A/P: In international trade documentation, an abbreviation for authority to purchase or authority to pay. In accounting, an abbreviation for accounts payable.

Absolute advantage: The ability of an individual party or country to produce more of a product or service with the same inputs as another party. It is therefore possible for a country to have no absolute advantage in any international trade activity. See also comparative advantage.

Accounting exposure: Another name for translation exposure. See Translation exposure.

Ad valorem duty: A customs duty levied as a percentage of the assessed value of goods entering a country.

ADB: Asian Development Bank.

Adjusted present value: A type of present value analysis in capital budgeting in which operating cash flows are discounted separately from (1) the various tax shields provided by the deductibility of interest and other financial charges, and (2) the benefits of project-specific concessional financing. Each component cash flow is discounted at a rate appropriate for the risk involved.

ADR: See American Depositary Receipt.

AfDB: African Development Bank.

Affiliate: A foreign enterprise in which the parent company owns a minority interest.

Agency for International Development (AID): A unit of the U.S. government dealing with foreign aid.

Agency theory: The costs and risks of aligning interests between shareholders of the firm and their agents, management, in the conduct of firm business and strategy.

All-equity discount rate: A discount rate in capital budgeting that would be appropriate for discounting operating cash flows if the project were financed entirely with owners’ equity.

Alt- A Mortgage: A mortgage type that, although not prime, is considered a relatively low-risk loan to a creditworthy borrower, but lacks some technical qualifications to be categorized as “conforming.”

American Depository Receipt (ADR): A certificate of ownership, issued by a U.S. bank, representing a claim on underlying foreign securities. ADRs may be traded in lieu of trading in the actual underlying shares.

American option: An option that can be exercised at any time up to and including the expiration date.

American selling price (ASP): For customs purposes, the use of the domestic price of competing merchandise in the United States as a tax base for determining import duties. The ASP is generally higher than the actual foreign price, so its use is a protectionist technique.

American terms: Foreign exchange quotations for the U.S. dollar, expressed as the number of U.S. dollars per unit of non-U.S. currency.

Anticipated exposure: A foreign exchange exposure that is believed by management to have a very high likelihood of occurring, but is not yet contractual, and is therefore not yet certain.

Appreciation: In the context of exchange rate changes, a rise in the foreign exchange value of a currency that is pegged to other currencies or to gold. Also called revaluation.

Arbitrage: A trading strategy based on the purchase of a commodity, including foreign exchange, in one market at one price while simultaneously selling it in another market at a more advantageous price, in order to obtain a risk-free profit on the price differential.

Arbitrageur: An individual or company that practices arbitrage.

Arithmetic return: A calculation in which the mean equals the average of the annual percentage changes in capital appreciation plus dividend distributions.

Arm’s length price: The price at which a willing buyer and a willing unrelated seller freely agree to carry out a transaction. In effect, a free market price. Applied by tax authorities in judging the appropriateness of transfer prices between related companies.

Asian currency unit: A trading department within a Singaporean bank that deals in foreign (non-Singaporean) currency deposits and loans.

Ask price: The price at which a dealer is willing to sell foreign exchange, securities or commodities. Also called offer price.

Asset Backed Security (ABS): A derivative security that typically includes second mortgages and home-equity loans based on mortgages, in addition to credit card receivables and auto loans.

Asset market approach: A strategy that determines whether foreigners are willing to hold claims in monetary form, depending on an extensive set of investment considerations or drivers.

At-the-money (ATM): An option whose exercise price is the same as the spot price of the underlying currency.

Back-to-back loan: A loan in which two companies in separate countries borrow each other’s currency for a specific period of time and repay the other’s currency at an agreed maturity. Sometimes the two loans are channeled through an intermediate bank. Back-to-back financing is also called link financing.

Backlog exposure: The period of time between contract initiation and fulfillment through delivery of services or shipping of goods.

Balance of payments (BOP): A financial statement summarizing the flow of goods, services, and investment funds between residents of a given country and residents of the rest of the world.

Balance of trade (BOT): An entry in the balance of payments measuring the difference between the monetary value of merchandise exports and merchandise imports.

Balance sheet hedge: An accounting strategy that requires an equal amount of exposed foreign currency assets and liabilities on a firm’s consolidated balance sheet.

Bank for International Settlements (BIS): A bank in Basel, Switzerland, that functions as a bank for European central banks.

Bank rate: The interest rate at which central banks for various countries lend to their own monetary institutions.

Bankers’ acceptance: An unconditional promise by a bank to make payment on a draft when it matures. This comes in the form of the bank’s endorsement (acceptance) of a draft drawn against that bank in accordance with the terms of a letter of credit issued by the bank.

Barter: International trade conducted by the direct exchange of physical goods, rather than by separate purchases and sales at prices and exchange rates set by a free market.

Basic balance: In a country’s balance of payments, the net of exports and imports of goods and services, unilateral transfers, and long-term capital flows.

Basis point: One one-hundredth of one percentage point, often used in quotations of spreads between interest rates or to describe changes in yields in securities.

Basis risk: A type of interest rate risk in which the interest rate base is mismatched.

Bearer bond: Corporate or governmental debt in bond form that is not registered to any owner. Possession of the bond implies ownership, and interest is obtained by clipping a coupon attached to the bond. The advantage of the bearer form is easy transfer at the time of a sale, easy use as collateral for a debt, and what some cynics call taxpayer anonymity, meaning that governments find it hard to trace interest payments in order to collect income taxes. Bearer bonds are common in Europe, but are seldom issued any more in the United States. The alternate form to a bearer bond is a registered bond.

Beta: Second letter of the Greek alphabet, used as a statistical measure of risk in the Capital Asset Pricing Model. Beta is the covariance between returns on a given asset and returns on the market portfolio, divided by the variance of returns on the market portfolio.

Bid: The price that a dealer is willing to pay to purchase foreign exchange or a security.

Bid-ask spread: The difference between a bid and an ask quotation.

Big Bang: The October 1986 liberalization of the London capital markets.

Bill of exchange (B/E): A written order requesting one party (such as an importer) to pay a specified amount of money at a specified time to the writer of the bill. Also called a draft. See Sight draft.

Bill of landing (B/L): A contract between a common carrier and a shipper to transport goods to a named destination. The bill of lading is also a receipt for the goods. Bills of lading are usually negotiable, meaning they are made to the order of a particular party and can be endorsed to transfer title to another party.

Black market: An illegal foreign exchange market.

Blocked funds: Funds in one country’s currency that may not be exchanged freely for foreign currencies because of exchange controls.

Border tax adjustments: The fiscal practice, under the General Agreement on Tariffs and Trade, by which imported goods are subject to some or all of the tax charged in the importing country and re-exported goods are exempt from some or all of the tax charged in the exporting country.

Branch: A foreign operation not incorporated in the host country, in contrast to a subsidiary.

Bretton Woods Conference: An international conference in 1944 that established the international monetary system that was in effect from 1945 to 1971. The conference was held in Bretton Woods, New Hampshire, United States.

Bridge financing: Short-term financing from a bank, used while a borrower obtains medium- or long term fixed-rate financing from capital markets.

Bulldogs: British pound-denominated bonds issued within the United Kingdom by a foreign borrower.

Cable: The U.S. dollar per British pound cross rate.

CAD: Cash against documents. International trade term.

Call option: The right, but not the obligation, to buy foreign exchange or another financial contract at a specified price within a specified time. See Option.

Capex: Capital expenditures.

Capital account: A section of the balance of payments accounts. Under the revised format of the International Monetary Fund, the capital account measures capital transfers and the acquisition and disposal of nonproduced, nonfinancial assets. Under traditional definitions, still used by many countries, the capital account measures public and private international lending and investment. Most of the traditional definition of the capital account is now incorporated into IMF statements as the financial account.

