third currency (usually US dollars)
Foreign exchange market
The market in which one country's currency is traded for another's
London Inter-bank Offered Rate
The rate most international banks charge one another for overnight Eurodollar loans
Discount
a currency is selling for less in the forward market than in the spot market
Premium
a currency is selling for more in the forward market than in the spot market
Swaps
agreements to exchange two securities or currencies
Spot trade
an agreement to trade currencies based on the exchange rate today for settlement within two business days
Foreign bonds
international bonds issued in a single county, usually denominated in that country's currency
Translation exposure
risk of adverse effects on a firm's financial statements due to changes in exchange rates
Political risk
risk related to changes in value that arise because of political actions (off shore)
Unbiased forward rates (UFR)
the condition stating that the current forward rate is an unbiased predictor of the future spot exchange rate
Uncovered interest parity (UIP)
the condition stating that the expected percentage change in the exchange rate is equal to the difference in interest rates
Spot exchange rate
the exchange rate on a spot trade
Purchasing power parity
the idea that exchange rates adjust to keep purchasing power constant among currencies
Relative purchasing power parity
the idea that exchange rates adjust to keep relative purchasing power constant among currencies (the value of currencies adjust to reflect relative inflation, higher inflation leading to lower value and vice versa)
Exchange rate
the price of one country's currency expressed in terms of another country's currency
Exchange rate risk
the risk due to changes in exchange rates
Exchange rate risk
the risk related to having international operations in a world where relative currency values vary
International Fisher Effect (IFE)
the theory that real interest rates are equal across countires
forward exchange rate
to be used in the future