Chapter 3: International Financial Markets

Smithsonian Agreement

A December 1971 agreement that adjusted the fixed exchange rates established at the Bretton Woods Conference of 1944. The other currencies were still pegged to the dollar until March 1973.

Asian Money Market

A market involving mostly dollar-denominated deposits. Emerged to accommodate the needs of businesses that were using the U.S. Dollar as a medium of exchange for international trade.

Foreign Exchange Market

Allowance of the exchange of one currency for another.

Forward Contract

An agreement between an MNC and a foreign exchange dealer that specifies the currencies to be exchanged, the exchange rate, and the date at which the transaction will occur

Eurobonds

Bonds that are sold in countries other than the country whose currency is used to denominate the bonds.

Foreign Exchange Dealers

Intermediaries in the foreign exchange market by exchanging currencies desired by MNCs or individuals.

Foreign Bond

Issued by a borrower foreign to the country where the bond is placed.

Eurocredit Loans

Loans of one year or longer that are extended by banks to MNCs or government agencies in Europe, which are transacted in the Eurocredit Market

Floating Rate Notes

When Eurobonds have a variable rate provision that adjusts the coupon rate over time according to prevailing market rates

International Money Market Securities

When MNCs and government agencies issue debt securities with a short-term maturity in the international money market

Interbank Market

When a bank begins to experience a shortage of a particular foreign currency, it can purchase that currency from other banks

Petrodollars

United States dollar earned through the export of petroleum

Bid Price

Buy Quote

American Depository Receipts

Certificates representing bundles of the non-U.S. firm's stock.

Parallel Bonds

Foreign bonds when the currency denominating each type of bond is determined by the country where it is sold

Bretton Woods Agreement

In 1944, an international agreement called for fixed exchange rates between currencies

Basel Accord

In 1988, the central banks of 12 developed countries and their respective commercial banks were required to maintain capital equal to at least 4 percent of their assets.

Yankee Stock Offerings

Non-U.S. corporations that need large amounts of funds sometimes issue stock in the United States because the U.S. new-issues market is so liquid.

Single European Act

Phased in by 1992. Capital can flow freely throughout Europe. Banks can offer a wide variety of lending, leasing, and securities activities in the EU. Regulations regarding competition, mergers, and taxes are similar throughout the EU. A bank established in any one of the EU countries has the right to expand into any or all of the other EU countries.

Currency Call Option

Provides the right to buy a specific currency at a specific price (strike price or exercise price) within a specific period of time.

Currency Put Option

Provides the right to sell a specific currency at a specific price within a specific period of time

Indirect Quotations

Quotations that report the number of units of a foreign currency per dollar

Direct Quotations

Quotations that report the value of a foreign currency in dollars per unit

Ask Price

Sell Quote

Currency Futures Contract

Specifies a standard volume of a particular currency to be exchanged on a specific settlement date

Bid/Ask Spread

The difference between the bid and ask prices

Eurodollars

The dollar deposits in banks in Europe

Futures Rate

The exchange rate at which one can purchase or sell a specified currency on the settlement date in accordance with the futures contract.

Spot Rate

The exchange rate at which one currency is traded for another in the spot market

Forward Rate

The exchange rate, specified in the forward contract, at which the currencies will be exchanged

Forward Market

The market in which forward contracts are traded

Spot Market

The market where immediate exchange transactions occur

London Interbank Offer Rate

The rate most often charged for very short-term loans between banks.

Cross Exchange Rate

The type of rate that reflects the amount of one foreign currency per unit of another foreign currency