Capital asset pricing model (CAPM): A theoretical model that relates the return on an asset to its risk, where risk is the contribution of the asset to the volatility of a portfolio. Risk and return are presumed to be determined in competitive and efficient financial markets.

Capital budgeting: The analytical approach used to determine whether investment in long-lived assets or projects is viable.

Capital flight: Movement of funds out of a country because of political risk.

Capital markets: The financial markets of various countries in which various types of long-term debt and/or ownership securities, or claims on those securities, are purchased and sold.

Capital mobility: The degree to which private capital moves freely from country to country in search of the most promising investment opportunities.

Carry trade: The strategy of borrowing in a low interest rate currency to fund investing in higher yielding currencies. Also termed currency carry trade. the strategy is speculative in that currency risk is present and not managed or hedged.

Cash budgeting: Planning for future receipts and disbursements of cash.

Cash flow return on investment (CFROI): A measure of corporate performance in which the numerator equals profit from continuing operations less cash taxes and depreciation. This is divided by cash investment, which is taken to mean the replacement cost of capital employed.

Certificate of deposit (CD): A negotiable receipt issued by a bank for funds deposited for a certain period of time. CDs can be purchased or sold prior to their maturity in a secondary market, making them an interest-earning marketable security

CIF (cost, insurance, and freight): See Cost, insurance, and freight.

CKD. Completely knocked down: International trade term for components shipped into a country for assembly there. Often used in the automobile industry.

Clearinghouse: An institution through which financial obligations are cleared by the process of settling the obligations of various members.

Clearinghouse Interbank Payments System (CHIPS): A New York-based computerized clearing system used by banks to settle interbank foreign exchange obligations (mostly U.S. dollars) between members.

Collar option: The simultaneous purchase of a put option and sale of a call option, or vice versa, resulting in a form of hybrid option.

Collateralized debt obligation (CDO): A portfolio of debt instruments of varying credit qualities created and packaged for resale as an asset-backed security. The collateral in the CDO is the real estate, aircraft, heavy equipment, or other property the loan was used to purchase.

COMECON: Acronym for Council for Mutual Economic Assistance. An association of the former Soviet Union and Eastern European governments formed to facilitate international trade among European Communist countries. COMECON ceased to exist after the breakup of the Soviet Union.

Commercial risk: In banking, the likelihood that a foreign debtor will be unable to repay its debts because of business events, as distinct from political ones.

Common market: An association through treaty of two or more countries that agree to remove all trade barriers between themselves. The best known is the European Common Market, now called the European Union.

Comparative advantage: A theory that everyone gains if each nation specializes in the production of those goods that it produces relatively most efficiently and imports those goods that other countries produce relatively most efficiently. The theory supports free trade arguments.

Competitive exposure: See Operating exposure.

Concession agreement: An understanding or contract between a foreign corporation and a host government defining the rules under which the corporation may operate in that country.

Consolidated financial statement: A corporate financial statement in which accounts of a parent company and its subsidiaries are added together to produce a statement which reports the status of the worldwide enterprise as if it were a single corporation. Internal obligations are eliminated in consolidated statements.

Consolidation: In the context of accounting for multinational corporations, the process of preparing a single reporting currency financial statement, which combines financial statements of subsidiaries that are in fact measured in different currencies.

Contagion: The spread of a crisis in one country to its neighboring countries and other countries with similar characteristics— at least in the eyes of cross-border investors.

Contingent foreign currency exposure: which is not yet certain. The final determination of the exposure is contingent upon another firm’s decision, such as a decision to invest or the winning of a business or construction bid.

Controlled foreign corporation (CFC): A foreign corporation in which U.S. shareholders own more than 50% of the combined voting power or total value. Under U.S. tax law, U.S. shareholders may be liable for taxes on undistributed earnings of the controlled foreign corporation.

Convertible bond: A bond or other fixed-income security that may be exchanged for a number of shares of common stock.

Convertible currency: A currency that can be exchanged freely for any other currency without government restrictions.

Corporate governance: The relationship among stakeholders used to determine and control the strategic direction and performance of an organization.

Corporate wealth maximization: The corporate goal of maximizing the total wealth of the corporation rather than just the shareholders’ wealth. Wealth is defined to include not just financial wealth but also the technical, marketing and human resources of the corporation.

Correspondent bank: A bank that holds deposits for and provides services to another bank, located in another geographic area, on a reciprocal basis.

Cost and freight (C&F): Price, quoted by an exporter, that includes the cost of transportation to the named port of destination.

Cost, insurance, and freight (CIF): Exporter’s quoted price including the cost of packaging, freight or carriage, insurance premium, and other charges paid in respect of the goods from the time of loading in the country of export to their arrival at the named port of destination or place of transshipment.

Counterparty: The opposite party in a double transaction, which involves an exchange of financial instruments or obligations now and a reversal of that same transaction at an agreed-upon later date.

Counterparty risk: The potential exposure any individual firm bears that the second party to any financial contract may be unable to fulfill its obligations under the contract’s specifications.

Countertrade: A type of international trade in which parties exchange goods directly rather than for money, a type of barter.

Countervailing duty: An import duty charged to offset an export subsidy by another country.

Country risk: In banking, the likelihood that unexpected events within a host country will influence a client’s or a government’s ability to repay a loan. Country risk is often divided into sovereign (political) risk and foreign exchange (currency) risk.

Country-specific-risk: Political risks that affect the MNE at the country level, such as transfer risk (blocked funds) and cultural and institutional risks.

Covered interest arbitrage (CIA): The process whereby an investor earns a risk-free profit by (1) borrowing funds in one currency, (2) exchanging those funds in the spot market for a foreign currency, (3) investing the foreign currency at interest rates in a foreign country, (4) selling forward, at the time of original investment, the investment proceeds to be received at maturity, (5) using the proceeds of the forward sale to repay the original loan, and (6) sustaining a remaining profit balance.

Covering: A transaction in the forward foreign exchange market or money market that protects the value of future cash flows. Covering is another term for hedging. See Hedge.

Crawling peg: A foreign exchange rate system in which the exchange rate is adjusted very frequently to reflect prevailing rate of inflation.

Credit default swap (CDS): A derivative contract that derives its value from the credit quality and performance of any specified asset. The CDS was invented by a team at JPMorgan in 1997, and designed to shift the risk of default to a third party. It is a way to bet whether a specific mortgage or security will either fail to pay on time or fail to pay at all.

Credit enhancement: A process of restructuring or recombining assets of different risk profiles in order to obtain a higher credit rating for the combined product.

Credit risk: The possibility that a borrower’s credit worth, at the time of renewing a credit, is reclassified by the lender.

Crisis planning: The process of educating management and other employees about how to react to various scenarios of violence or other disruptive events.

Cross rate: An exchange rate between two currencies derived by dividing each currency’s exchange rate with a third currency. Colloquially, it is often used to refer to a specific currency pair such as the euro/yen cross rate, as the yen/dollar and dollar/euro are the more common currency quotations.

Cross-border acquisition: A purchase in which one firm acquires another firm located in a different country.

Cross-currency swap: See Currency swap.

Cross-listing: The listing of shares of common stock on two or more stock exchanges.

Cumulative translation adjustment (CTA) account: An entry in a translated balance sheet in which gains and/or losses from translation have been accumulated over a period of years.

Currency basket: The value of a portfolio of specific amounts of individual currencies, used as the basis for setting the market value of another currency. Also called currency cocktail.

Currency board: A currency board exists when a country’s central bank commits to back its money supply entirely with foreign reserves at all times.

Currency swap: A transaction in which two counterparties exchange specific amounts of two different currencies at the outset, and then repay over time according to an agreed-upon contract that reflects interest payments and possibly amortization of principal. In a currency swap, the cash flows are similar to those in a spot and forward foreign exchange transaction. See also Swap.

Current account: In the balance of payments, the net flow of goods, services, and unilateral transfers (such as gifts) between a country and all foreign countries.

