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