Capital Market
System that allocates financial resources in the form of debt and equity according to their most efficient uses.
Debt
Must repay principal plus interest
-bonds are debt instruments
-bonds have timed principal and interest payments
Equity
Part ownership of a company
-investments in the form of stock
-share in financial gains or losses
Bond
Debt instrument that specifies the timing of principles and interest payments.
Stock
Shares of ownership in a company`s assests that give shareholders a claim on the company`s future cash flows.
Liquidity
Ease with which bondholders and shareholders may convert their investments into cash.
International Capital Market
Network of people, firms, financial institutions and governments borrowing and investing internationally.
Borrowers
-Expand the money supply
- Reduce the cost of money
Lenders
- Spread and reduce risk
-Offset gains and losses
Information Technology
� real time information on global
opportunities and risks
� faster response times; lower cost
Deregulation
competition from less regulated
capital markets in small nations
forced largest nations to open
markets, lower transaction costs
Financial Instruments
Innovation created new securities from formerly hard to trade assets.
Securization
is the
process of unbundling
and repackaging
hard-to-trade financial
assets into more liquid,
negotiable and
marketable securities.
Offshore Financial Center (OFO)
country or territory whose financial sector provides financial services (borrowing, lending, deposits) to non-residents. Common features:
�fewer regulations
�few (if any) taxes
�banking secrecy
Operational Center
Extensive financial activity and currency tradingg
Booking Center
Mostly for bookkeeping and tax purposes
International Bond Market
Market of bonds sold by issuing companies, governments and others outside their own countries
Eurobond
Bond issued outside the country in whose currency the bond is denominated 75%-80% of all international bonds
Foregin Bond
Bond sold outside a borrower's country and denominated in the currency of the country in which it is sold 20%-25% of all international bonds
Interest Rates
Differential interest rates between developed and developing nations are driving growth in international bond market.
International Equity Market
Market of stocks bought and sold outside the issuer`s home country.
Eurocurrency Market
Unregulated market of currencies banked outside their countries of origin*
Interbank interest rate
Interest rates that the world`s largest banks charge one another for loans.
Foreign Exchange Market
Market in which currencies are bought and sold and their prices are determined.
Exchange Rate
rate at which one currency is exchanged for another.
Currency Hedging
done to insure against potential losses
from adverse exchange-rate changes
Speculation
The sequential purchase and sale
(or vice-versa) of a currency for profit
Arbitrage
the instantaneous purchase and sale
of a currency in different markets for profit.
Currency Conversion
done to facilitate sale or purchase, or to invest directly abroad.
Interest Arbitrage
Profit- motivated purchase ans sale of interest - paying securities denominated in different currencies.
Quoted Currency
The numerator in a quoted exchange rate, or the currency with which another currency is to be purchased.
Base Currency
The Denominator in a quoted exchange rate, or the currency that is to be purchased with another currency.
Exchange-rate risk ( foreign exchange risk)
Risk of adverse changes in exchange rates.
Cross rate
Exchange rate calculated using two other exchange rates.
Spot rate
Exchange rate requiring delivery of the trade currency within two business days.
spot Market
Market for currency transactions at spot rate.
Forward Rate
Exchange rate at which two parties agree to exchange currencies on a specified future date.
Forward market
Market for currency transactions at forward rates.
Forward contract
Contract that requires the exchange of an agreed-upon amount of a currency on an agreed-upon date at a specific exchange rate.
Derivative
Financial instrument whose value derives from other commodities or financial instruments.
Currency Swap
Simultaneous purchase and sale of foreign exchange for two different dates.
Currency option
Right, or option, to exchange a specific amount of a currency on a specific date at a specific rate.
Currency futures contract
Contract requiring the exchange of a specific amount of currency on a specific date at a specific exchange rate, with all conditions fixed and not adjustable.
Vehicle Currency
Currency used as an intermediary to convert funds between two other currencies.
Interbank Market
Market in which the world`s largest banks exchange currencies at spot and forward rates.
Clearing
Process of aggregating the currencies that one bank owes another and then carrying the transaction.
Securities exchange
Exchange specializing in currency futures and options transactions.
Over the Counter (OTO) Market
Decentralized exchange encompassing a global computer network of foreign exchange traders and other market participants.
Convertible (Hard) Currency
Currency that trades freely in the price determined by the forces of supply and demand.
Counter trade
Practice of selling goods and services that are paid for, in whole or in part, with other goods or services.