Current rate method: A method of translating the financial statements of foreign subsidiaries into the parent’s reporting currency. All assets and liabilities are translated at the current exchange rate.

Current/noncurrent method: A method of translating the financial statements of foreign subsidiaries into the parent’s reporting currency. All current assets and current liabilities are translated at the current rate, and all noncurrent accounts at their historical rates.

D/A: Documents against acceptance. International trade term.

D/P: Documents against payment. International trade term.

D/S: Days after sight. International trade term.

Deductible expense: A business expense which is recognized by tax officials as deductible toward the firm’s income tax liabilities.

Deemed-paid tax: That portion of taxes paid to a foreign government that is allowed as a credit (reduction) in taxes due to a home government.

Delta: The change in an option’s price divided by the change in the price of the underlying instrument. Hedging strategies are based on delta ratios.

Demand deposit: A bank deposit that can be withdrawn or transferred at any time without notice, in contrast to a time deposit where (theoretically) the bank may require a waiting period before the deposit can be withdrawn. Demand deposits may or may not earn interest. A time deposit is the opposite of a demand deposit.

Depository receipt: See American Depositary Receipt.

Depreciate: In the context of foreign exchange rates, a drop in the spot foreign exchange value of a floating currency, i.e. a currency whose value is determined by open market transactions.

Depreciation: A market-driven change in the value of a currency which results in reduced value or purchasing power.

Derivative: An asset which derives all changes in value on a separate underlying asset.

Devaluation: The action of a government or central bank authority to drop the spot foreign exchange value of a currency that is pegged to another currency or to gold.

Direct quote: The price of a unit of foreign exchange expressed in the home country’s currency. The term has meaning only when the home country is specified.

Directed public share issue: An issue that is targeted at investors in a single country and underwritten in whole or in part by investment institutions from that country

Dirty float: A system of floating (i.e. market determined) exchange rates in which the government intervenes from time to time to influence the foreign exchange value of its currency.

Discount: In the foreign exchange market, the amount by which a currency is cheaper for future delivery than for spot (immediate) delivery. The opposite of discount is premium.

Dividend yield: The current period dividend distribution as a percentage of the beginning of period share price.

Dollarization: The use of the U.S. dollar as the official currency of a country.

Domestic international sales corporation (DISC): Under the U.S. tax code, a type of subsidiary formed to reduce taxes on exported U.S.-produced goods. It has been ruled illegal by the World Trade Organization.

Draft: An unconditional written order requesting one party (such as an importer) to pay a specified amount of money at a specified time to the order of the writer of the draft. Also called a bill of exchange. Personal checks are one type of draft.

Dragon bond: A U.S. dollar-denominated bond sold in the so-called Dragon economies of Asia, such as Hong Kong, Taiwan, and Singapore.

Dumping: The practice of offering goods for sale in a foreign market at a price that is lower than that of the same product in the home market or a third country. As used in GATT, a special case of differential pricing.

Economic exposure: Another name for operating exposure. See Operating exposure.

Economic Value Added (EVA): A widely used measure of corporate financial performance. It is calculated as the difference between net operating profits after tax for the business and the cost of capital invested (both debt and equity). EVA is a registered trademark of Stern Stewart & Company.

Edge Act and Agreement Corporation: Subsidiary of a U.S. bank incorporated under federal law to engage in various international banking and financing operations, including equity participations that are not allowed to regular domestic banks. The Edge Act subsidiary may be located in a state other than that of the parent bank.

Effective exchange rate: An index measuring the change in value of a foreign currency determined by calculating a weighted average of bilateral exchange rates. The weighting reflects the importance of each foreign country’s trade with the home country.

Effective tax rate: Actual taxes paid as a percentage of actual income before tax.

Efficient market: A market in which all relevant information is already reflected in market prices. The term is most frequently applied to foreign exchange markets and securities markets.

EOM: End of month. International trade term.

Equity risk premium: The average annual return of the market expected by investors over and above riskless debt.

Euro: A new currency unit that replaced the individual currencies of 12 European countries that belong to the European Union.

Euro equity public issue: A new equity issue that is underwritten and distributed in multiple foreign equity markets, sometimes simultaneously with distribution in the domestic market.

Euro zone: The countries that officially use the euro as their currency.

Euro-commercial paper (ECP): Short-term notes (30, 60, 90, 120, 180, 270, and 360 days) sold in international money markets.

Eurobank: A bank, or bank department, that bids for time deposits and makes loans in currencies other than that of the country where the bank is located.

Eurobond: A bond originally offered outside the country in whose currency it is denominated. For example, a dollar-denominated bond originally offered for sale to investors outside the United States.

Eurocredit: Bank loans to MNEs, sovereign governments, international institutions, and banks denominated in Eurocurrencies and extended by banks in countries other than the country in whose currency the loan is denominated.

Eurocurrency: A currency deposited in a bank located in a country other than the country issuing the currency.

Eurodollar: A U.S. dollar deposited in a bank outside the United States. A Eurodollar is a type of Eurocurrency.

Euronote: Short- to medium-term debt instruments sold in the Eurocurrency market.

European Central Bank (ECB): Conducts monetary policy of the European Monetary Union. Its goal is to safeguard the stability of the euro and minimize inflation.

European Currency Unit (ECU): A composite currency created by the European Monetary System prior to the euro, which was designed to function as a reserve currency numeraire. The ECU was used as the numeraire for denominating a number of financial instruments and obligations.

European Economic Community (EEC): The European common market composed of Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, and the United Kingdom. Officially renamed the European Union (EU) January 1, 1994.

European Free Trade Association (EFTA): European countries not part of the European Union but having no internal tariffs.

European Monetary System (EMS): A monetary alliance of fifteen European countries (same members as the European Union).

European option: An option that can be exercised only on the day on which it expires.

European terms: Foreign exchange quotations for the U.S. dollar, expressed as the number of non-U.S. currency units per U.S. dollar.

European Union (EU): The official name of the former European Economic Community (EEC) as of January 1, 1994.

Ex dock: Followed by the name of a port of import. International trade term in which seller agrees to pay for the costs (shipping, insurance, customs duties, etc.) of placing the goods on the dock at the named port.

Exchange rate: The price of a unit of one country’s currency expressed in terms of the currency of some other country.

Exchange Rate Mechanism (ERM): The means by which members of the EMS formerly maintained their currency exchange rates within an agreed-upon range with respect to the other member currencies.

Exchange rate pass-through: The degree to which the prices of imported and exported goods change as a result of exchange rate changes.

Exercise price: Same as the strike price ; the agreed upon rate of exchange within an option contract to buy or sell the underlying asset.

Export credit insurance: Provides assurance to the exporter or the exporter’s bank that, should the foreign customer default on payment, the insurance company will pay for a major portion of the loss. See also Foreign Credit Insurance Association (FCIA).

Export-Import Bank (Eximbank): A U.S. government agency created to finance and otherwise facilitate imports and exports.

Expropriation: Official government seizure of private property, recognized by international law as the right of any sovereign state provided expropriated owners are given prompt compensation and fair market value in convertible currencies.

Factoring: Specialized firms, known as factors, purchase receivables at a discount on either a non-recourse or recourse basis.

FAF: Fly away free. International trade term.

FAQ: Free at quay. International trade term.

FAS (free alongside ship): An international trade term in which the seller’s quoted price for goods includes all costs of delivery of the goods alongside a vessel at the port of embarkation.

FASB 8: A regulation of the Financial Accounting Standards Board requiring U.S. companies to translate foreign affiliate financial statements by the temporal method. FASB 8 was in effect from 1976 to 1981. It is still used under specific circumstances.

FASB 52: A regulation of the Financial Accounting Standards Board requiring U.S. companies to translate foreign subsidiary financial statements by the current rate (closing rate) method. FASB 52 became effective in 1981.

FI: Free in. International trade term meaning that all expenses for loading into the hold of a vessel apply to the account of the consignee.

