International Financial Management Chapter 3

Foreign Exchange Market

Allows for the exchange of one currency for another

Bretton Woods Agreement

An international agreement that called for fixed exchange rates between currencies. Exchange rates were established between currencies, and governments intervened to prevent exchange rates from moving more than 1 percent above or below their initially est

Smithsonian Agreement

The US Dollar was devalued relative to the other major currencies. The degree to which the dollar was devalued varied with each foreign currency. Exchange rates were allowed to fluctuate 2.25 percent in either direction from the newly set rates.

Floating Exchange Rate System

The currencies of most countries have been allowed to fluctuate in accordance with market forces; however, their respective central banks periodically intervene to stabilize exchange rates.

Foreign Exchange Dealers

Serve as intermediaries in the foreign exchange market by exchanging currencies desired by MNCs or individuals.

Spot Market

Market where immediate exchange transactions occur

Spot Rate

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

Interbank Market

If a bank begins to experience a shortage of a particular currency, it can purchase that currency from other banks. This trading between banks occurs in the _______ market.

Bid Price

Buy quote for a foreign currency

Ask Price

Sell quote for a foreign currency

Bid/Ask Spread

The difference between the bid and ask prices

Direct Quotations

Quotations that report the value of a foreign currency in dollars

Indirect Quotations

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

Cross Exchange Rate

Reflects the amount of one foreign currency per unit of another foreign currency

Forward Contract

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

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. It is an over-the-counter market, and its main participants are the foreign exchange dealers and the MNCs that wish to obtain a forward contract

Currency Futures Contract

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

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

Currency Call Option

Provides the right to buy a specific currency at a specific 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. It is used to hedge future receivables.

Strike Price

Exercise Price


US Dollars being deposited in European Banks. This helps facilitate international trade with European countries


Oil revenues deposited in banks

London Interbank Offer Rate (LIBOR)

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

Asian Money Market

Originated as a market involving mostly dollar-denominated deposits. The market emerged to accommodate the needs businesses that were using the US dollar as a medium of exchange for international trade

International Money Market Securities

Debt securities issued by MNCs and government agencies with a short-term maturity in the international money market

Eurocredit Loans

Loans of one year or longer that are extended by banks to MNCs or government agencies in Europe are commonly called Eurocredit Loans

Eurocredit Market

Eurocredit loans are transacted in the ______market.


An group of banks that participate in lending. A lead bank is responsible for negotiating the terms with the borrower, after which the bank organizes a group of banks to underwrite the loans

Single European Act

Provisions of this act include:
- 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

Basel Accord

Established by the central banks of 12 developed countries. According to this, their respective commercial banks were required to maintain capital equal to at least 4 percent of their assets. For this purpose, banks' assets are weighted by risk, which mea

Foreign Bond

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


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

Floating Rate Notes (FRNs)

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

Yankee Stock Offerings

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

American Depository Receipts (ADRs)

Certificates representing bundles of the firm's stock. The use of these circumvents some disclosure requirements imposed on stock offerings in the US while enabling non-US firms to tap the US market for funds.