Capital market
system that allocates financial resources in the form of debt and equity according to their most efficient uses
debt
loan in which the borrower promises to repay principal plus interest
bond
debt instrument that specifies the timing of principal and interest payments
equity
part ownership of a company, the shareholders takes part in the company's financial gains and losses
stock
shares of ownership in a company's assets that give the shareholders a claim on the company's future cash flows
dividends
payments made out of surplus funds
liquidity
ease with which bondholders and shareholders may convert their investments into cash
International Capital Market
network of individuals, companies, financial institutions and governments that invest and borrow across national boundaries
Information technology
reduces the time and money needed to communicate globally and allows for 24-hour electronic trading
Deregulation
increases competition, lowers transaction costs, and opens up national financial markets
Financial Instruments
growth has resulted from securitization, which is the repackaging of hard-to-trade financial assets into more liquid, negotiable, and marketable securities
Offshore Financial Centers
country or territory whose financial sector features very few regulations and few if any taxes
Operational center
Extensive financial activity and currency trading
Booking Centers
mostly for bookkeeping and tax purposes; Funds simply pass through these centers on their way to large operational centers
International Bond Market
Market of bonds sold by issuing companies, governments, and others outside their own countries
eurobond
Bond that is issued outside the country in whose currency the bond is denominated
foreign bond
Bond sold outside a borrower's country and denominated in the currency of the country in which it is sold
interest rates
Driving growth are differential interest rates between developed and developing nations
International Equity Market
Market of stocks bought and sold outside the issuer's home country
cyber markets
stock markets that have no central geographic locations, global trading activities conducted on the internet
eurocurrency market
market consisting of all the world's currencies that are banked outside of their countries of origin
Interbank interest rates
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
hedging
Insure against potential losses from adverse exchange-rate changes
arbitrage
Instantaneous purchase and sale of a currency in different markets for profit
speculation
Sequential purchase and sale (or vice-versa) of a currency for profit
conversion
To facilitate transactions, invest directly abroad, or repatriate profits
exchange rate
rate at which one currency is exchanges for another
bid quote
price at which it will buy
ask quote
price at which it will sell
bid-ask spread
difference between the two quote rates
quoted currency
the numerator in a quoted exchange rate
base currency
the denominator in a quote exchange rate
Cross Rate
exchange rate calculated using two other exchange rates
spot rate
exchange rate requiring delivery of the traded currency within two business days
forward rate
Rate at which two parties will exchange currencies on a specified future date
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 to exchange a specified amount of a currency on a specified date at a specified rate
Currency futures contract
requiring the exchange of a specified amount of currency on a specified date at a specified rate with all conditions fixed and not adjustable
Vehicle currency
currency used as an intermediate to convert funds between two other currencies
Interbank market
Market in which the world's largest banks exchange currencies at spot and forward rates
Securities Exchange
specialize in currency futures and options transactions
Over the Counter Market
global computer network of traders and other participants with no central trading location
clearing
process of aggregating the currencies that one bank owes another and then carrying out the transaction
Convertible (hard) currency
currency that trades freely in the foreign exchange market with its price determined by the forces of supply and demand
countertrade
involves exchanging goods or services without using money