Financial account: A section of the balance of payments accounts. Under the revised format of the International Monetary Fund, the financial account measures long-term financial flows including direct foreign investment, portfolio investments, and other long-term movements. Under the traditional definition, which is still used by many countries, items in the financial account were included in the capital account.

Financial derivative: A financial instrument, such as a futures contract or option, whose value is derived from an underlying asset like a stock or currency.

Financial engineering: Those basic building blocks, such as spot positions, forwards, and options, used to construct positions that provide the user with desired risk and return characteristics.

Firm-specific risks: Political risks that affect the MNE at the project or corporate level. Governance risk due to goal conflict between an MNE and its host government is the main political firm-specific risk.

First in, first out (FIFO): An inventory valuation approach in which the cost of the earliest inventory purchases is charged against current sales. The opposite is LIFO, or last in, first out.

Fisher Effect: A theory that nominal interest rates in two or more countries should be equal to the required real rate of return to investors plus compensation for the expected amount of inflation in each country.

Fixed exchange rates: Foreign exchange rates tied to the currency of a major country (such as the United States), to gold, or to a basket of currencies such as Special Drawing Rights.

Flexible exchange rates: The opposite of fixed exchange rates. The foreign exchange rate is adjusted periodically by the country’s monetary authorities in accordance with their judgment and/or an external set of economic indicators.

Floating exchange rates: Foreign exchange rates determined by demand and supply in an open market that is presumably free of government interference.

Floating-rate note (FRN): Medium-term securities with interest rates pegged to LIBOR and adjusted quarterly or semiannually.

FOB: Free on board. International trade term in which exporter’s quoted price includes the cost of loading goods into transport vessels at a named point.

Foreign affiliate: A foreign business unit that is less than 50% owned by the parent company.

Foreign bond: A bond issued by a foreign corporation or government for sale in the domestic capital market of another country, and denominated in the currency of that country.

Foreign Corrupt Practices Act of 1977: A U.S. law that punishes companies and their executives if they pay bribes or make other improper payments to foreigners.

Foreign Credit Insurance Association (FCIA): An unincorporated association of private commercial insurance companies, in cooperation with the Export- Import Bank of the United States, that provides export credit insurance to U.S. firms.

Foreign currency intervention: Any activity or policy initiative by a government or central bank with the intent of changing a currency value on the open market. They may include both direct intervention, in which the central bank may buy or sell its own currency, or indirect intervention, in which it may change interest rates in order to change the attractiveness of domestic currency obligations in the eyes of foreign investors.

Foreign currency translation: The process of restating foreign currency accounts of subsidiaries into the reporting currency of the parent company in order to prepare a consolidated financial statement.

Foreign direct investment (FDI): Purchase of physical assets, such as plant and equipment, in a foreign country, to be managed by the parent corporation. FDI is distinguished from foreign portfolio investment.

Foreign exchange broker: An individual or firm that arranges foreign exchange transactions between two parties, but is not itself a principal in the trade. Foreign exchange brokers earn a commission for their efforts.

Foreign exchange dealer (or trader): An individual or firm that buys foreign exchange from one party (at a bid price), and then sells it (at an ask price) to another party. The dealer is a principal in two transactions and profits via the spread between the bid and ask prices.

Foreign exchange rate: The price of one country’s currency in terms of another currency, or in terms of a commodity such as gold or silver. See also Exchange rate.

Foreign exchange risk: The likelihood that an unexpected change in exchange rates will alter the home currency value of foreign currency cash payments expected from a foreign source. Also, the likelihood that an unexpected change in exchange rates will alter the amount of home currency needed to repay a debt denominated in a foreign currency.

Foreign sales corporation (FSC): Under U.S. tax code, a type of foreign corporation that provides tax exempt or tax-deferred income for U.S. persons or corporations having export-oriented activities.

Foreign tax credit: The amount by which a domestic firm may reduce (credit) domestic income taxes for income tax payments to a foreign government.

Forfaiting (forfeiting): A technique for arranging nonrecourse medium-term export financing, used most frequently to finance imports into Eastern Europe. A third party, usually a specialized financial institution, guarantees the financing.

Forward contract: An agreement to exchange currencies of different countries at a specified future date and at a specified forward rate.

Forward differential: The difference between spot and forward rates, expressed as an annual percentage.

Forward discount or premium: The same as forward differential.

Forward rate: An exchange rate quoted for settlement at some future date. The rate used in a forward transaction.

Forward rate agreement (FRA): An interbank-traded contract to buy or sell interest rate payments on a notional principal.

Forward transaction: An agreed-upon foreign exchange transaction to be settled at a specified future date, often one, two, or three months after the transaction date.

Free cash flow: Operating cash flow less capital expenditures (capex).

Free-trade zone: An area within a country into which foreign goods may be brought duty free, often for purposes of additional manufacture, inventory storage, or packaging. Such goods are subject to duty only when they leave the duty-free zone to enter other parts of the country.

Freely floating exchange rates: Exchange rates determined in a free market without government interference, in contrast to dirty float.

Fronting loan: A parent-to-subsidiary loan that is channeled through a financial intermediary such as a large international bank in order to reduce political risk. Presumably government authorities are less likely to prevent a foreign subsidiary repaying an established bank than repaying the subsidiary’s corporate parent.

Functional currency: In the context of translating financial statements, the currency of the primary economic environment in which a foreign subsidiary operates and in which it generates cash flows.

Futures, or futures contracts: Exchange traded agreements calling for future delivery of a standard amount of any good, e.g. foreign exchange, at a fixed time, place, and price.

Gamma: A measure of the sensitivity of an option’s delta ratio to small unit changes in the price of the underlying security.

Gap risk: A type of interest rate risk in which the timing of maturities is mismatched.

General Agreement on Tariffs and Trade (GATT): A framework of rules for nations to manage their trade policies, negotiate lower international tariff barriers, and settle trade disputes.

Generally Accepted Accounting Principles (GAAP): Approved accounting principles for U.S. firms, defined by the Financial Accounting Standards Board (FASB).

Geometric return: A calculation that uses the beginning and ending returns to calculate the annual average rate of compounded growth, similar to an internal rate of return.

Global depositary receipt (GDR): Similar to American Depositary Receipts (ADRs), it is a bank certificate issued in multiple countries for shares in a foreign company. Actual company shares are held by a foreign branch of an international bank. The shares are traded as domestic shares, but are offered for sale globally by sponsoring banks.

Global registered shares: Similar to ordinary shares, global registered shares have the added benefit of being tradable on equity exchanges around the globe in a variety of currencies.

Global-specific risks: Political risks that originate at the global level, such as terrorism, the anti-globalization movement, environmental concerns, poverty, and cyber attacks.

Gold standard: A monetary system in which currencies are defined in terms of their gold content, and payment imbalances between countries are settled in gold.

Greenfield investment: An initial investment in a new foreign subsidiary with no predecessor operation in that location. This is in contrast to a new subsidiary created by the purchase of an already existing operation. An investment which starts, conceptually if not literally, with an undeveloped “green field.”

Gross up: See Deemed-paid tax.

Hard currency: A freely convertible currency that is not expected to depreciate in value in the foreseeable future.

Hedge accounting: An accounting procedure that specifies that gains and losses on hedging instruments be recognized in earnings at the same time that the effects of changes in the value of the items being hedged are recognized.

Hedging: Purchasing a contract (including forward foreign exchange) or tangible good that will rise in value and offset a drop in value of another contract or tangible good. Hedges are undertaken to reduce risk by protecting an owner from loss.

Historical exchange rate: In accounting, the exchange rate in effect when an asset or liability was acquired.

Hot money: Money that moves internationally from one currency and/or country to another in response to interest rate differences, and moves away immediately when the interest advantage disappears.

Hybrid foreign currency options: Purchase of a put option and the simultaneous sale of a call (or vice versa) so that the overall cost is less than the cost of a straight option.

