Important terms for International Finance

1. International finance is the study of monetary interactions that emerge between two or more countries.
International finance focuses on areas such as foreign direct investment and currency exchange rates.

2. foreign direct investment (FDI) - the purchase of land, equipment or buildings or the construction of
new equipment or buildings by a foreign company. FDI also refers to the purchase of a controlling
interest in existing operations and businesses (known as mergers and acquisitions). Multinational firms
seeking to tap natural resources, access lucrative or emerging markets, and keep production costs
down by accessing low-wage labor pools in developing countries are FDI investors. Classic examples of
FDI include American banks taking over Korean ones or Canadian mining companies building mines
in Brazil

3. International Monetary Fund (IMF) – the IMF is an international organization established in 1944 to
provide short-term financial assistance to countries needing to stabilize exchange rates or alleviate
balance of payments difficulties. Since the 80s the IMF has become increasingly involved in the
economic decision-making of nations through the conditionality associated with its loans.

4. bailouts - a common name for the IMF-coordinated emergency rescue loans to economies in crisis. The
most immediate beneficiaries of bailouts are typically foreign investors, while citizens are left holding
the IMF debt bill.

5. Balance of Payments A financial statement prepared for a given country summarizing the flows of
goods, services, and funds between the residents of that country and the residents of the rest of the
world during a certain period of time. The balance of payments is prepared using the concept of
double-entry bookkeeping, where the total of debits equals the total of credits.

6. Balance of Trade The net of imports and exports of goods and services reported in the balance of
payments.

7. exchange rates - the price of one country's currency relative to another (e.g. $1 Cdn = $.67 US. Exchange
rates can be managed according to two basic systems - floating, fixed or pegged.

8. Floating Exchange Rate System A system in which the values of various currencies relative to each
other are established by the forces of supply and demand in the market without intervention by the
governments involved. In practice most floating rates are really "managed floating" with periodic ad
hoc intervention by central banks.

9. Fixed Exchange Rate System A system in which the values of various countries' currencies are tied to
one major currency (such as the U.S. dollar), gold, or special drawing rights. The term should not be
taken literally because fluctuations within a range of 1% or 2% on either side of the fixed rate are
usually permitted in such a system.

10. Direct Quotation A rate of exchange quoted in units of foreign currency for each unit of the domestic
currency.

11. Indirect Quotation A rate of exchange quoted in units of domestic currency for each unit of foreign
currency.

12. Arbitrage The simultaneous purchase and sale or lending and borrowing of two assets in order to
profit from a price disparity.

13. Cost of Capital The weighted rate of return expected by the various parties financing the firm.
Bondholders expect a return equivalent to the market interest rate on debt, while equity holders expect
a return that is a function of dividends received and capital gains as the stock appreciates in value,
 adjusted for risk. The cost of capital is traditionally used as a hurdle rate that projects must yield in
order to be accepted by the firm.

14. Cross Rate An exchange rate between two currencies neither of which is the U.S. dollar. A cross rate is
usually constructed from the individual exchange rates of the two currencies with respect to the U.S.
dollar.

15. Depreciation A gradual decrease in the market value of a currency with respect to a second currency or
a real asset. The term is used in reference to a market price as opposed to an official price or par value.

16. Devaluation A sudden decrease in the market value of a currency with respect to a second currency or
a real asset. The term is used in reference to an official price, such as a fixed exchange rate or a declared
par value, as opposed to a market price.

17. Discount The amount by which a currency is cheaper for future delivery than for immediate or spot
delivery is a forward market discount. If sterling is selling for US$2.3940 on the spot market but at
US$2.3920 for delivery in three months, then it is selling at a 20-point discount.

18. Exchange Risk The risk assumed by a party to an international transaction in which the party could
incur an exchange loss as a result of currency movements.

19. Fisher Effect The theory that interest rates in any country rise by an amount approximately equal to the
anticipated rate of inflation. If the basic rate of interest is 3% a year when there is no inflation, and if
inflation is then anticipated to equal 5% a year, the rate of interest will rise to approximately 8% a year.

20. Fundamental Analysis A method of analyzing and predicting price movements using information
about supply and demand.

21. Gross National Product (GNP) The total market value of all goods and services which is produced in
an economy in one year.

22. Hard Currency A strong, freely convertible currency. A strong currency is one that is not expected to
devalue in the foreseeable future.

23. Interest Rate Parity The process that ensures that the annualized forward premium or discount equals
the interest rate differentials on equivalent securities in two currencies.

24. The Karachi Interbank Offered Rate (KIBOR) is a daily reference rate based on the interest rates at
which banks offer to lend unsecured funds to other banks in the Karachi wholesale (or "interbank")
money market. The banks used it as a benchmark in their lending to corporate sector.

25. The bid price is the highest price a buyer is willing to pay for a security or asset.

26. The ask price refers to the lowest price a seller will accept for a security.

27. The difference between these two prices is known as the spread; the smaller the spread, the greater the
liquidity of the given security.

28. Capital Inflow: A term used to describe a financial account surplus. In other words, a capital inflow
represents borrowing from abroad. For example, ‘capital inflows have been financing an excess of U.S.
investment over its national savings

29. . Capital Mobility: A term used to describe how easy it is for domestic and foreign residents to
exchange assets. A variety of government controls and taxes can impede the free exchange of assets
across borders. For example, most countries impose restrictions on the ability of foreigners to acquire
equity in domestic businesses.
30. Capital Outflow: The opposite of capital inflow, i.e., lending to foreigners.