Chapter 6 - International Finance and Trade
sight draft
an instrument requiring immediate payment
euro
official currency of the eurozone members
european union (EU)
organization established to promote trade and economic development among european countries
balance of trade
the net balance of exports and imports of goods and services
merchandise trade balance
the net difference between a countries import and export of goods
currency exchange rate
value of one currency relative to another currency
commercial letter of credit
a banks written statement to an individual or firm guaranteeing acceptance and payment of a draft up to a specified sum if the draft is presented according to the terms of the letter
clean draft
a draft that is not accompanied by any special documents and is generally used when the exported has confidence in the importers ability to meet the draft when presented
bankers acceptance
a promise of future payment issued by a firm and guaranteed by a bank
gold standard
a standard in which currencies of countries of major countries are converted in to gold at fixed exchange rates
flexible exchange rates
a system in which currency exchange rates are determined by supply and demand
bretton woods system
a system in which individual currencies would be tied to gold through the US dollar via fixed or pegged exchange rates
international monetary system
a system on instructions and mechanisms to foster international trade, manage the flow of financial capital and determine currency exchange rates
time draft
an instrument requiring payment at a later date
trust receipt
an instrument through which a bank retains title to goods until they are paid for
draft (bill of exchange)
an unconditional written order, signed y the party drawing it, requiring the party to whom it is addressed to pay a certain sum of money to order or to bearer
export-import bank
bank established to help finance and facilitate exports and imports between the United States and other countries
eurozone members
countries that have adopted the euro as their common currency
world bank
created to create economic growth in developing countries (also called the international bank for reconstruction and development)
international monetary fund (IMF)
created too promote world trade through monitoring and maintaining fixed exchange rates and by making loans to countries facing balance of trade and payments problems
spot exchange rate
current rate being quoted for delivery of the currency on the spot
documentary draft
draft that is accompanied by an order bill of lading along with other papers such as insurance receipts, certificates of sanitation and consular invoices
currency exchange markets (foreign exchange markets)
electronic markets where banks and institutional traders buy and sell currencies on behalf of business, other clients and themselves
capital account balance
includes foreign government and private investment in the US netted against US investment in foreign countries
indirect quotation method
indicates the number of units of a foreign currency needed to purchase one unit of the home countries currency
direct quotation method
indicates the value of one unit of a foreign currency in terms of a home countries currency
balance of payments
involves all of its international transactions, including foreign investment, private and government grants, US military spending overseas and many other items besides the buying and selling of goods and services
travelers letter of credit
issued by a bank in one country and addressed to a list of foreign banks,which have agreed to purchase sight drafts presented to them by persons with appropriate letters of credit
forward exchange rate
negotiated exchange rate for the purchase or sale of a currency where delivery will take place at a future date
order bill of lading
represents the written acceptance of goods for shipment by a transportation company and the terms under which the goods are to be transported to their destination
special drawing rights (SDRs)
reserve assets created by the IMF and consisting of a basket or portfolio of currencies that could be used to make international payments
economic risk
risk associated with possible slow or negative economic growth, as well as variability in economic growth
current account balance
shows the flow of income into and out of the United States during a specified period
purchasing power parity (PPP)
states that a country with a relatively higher expected inflation rate will have its currency depreciate relative to a country (or group of countries using a single currency) with a relatively lower inflation rate
interest rate parity (IRP)
states that a country with a relatively higher nominal interest rate will have its currency depreciated relative to a country with a relatively lower nominal interest rate
political risk
the risk associated with the possibility that a national government might confiscate or expropriate assets held by foreigners
arbitrage
the simultaneous, or nearly simultaneous, purchasing of commodities, securities or bills of exchange in one market and selling them in another where the price is higher