Hyperinflation countries: Countries with a very high rate of inflation. Under United States FASB 52, these are defined as countries where the cumulative three-year inflation amounts to 100% or more.

IMM: International Monetary Market. A division of the Chicago Mercantile Exchange.

Impossible Trinity: An ideal currency would have exchange rate stability, full financial integration, and monetary independence.

In-house bank: An internal bank established within an MNE if its needs are either too large or too sophisticated for local banks. The in-house bank is not a separate corporation but performs a set of functions by the existing treasury department. Acting as an independent entity, the in-house bank transacts with various internal business units of the firm on an arm’s length basis.

In-the-money (ITM): Circumstance in which an option is profitable, excluding the cost of the premium, if exercised immediately.

Indirect quote: The price of a unit of a home country’s currency expressed in terms of a foreign country’s currency.

Integrated foreign entity: An entity that operates as an extension of the parent company, with cash flows and general business lines that are highly interrelated with those of the parent.

Intellectual property rights: Legislation that grants the exclusive use of patented technology and copyrighted creative materials. A worldwide treaty to protect intellectual property rights has been ratified by most major countries, including most recently by China.

Interest rate futures: See Futures, or futures contracts.

Interest rate parity: A theory that the differences in national interest rates for securities of similar risk and maturity should be equal to but opposite in sign (positive or negative) to the forward exchange rate discount or premium for the foreign currency

Interest rate risk: The risk to the organization arising from interest bearing debt obligations, either fixed or floating rate obligations. It is typically used to refer to the changing interest rates which a company may incur by borrowing at floating rates of interest.

Interest rate swap: A transaction in which two counterparties exchange interest payment streams of different character (such as floating vs. fixed), based on an underlying notional principal amount.

Internal bank: The use of an internal unit of the corporation to act as a bank for exchanges of capital, currencies, or obligations between various units of the company.

Internal rate of return (IRR): A capital budgeting approach in which a discount rate is found that matches the present value of expected future cash inflows with the present value of outflows.

Internalization: A theory that the key ingredient for maintaining a firm-specific competitive advantage in international competition is the possession of proprietary information and control of human capital that can generate new information through expertise in research, management, marketing, or technology.

International Bank for Reconstruction and Development (IBRD, or World Bank): International development bank owned by member nations that makes development loans to member countries

International Banking Facility (IBF): A department within a U.S. bank that may accept foreign deposits and make loans to foreign borrowers as if it were a foreign subsidiary. IBFs are free of U.S. reserve requirements, deposit insurance, and interest rate regulations.

International CAPM (ICAPM): A strategy in which the primary distinction in the estimation of the cost of equity for an individual firm using an internationalized version of the domestic capital asset pricing model is the definition of the “market” and a recalculation of the firm’s beta for that market.

International Fisher Effect: A theory that the spot exchange rate should change by an amount equal to the difference in interest rates between two countries.

International Monetary Fund (IMF): An international organization created in 1944 to promote exchange rate stability and provide temporary financing for countries experiencing balance of payments difficulties.

International Monetary Market (IMM): A branch of the Chicago Mercantile Exchange that specializes in trading currency and financial futures contracts.

International monetary system: The structure within which foreign exchange rates are determined, international trade and capital flows are accommodated, and balance of payments adjustments made.

Intrinsic value: The financial gain if an option is exercised immediately.

Investment agreement: An agreement that spells out specific rights and responsibilities of both the investing foreign firm and the host government.

Investment grade: A credit rating of BBB- or higher.

J-curve affect: The adjustment path of a country’s trade balance following a devaluation or significant depreciation of the country’s currency. The path first worsens as a result of existing contracts before improving as a result of more competitive pricing conditions.

Joint venture: A business venture that is owned by two or more entities, often from different countries.

Jumbo loans: Loans of $1 billion or more.

Kangaroo bonds: Australian dollar-denominated bonds issued within Australia by a foreign borrower.

Lag: In the context of leads and lags, payment of a financial obligation later than is expected or required.

Lambda: A measure of the sensitivity of an option premium to a unit change in volatility.

Last in, first out (LIFO): An inventory valuation approach in which the cost of the latest inventory purchases is charged against current sales. The opposite is FIFO, or first in, first out.

Law of one price: The concept that if an identical product or service can be sold in two different markets, and no restrictions exist on the sale or transportation costs of moving the product between markets, the product’s price should be the same in both markets.

Lead: In the context of leads and lags, the payment of a financial obligation earlier than is expected or required.

Lender of last resort: The body or institution within an economy which is ultimately capable of preserving the financial survival or viability of individual institutions. Typically the country’s central bank.

Letter of credit (L/C): An instrument issued by a bank, in which the bank promises to pay a beneficiary upon presentation of documents specified in the letter.

Link financing: See Back-to-back loan or Fronting loan.

Liquid: The ability to exchange an asset for cash at or near its fair market value.

Location-specific advantage: Market imperfections or genuine comparative advantages that attract foreign direct investment to particular locations.

London Interbank Offered Rate (LIBOR): The deposit rate applicable to interbank loans in London. LIBOR is used as the reference rate for many international interest rate transactions.

Long position: A position in which foreign currency assets exceed foreign currency liabilities. The opposite of a long position is a short position.

Maastricht Treaty: A treaty among the 12 European Union countries that specified a plan and timetable for the introduction of a single European currency, to be called the euro.

Macro risk: See Country-specific risk.

Macroeconomic uncertainty: Operating exposure’s sensitivity to key macroeconomic variables, such as exchange rates, interest rates, and inflation rates.

Managed float: A country allows its currency to trade within a given band of exchange rates.

Margin: A deposit made as security for a financial transaction otherwise financed on credit.

Marked to market: The condition in which the value of a futures contract is assigned to market value daily, and all changes in value are paid in cash daily. The value of the contract is revalued using the closing price for the day. The amount to be paid is called the variation margin.

Market liquidity: The degree to which a firm can issue a new security without depressing the existing market price, as well as the degree to which a change in price of its securities elicits a substantial order flow.

Market segmentation: The divergence within a national market of required rates of return. If all capital markets are fully integrated, securities of comparable expected return and risk should have the same required rate of return in each national market after adjusting for foreign exchange risk and political risk.

Matching currency cash flows: The strategy of offsetting anticipated continuous long exposure to a particular currency by acquiring debt denominated in that currency.

Merchant bank: A bank that specializes in helping corporations and governments finance by any of a variety of market and/or traditional techniques. European merchant banks are sometimes differentiated from clearing banks, which tend to focus on bank deposits and clearing balances for the majority of the population.

Micro risk: See Firm-specific risk.

Monetary assets or liabilities: Assets in the form of cash or claims to cash (such as accounts receivable), or liabilities payable in cash. Monetary assets minus monetary liabilities are called net monetary assets.

Monetary/nonmonetary method: A method of translating the financial statements of foreign subsidiaries into the parent’s reporting currency. All monetary accounts are translated at the current rate, and all nonmonetary accounts are translated at their historical rates. Sometimes called temporal method in the United States.

Money market hedge: The use of foreign currency borrowing to reduce transaction or accounting foreign exchange exposure.

Money markets: The financial markets in various countries in which various types of short-term debt instruments, including bank loans, are purchased and sold.

Moral hazard: When an individual or organization takes on more risk than it would normally as result of the existence or support of a secondary insuring or protecting authority or organization.

Mortgage Backed Security (MBS or MBO): A derivative security composed of residential or commercial real estate mortgages.

Most-favored-nation (MFN) treatment: The application by a country of import duties on the same, or most favored, basis to all countries accorded such treatment. Any tariff reduction granted in a bilateral negotiation will be extended to all other nations granted most-favored-nation status.

Multilateral netting: The process of netting intracompany payments in order to reduce the size and frequency of cash and currency exchanges.

Multinational enterprise (MNE): A firm that has operating subsidiaries, branches, or affiliates located in foreign countries.

