Eun−Resnick: InternationalFinancial Management,Third EditionBack MatterGlossary
© The McGraw−HillCompanies, 2004
Efficient Market Hypothesis
Hypothesis stating thatfinancial markets are informationally efficient in that thecurrent asset prices reflect all the relevant and availableinformation.
Elasticity of Demand
Ameasure of the sensitivity of demandfor a product with respect to its price.
The rate at which interbank deposits of theeuroare offered by one prime bank to another in countriesthat make up the EMU as well as prime banks in non-EMUEU countries and major prime banks in non-EUcountries.
The common European currency introduced in 1999 of the 11 countries of the EU that make up the EMU.
Abond issue denominated in a particular currencybut sold to investors in national capital markets other than theissuing country.
Atime deposit of money in an internationalbank located in a country other than the country which issuesthe currency.
European Central Bank (ECB)
The central bank of the 11countries that make up the EMU, responsible for maintainingprice stability via monetary policy.
European Currency Unit (ECU)
Abasket currency made upof a weighted average of the currencies of the 12 members of the European Union. The precursor of the euro.
European Monetary System (EMS)
Replaced the snake in1979. Asystem to establish monetary stability in Europe andpromote European economic and political unification.
European Monetary Union (EMU)
The monetary union of 11countries of the EU that irrevocably fixed their exchange ratesand use the common euro currency.
An option which can be exercised only atthe maturity date of the contract.
European Union (EU)
Aregional economic integration inWestern Europe, currently with 15 member states, in which allbarriers to the free flow of goods, capital, and people havebeen removed. EU plans to complete economic unification in-cluding a single currency.
Exchange Rate Mechanism (ERM)
The procedure, prior tothe introduction of the euro, by which EMS member coun-tries collectively manage their exchange rates based on aparity grid system, a system of par values between ERMcountries.
Exchange Rate Pass-through
The relationship between ex-change rate changes and the price adjustments of internation-ally traded goods.
The prespecified price paid or received when anoption is exercised.
Export-Import Bank (Eximbank) of the United States
Char-tered in 1945, it is an independent government agency whichfacilitates and finances U.S. export trade by financing exportsin situations where private financial institutions are unable orunwilling to provide financing.
The coefficient obtained from regressingthe home currency value of assets on the foreign exchange rateunder consideration. This provides a measure of the firm’s eco-nomic exposure to currency risk.
Hedging only the net exposure by firmswhich have both payables and receivables in foreign currencies.
Refers to hedging exchange risk exposureusing financial contracts such as currency forward and optionscontracts.
Theory stating that the nominal interest rate is thesum of the real interest rate and the expected inflation rate.
Flexible Sourcing Policy
Astrategy for managing operatingexposure that involves sourcing from areas where input costsare low.
Floating Rate Note
Medium-term bonds which have theircoupon payments indexed to a reference rate such as the three-month U.S. dollar LIBOR.
Refers to a bond offered by a foreign borrowerto the investors in a national capital market and denominated inthat nation’s currency. Example: An American company sellingyen-denominated bonds in Japan to local investors.
An overseas affiliate of a MNC which is notan independently incorporated firm but is rather an extensionof the parent.
Foreign Direct Investment (FDI)
Investment in a foreigncountry that gives the MNC a measure of control.
Foreign Exchange Markets
Encompass the conversion of pur-chasing power from one currency into another, bank depositsof foreign currencies, and trading in foreign currency spot, for-ward, futures, swap, and options contracts.
Foreign Exchange Risk
The risk of facing uncertain future ex-change rates.
An affiliate organization of a MNC whichis independently incorporated in a foreign country.
Foreign Tax Credit
Used to avoid double taxation on a par-ent firm with foreign subsidiaries. It is the credit given to theparent firm against taxes due in the host country based onthetaxes paid to foreign tax authorities on foreign-sourceincome.
Aform of medium-term trade financing used to fi-nance exports in which the exporter sells promissory notes to abank at a discount, thereby freeing the exporter from carryingthe financing.
Forward Expectations Parity
Theory stating that the forwardpremium or discount is equal to the expected change in the ex-change rate between two currencies.
Amarket for trading foreign exchange con-tracts initiated today but to be settled at a future date.
Forward Market Hedge
Amethod of hedging exchange risk exposure in which a foreign currency contract is sold or boughtforward.
The amount over (under) thespot exchange rate for a forward rate that is often expressed asan annualized percent deviation from the spot rate.
Forward Rate Agreement
An interbank contract that is used tohedge the interest rate risk in mismatched deposits and credits.
Free Cash Flow
It represents a firm’s internally generated fundin excess of the amount needed to finance all investment proj-ects with positive net present values.
For a foreign subsidiary of a MNC, it isthe currency of the primary economic environment in whichthe entity operates. This is typically the local currency of thecountry in which the entity conducts most of its business.