Financial Management Chapter 21

American Depositary Receipt (ADR)
A security issued in the united States representing shares of a foreign stock and allowing that stock to be traded in the United States
cross rate
the implicit exchange rate between two currencies (usually non- U.S) quoted in some third currency (usually the U.S. dollar)
International bonds issued in multiple countries but denominated in a single currency (usually the issuer’s currency)
Money deposited in a financial center outside of the country whose currency is involved
Foreign Bonds
International bonds issued in a single country, usually denominated in that country’s currency
British and Irish government securities
London Interbank Offered Rate (LIBOR)
the rate most international banks charge one another for overnight Eurodollar loans
Agreements to exchange two securities or currencies
Foreign Exchange Market
The market in which one country’s currency is traded for another’s
Exchange Rate
the price of one country’s currency expressed in terms of another country’s currency
Spot trade
An agreement to trade currencies based on the exchange rate today for settlement within two business days
Spot Exchange Rate
the exchange rate on a spot trade
Forward Trade
An agreement to exchange currency at some time in the future
Forward Exchange Rate
The agreed-upon exchange rate to be used in a forward trade
Purchasing Power Parity (PPP)
The idea that the exchange rate adjusts to purchasing power constraints among currencies
Interest Rate Parity (IRP)
The condition stating that the interest rate differential between two countries is equal to the percentage difference between the forward exchange rate and the spot exchange rate
Unbiased Forward Rates (UFR)
The condition stating that the current forward rate is an unbiased predictor of the future spot exchange rate
Uncovered Interest Parity (UIP)
The condition stating that the expected percentage change in the exchange rate is equal to the difference in interest rates
International Fisher Effect (IFE)
The theory that real interest rates are equal across countries
Exchange Rate Risk
The risk related to having international operations in a world where relative currency values vary
Political Risk
Risk related to changes in value that arise because of political actions