Natural hedge: The use or existence of an offsetting or matching cash flow from firm operating activities to hedge a currency exposure.

Negotiable instrument: A written draft or promissory note, signed by the maker or drawer, that contains an unconditional promise or order to pay a definite sum of money on demand or at a determinable future date, and is payable to order or to bearer. A holder of a negotiable instrument is entitled to payment despite any personal disagreements between the drawee and maker.

Nepotism: The practice of showing favor to relatives over other qualified persons in conferring such benefits as the awarding of contracts, granting of special prices, promotions to various ranks, etc.

Net present value: A capital budgeting approach in which the present value of expected future cash inflows is subtracted from the present value of outflows.

Net working capital (NWC): Accounts receivable plus inventories less accounts payable.

Netting: The mutual offsetting of sums due between two or more business entities.

Nominal exchange rate: The actual foreign exchange quotation, in contrast to real exchange rate, which is adjusted for changes in purchasing power.

Nondeliverable forward: A forward or futures contract on currencies, settled on the basis of the differential between the contracted forward rate and occurring spot rate, but settled in the currency of the traders. For example, a forward contract on the Chinese yuan that is settled in dollars, not yuan.

Nontariff barrier: Trade restrictive practices other than custom tariffs, such as import quotas, voluntary restrictions, variable levies, and special health regulations.

North American Free Trade Agreement (NAFTA): A treaty allowing free trade and investment between Canada, the United States, and Mexico.

Note issuance facility (NIF): An agreement by which a syndicate of banks indicates a willingness to accept short-term notes from borrowers and resell those notes in the Eurocurrency markets. The discount rate is often tied to LIBOR.

Notional principal: The size of a derivative contract, in total currency value, as used in futures contracts, forward contracts, option contracts, or swap agreements.

NPV: See Net present value.

NSF: Not-sufficient funds. Term used by a bank when a draft or check is drawn on an account not having a sufficient credit balance.

O/A: Open account. Arrangement in which the importer (or other buyer) pays for the goods only after the goods are received and inspected. The importer is billed directly after shipment, and payment is not tied to any promissory notes or similar documents.

Offer: The price at which a trader is willing to sell foreign exchange, securities, or commodities. Also called ask.

Official reserves account: Total reserves held by official monetary authorities within the country, such as gold, SDRs, and major currencies.

Offshore finance subsidiary: A foreign financial subsidiary owned by a corporation in another country. Offshore finance subsidiaries are usually located in tax-free or low-tax jurisdictions to enable the parent multinational firm to finance international operations without being subject to home country taxes or regulations.

OLI paradigm: An attempt to create an overall framework to explain why MNEs choose foreign direct investment rather than serve foreign markets through alternative modes such as licensing, joint ventures, strategic alliances, management contracts, and exporting.

On the run: International banks of the highest credit quality that are willing to exchange obligations on a no-name basis.

Operating cash flows: The primary cash flows generated by a business from the conduct of trade, typically composed of earnings, depreciation and amortization, and changes in net working capital.

Operating exposure: The potential for a change in expected cash flows, and thus in value, of a foreign subsidiary as a result of an unexpected change in exchange rates. Also called economic exposure.

Option: In foreign exchange, a contract giving the purchaser the right, but not the obligation, to buy or sell a given amount of foreign exchange at a fixed price per unit for a specified time period. Options to buy are calls and options to sell are puts.

Order bill of lading: A shipping document through which possession and title to the shipment reside with the owner of the bill.

Organization of Petroleum Exporting Countries (OPEC): An alliance of most major crude oil producing countries, formed for the purpose of allocating and controlling production quotas so as to influence the price of crude oil in world markets.

Originate-to-Distribute (OTD): A common practice in the U.S. real estate market during the 2001 2007 real estate boom in which a real estate lender, or originator, makes loans expressly for the purpose of immediate resale.

Out-of-the-money (OTM): An option that would not be profitable, excluding the cost of the premium, if exercised immediately.

Outright quotation: The full price, in one currency, of a unit of another currency. See Points quotation.

Outsourcing: See Supply chain management.

Over-the-counter market: A market for share of stock, options (including foreign currency options), or other financial contracts conducted via electronic connections between dealers. The over-the-counter market has no physical location or address, and is thus differentiated from organized exchanges that have a physical location where trading takes place.

Overseas Private Investment Corporation (OPIC): A U.S. government-owned insurance company that insures U.S. corporations against various political risks.

Overvalued currency: A currency with a current foreign exchange value (i.e. current price in the foreign exchange market) greater than the worth of that currency. Because “worth” is a subjective concept, overvaluation is a matter of opinion. If the euro has a current market value of $1.20 (i.e. the current exchange rate is $1.20/ ) at a time when its “true” value as derived from purchasing power parity or some other method is deemed to be $1.10, the euro is overvalued. The opposite of overvalued is undervalued.

Owner-specific advantage: A firm must have competitive advantages in its home market. These must be firm-specific, not easily copied, and in a form that allows them to be transferred to foreign subsidiaries.

Panda Bond: The issuance of a yuan denominated bond in the Chinese market by a foreign borrower.

Parallel loan: Another name for a back-to back loan, in which two companies in separate countries borrow each other’s currency for a specific period of time, and repay the other’s currency at an agreed maturity.

Parallel market: An unofficial foreign exchange market tolerated by a government but not officially sanctioned. The exact boundary between a parallel market and a black market is not very clear, but official tolerance of what would otherwise be a black market leads to use of the term parallel market.

Parity conditions: In the context of international finance, a set of basic economic relationships that provide for equilibrium between spot and forward foreign exchange rates, interest rates, and inflation rates.

Participating forward: A complex option position which combines a bought put and a sold call option at the same strike price to create a net zero position. Also called zero-cost option and forward participation agreement.

Pass-through period: The period of time it takes for an exchange rate change to be reflected in market prices of products or services.

Phi: The expected change in an option premium caused by a small change in the foreign interest rate (interest rate for the foreign currency).

Plain vanilla swap: An interest rate swap agreement exchange fixed interest payments for floating interest payments, all in the same currency.

Points: The smallest units of price change quoted, given a conventional number of digits in which a quotation is stated.

Points quotation: A forward quotation expressed only as the number of decimal points (usually four decimal points) by which it differs from the spot quotation.

Political risk: The possibility that political events in a particular country will influence the economic well-being of firms in that country. See also Sovereign risk.

Portfolio investment: Purchase of foreign stocks and bonds, in contrast to foreign direct investment.

Possessions corporation: A U.S. corporation, the subsidiary of another U.S. corporation located in a U.S. possession such as Puerto Rico, that for tax purposes is treated as if it were a foreign corporation.

Premium: In a foreign exchange market, the amount by which a currency is more expensive for future delivery than for spot (immediate) delivery. The opposite of premium is discount.

Prime mortgage: A mortgage categorized as conforming (also referred to as conventional loans), meaning it would meet the guarantee requirements for resale to Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac.

Private equity: Assets that are composed of equity shares in companies that are not publicly traded.

Private placement: The sale of a security issue to a small set of qualified institutional buyers.

Profit warning: The public announcement by a publicly traded company that current period earnings will fall significantly either from a previously reported period or investor expectations.

Project financing: Arrangement of financing for long-term capital projects, large in scale, long in life, and generally high in risk.

Protectionism: A political attitude or policy intended to inhibit or prohibit the import of foreign goods and services. The opposite of free trade policies.

Psychic distance: Firms tend to invest first in countries with a similar cultural, legal, and institutional environment.

Purchasing power parity (PPP): A theory that the price of internationally traded commodities should be the same in every country, and hence the exchange rate between the two currencies should be the ratio of prices in the two countries.

Put: An option to sell foreign exchange or financial contracts. See Option.

Qualified institutional buyer (QIB): An entity (except a bank or a savings and loan) that owns and invests on a discretionary basis a minimum of $100 million in securities of non-affiliates.

Quota: A limit, mandatory or voluntary, set on the import of a product.

Quotation: In foreign exchange trading, the pair of prices (bid and ask) at which a dealer is willing to buy or sell foreign exchange.

Range forward: A complex option position that combines the purchase of a put option and the sale of a call option with strike prices equidistant from the forward rate. Also called flexible forward, cylinder option, option fence, mini-max, and zero-cost tunnel.

Real exchange rate: An index of foreign exchange adjusted for relative price-level changes from a base point in time, typically a month or a year. Sometimes referred to as real effective exchange rate, it is used to measure purchasing-power-adjusted changes in exchange rates.

Real option analysis: The application of option theory to capital budgeting decisions.

Reference rate: The rate of interest used in a standardized quotation, loan agreement, or financial derivative valuation.

Registered bond: Corporate or governmental debt in a bond form in which the owner’s name appears on the bond and in the issuer’s records, and interest payments are made to the owner.

Reinvoicing center: A central financial subsidiary used by a multinational firm to reduce transaction exposure by having all home country exports billed in the home currency and then reinvoiced to each operating subsidiary in that subsidiary’s local currency.

Relative purchasing power parity: A theory that if the spot exchange rate between two countries starts in equilibrium, any change in the differential rate of inflation between them tends to be offset over the long run by an equal but opposite change in the spot exchange rate.

Renminbi (RMB): The alternative official name (the yuan, CNY) of the currency of the People’s Republic of China.

Reporting currency: In the context of translating financial statements, the currency in which a parent firm prepares its own financial statements. Usually this is the parent’s home currency.

Repositioning of funds: The movement of funds from one currency or country to another. An MNE faces a variety of political, tax, foreign exchange, and liquidity constraints that limit its ability to move funds easily and without cost.

Representative office: A representative office established by a bank in a foreign country to help clients doing business in that country. It also functions as a geographically convenient location from which to visit correspondent banks in its region rather than sending bankers from the parent bank at greater financial and physical cost.

Repricing risk: The risk of changes in interest rates charged or earned at the time a financial contract’s rate is reset.

Restricted stock: Stock shares given to management that are not tradable or transferable before a specified future date (when they vest) or other specified conditions.

Revaluation: A rise in the foreign exchange value of a currency that is pegged to other currencies or to gold. Also called appreciation.

Rho: The expected change in an option premium caused by a small change in the domestic interest rate (interest rate for the home currency).

Risk-sharing agreement: A contractual arrangement in which the buyer and seller agree to share or split currency movement impacts on payments between them.

Risk: The likelihood that an actual outcome will differ from an expected outcome. The actual outcome could be better or worse than expected (two-sided risk), although in common practice risk is more often used only in the context of an adverse outcome (one-sided risk). Risk can exist for any number of uncertain future situations, including future spot rates or the results of political events.

Rules of the Game: The basis of exchange rate determination under the international gold standard during most of the 19th and early 20th centuries. All countries agreed informally to follow the rule of buying and selling their currency at a fixed and predetermined price against gold.

Samurai bonds: Yen-denominated bonds issued within Japan by a foreign borrower.

Sarbanes-Oxley Act: An act passed in 2002 to regulate corporate governance in the United States.

SEC Rule 144A: Permits qualified institutional buyers to trade privately placed securities without requiring SEC registration.

Section 482: The set of U.S. Treasury regulations governing transfer prices.

Securitization: The replacement of nonmarketable loans (such as direct bank loans) with negotiable securities (such as publicly traded marketable notes and bonds), so that the risk can be spread widely among many investors, each of whom can add or subtract the amount of risk carried by buying or selling the marketable security.

Self-sustaining foreign entity: One that operates in the local economic environment independent of the parent company.

Selling short (shorting): The sale of an asset which the seller does not (yet) own. The premise is that the seller believes he will be able to purchase the asset for contract fulfillment at a lower price before sale contract expiration.

Shared services: A charge to compensate the parent for costs incurred in the general management of international operations and for other corporate services provided to foreign subsidiaries that must be recovered by the parent firm.

Shareholder wealth maximization (SWM): The corporate goal of maximizing the total value of the shareholders’ investment in the company.

Sharpe measure (SHP): Calculates the average return over and above the risk-free rate of return per unit of portfolio risk. It uses the standard deviation of a portfolio’s total return as the measure of risk.

Shogun bonds: Foreign currency-denominated bonds issued within Japan by Japanese corporations.

Short position: See Long position.

SIBOR: Singapore interbank offered rate.

Sight draft: A bill of exchange (B/E) that is due on demand; i.e. when presented to the bank. See also Bill of exchange.

SIMEX: Singapore International Monetary Exchange.

SIV. Structure Investment Vehicle: The SIV is an off-balance- sheet entity first created by Citigroup in 1988. It was designed to allow a bank to create an investment entity that would invest in long term and higher yielding assets such as speculative grade bonds, mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs), while funding itself through commercial paper (CP) issuances.

Society for Worldwide Interbank Financial Telecommunications(SWIFT): A dedicated computer network providing funds transfer messages between member banks around the world.

Soft currency: A currency expected to drop in alue relative to other currencies. Free trading in a currency deemed soft is often restricted by the monetary authorities of the issuing country.

Sovereign risk: The risk that a host government may unilaterally repudiate its foreign obligations or may prevent local firms from honoring their foreign obligations. Sovereign risk is often regarded as a subset of political risk.

Sovereign spread: The credit spread paid by a sovereign borrower on a major foreign currency denominated debt obligation. For example, the credit spread paid by the Venezuelan government to borrow U.S. dollars over and above a similar maturity issuance by the U.S. Treasury.

Special Drawing Right (SDR): An international reserve asset, defined by the International Monetary Fund as the value of a weighted basket of five currencies.

Special purpose vehicle (SPV) or special purpose entity (SPE): An off-balance sheet legal entity, typically a partnership, set up for a very special business purpose that will isolate or limit the partner’s financial risks associated with risks associated with the SPV’s activities or assets. Similar in function to an SIV.

Speculation: An attempt to make a profit by trading on expectations about future prices.

Speculative grade: A credit quality that is below BBB, below investment grade. The designation implies a possibility of borrower default in the event of unfavorable economic or business conditions.

Spot rate: The price at which foreign exchange can be purchased (its bid) or sold (its ask) in a spot transaction. See Spot transaction.

Spot transaction: A foreign exchange transaction to be settled (paid for) on the second following business day.

Spread: The difference between the bid (buying) quote and the ask (selling) quote.

Stakeholder capitalism: Another name for corporate wealth maximization.

Statutory tax rate: The legally imposed tax rate.

Strategic alliance: A formal relationship, short of a merger or acquisition, between two companies, formed for the purpose of gaining synergies because in some aspect the two companies complement each other.

Strike price: The agreed upon rate of exchange within an option contract.

Stripped bonds: Bonds issued by investment bankers against coupons or the maturity (corpus) portion of original bearer bonds, where the original bonds are held in trust by the investment banker. Whereas the original bonds will have coupons promising interest at each interest date (say June and December for each of the next twenty years), a given stripped bond will represent a claim against all interest payments from the entire original issue due on a particular interest date. A stripped bond is in effect a zero coupon bond manufactured by the investment banker.

Subpart F: A type of foreign income, as defined in the U.S. tax code, which under certain conditions is taxed immediately in the United States even though it has not been repatriated to the United States. It is income of a type that is otherwise easily shifted offshore to avoid current taxation.

Subprime (subprime mortgage): Subprime borrowers have a higher perceived risk of default, normally as a result of credit history elements which may include bankruptcy, loan delinquency, default, or simply a borrower with limited experience or history of debt. They are nearly exclusively floating-rate structures, and carry significantly higher interest rate spreads over the floating bases like LIBOR.

Subsidiary: A foreign operation incorporated in the host country and owned 50% or more by a parent corporation. Foreign operations that are not incorporated are called branches.

Supply chain management: A strategy that focuses on cost reduction through imports from less costly foreign locations with lower wages.

Sushi bonds: Eurodollar or other non-yen-denominated bonds issued by a Japanese corporation for sale to Japanese investors.

Swap: This term is used in many contexts. In general it is the simultaneous purchase and sale of foreign exchange or securities, with the purchase executed at once and the sale back to the same party carried out at an agreed-upon price to be completed at a specified future date. Swaps include interest rate swaps, currency swaps, and credit swaps. A swap rate is a forward foreign exchange quotation expressed in terms of the number of points by which the forward rate differs from the spot rate.

SWIFT: See Society for Worldwide Interbank Financial Telecommunications.

Syndicated loan: A large loan made by a group of banks to a large multinational firm or government. Syndicated loans allow the participating banks to maintain diversification by not lending too much to a single borrower.

Synthetic forward: A complex option position which combines the purchase of a put option and the sale of a call option, or vice versa, both at the forward rate. Theoretically, the combined position should have a net-zero premium.

Systematic risk: In portfolio theory, the risk of the market itself, i.e. risk that cannot be diversified away.

T/A: Trade acceptance. International trade term.

Tariff: A duty or tax on imports that can be levied as a percentage of cost or as a specific amount per unit of import.

Tax deferral: Foreign subsidiaries of MNEs pay host country corporate income taxes, but many parent countries, including the United States, defer claiming additional taxes on that foreign source income until it is remitted to the parent firm.

Tax exposure: The potential for tax liability on a given income stream or on the value of an asset. Usually used in the context of a multinational firm being able to minimize its tax liabilities by locating some portion of operations in a country where the tax liability is minimized.

Tax haven: A country with either no or very low tax rates that uses its tax structure to attract foreign investment or international financial dealings.

Tax morality: The consideration of conduct by an MNE to decide whether to follow a practice of full disclosure to local tax authorities or adopt the philosophy, “When in Rome, do as the Romans do.”

Tax neutrality: In domestic tax, the requirement that the burden of taxation on earnings in home country operations by an MNE be equal to the burden of taxation on each currency equivalent of profit earned by the same firm in its foreign operations. Foreign tax neutrality requires that the tax burden on each foreign subsidiary of the firm be equal to the tax burden on its competitors in the same country.

Tax on undistributed profits: A different income tax applied to retained earnings from that applied to distributed earnings (dividends).

Tax treaties: A network of bilateral treaties that provide a means of reducing double taxation.

Technical analysis: The focus on price and volume data to determine past trends that are expected to continue into the future. Analysts believe that future exchange rates are based on the current exchange rate.

TED Spread: Treasury Eurodollar Spread. The difference, in basis points, between the 3-month interest rate swap index or the 3-month LIBOR interest rate, and the 90-day U.S. Treasury bill rate. It is sometimes used as an indicator of credit crisis or fear over bank credit quality.

Temporal method: In the United States, term for a codification of a translation method essentially similar to the monetary/nonmonetary method.

Tenor: The length of time of a contract or debt obligation; loan repayment period.

Tequila effect: Term used to describe how the Mexican peso crisis of December 1994 quickly spread to other Latin American currency and equity markets through the contagion effect.

Terms of trade: The weighted average exchange ratio between a nation’s export prices and its import prices, used to measure gains from trade. Gains from trade refers to increases in total consumption resulting from production specialization and international trade.

Territorial taxation (territorial approach): Taxation of income earned by firms within the legal jurisdiction of the host country, not on the country of the firm’s incorporation.

Theta: The expected change in an option premium caused by a small change in the time to expiration.

Time draft: A draft that allows a delay in payment. It is presented to the drawee, who accepts it by writing a notice of acceptance on its face. Once accepted, the time draft becomes a promise to pay by the accepting party. See also Bankers’ acceptance.

Total Shareholder Return (TSR): A measure of corporate performance based on the sum of share price appreciation and current dividends.

Tranche: An allocation of shares, typically to underwriters that are expected to sell to investors in their designated geographic markets.

Transaction exposure: The potential for a change in the value of outstanding financial obligations entered into prior to a change in exchange rates but not due to be settled until after the exchange rates change.

Transfer pricing: The setting of prices to be charged by one unit (such as a foreign subsidiary) of a multi-unit corporation to another unit (such as the parent corporation) for goods or services sold between such related units.

Translation exposure: The potential for an accounting-derived change in owners’ equity resulting from exchange rate changes and the need to restate financial statements of foreign subsidiaries in the single currency of the parent corporation. See also Accounting exposure.

Transnational firm: A company owned by a coalition of investors located in different countries.

Transparency: The degree to which an investor can discern the true activities and value drivers of a company from the disclosures and financial results reported.

Treynor measure (TRN): A calculation of the average return over and above the risk-free rate of return per unit of portfolio risk. It uses the portfolio’s beta as the measure of risk.

Triangular arbitrage: An arbitrage activity of exchanging currency A for currency B for currency C back to currency A to exploit slight disequilibrium in exchange rates.

Turnover tax: A tax based on turnover or sales, and is similar in structure to a VAT, in which taxes may be assessed on intermediate stages of a good’s production.

Unaffiliated: An independent third-party.

Unbiased predictor: A theory that spot prices at some future date will be equal to today’s forward rates.

Unbundling: Dividing cash flows from a subsidiary to a parent into their many separate components, such as royalties, lease payments, dividends, etc. so as to increase the likelihood that some fund flows will be allowed during economically difficult times.

Uncovered interest arbitrage (UIA): The process by which investors borrow in countries and currencies exhibiting relatively low interest rates and convert the proceeds into currencies that offer much higher interest rates. The transaction is “uncovered” because the investor does not sell the higher yielding currency proceeds forward.

Undervalued: The status of currency with a current foreign exchange value (i.e. current price in the foreign exchange market) below the worth of that currency. Because “worth” is a subjective concept, undervaluation is a matter of opinion. If the euro has a current market value of $1.20 (i.e. the current exchange rate is $1.20/e) at a time when its “true” value as derived from purchasing power parity or some other method is deemed to be $1.30, the euro is undervalued. The opposite of undervalued is overvalued.

Unsystematic risk: In a portfolio, the amount of risk that can be eliminated by diversification.

Value date: The date when value is given (i.e. funds are deposited) for foreign exchange transactions between banks.

Value today: A spot foreign exchange transaction in which delivery and payment are made on the same day as the contract. Normal delivery is two business days after the contract.

Value tomorrow: A spot foreign exchange transaction in which delivery and payment are made on the next business day after the contract. Normal delivery is two business days after the contract.

Value-added tax: A type of national sales tax collected at each stage of production or sale of consumption goods, and levied in proportion to the value added during that stage.

Volatility: In connection with options, the standard deviation of daily spot price movement.

Weighted average cost of capital (WACC): The sum of the proportionally weighted costs of different sources of capital, used as the minimum acceptable target return on new investments.

Wire transfer: Electronic transfer of funds.

Working capital management: The management of the net working capital requirements (A/R plus inventories less A/P) of the firm.

World Bank: See International Bank for Reconstruction and Development.

Worldwide approach to taxes: The principle that taxes are levied on the income earned by firms that are incorporated in a host country, regardless of where the income was earned.

Writer: Seller.

Yankee bonds: Dollar-denominated bonds issued within the United States by a foreign borrower.

Yield to maturity: The rate of interest (discount) that equates future cash flows of a bond, both interest and principal, with the present market price. Yield to maturity is thus the time-adjusted rate of return earned by a bond investor.

Yuan (CNY): The official currency of the People’s Republic of China, also termed the renminbi.

Zero coupon bond: A bond that pays no periodic interest, but returns a given amount of principal at a stated maturity date. Zero coupon bonds are sold at a discount from the maturity amount to provide the holder a compound rate of return for the holding period.