ELEC 3 Flashcards
(98 cards)
1
Q
is the conversion of one currency into another at a specific rate known as the foreign exchange rate. The conversion for rates almost all currencies are constantly floating as they are driven by the market forces of supply and demand.
A
Foreign exchange or (fx or forex)
2
Q
FACTORS THAT AFFECT FOREIGN EXCHANGE RATES
A
May factors can potentially influence the market forces behind foreign exchange rates. The
factors include various economic, political and even psychological conditions.
The economic factors
include a government’s economic policies, trade balances, inflation and economic growth outlook.
3
Q
is a decentralized and over the counter market where all currency exchanges trades occur. It is
the largest (in terms of trading volume) and the most liquid market in the world
A
THE FOREIGN EXCHANGE MARKET
4
Q
The forex market’s major trading centers are located in major financial hubs around the world
A
including New York, London, Frankfurt, Tokyo, Hongkong and Sydney
5
Q
Is a theory regarding the relationship between the spot exchanges rate and the expected spot
rate or forward exchange rate of two currencies, based on interest rates.
The theory holds that the forward exchange rate should be equal to the spot currency exchange
rate times the interest rate of the home country, divided by the interest rate of the foreign
country.
A
INTEREST RATE PARITY
6
Q
refers to the state in which no-arbitrage is
satisfied without the use of a forward contract
A
Uncovered IRP
7
Q
to the state in which no-arbitrage is satisfied with the
use of a forward contract
A
covered interest rate parity
8
Q
INTEREST RATE PARITY EQUATION
A
St(a/b)= The spot rate (in currency a per currency b)
ST(a/b)= Expected Spot Rate at time T (in currency A per currency b)
Ft= The Forward Rate (in currency a per currency b)
ia= interest rate of country A
ib= interest rate of country B
T= time to expiration date
9
Q
This theory states that the exchange rate between currencies of two countries should be equal
to the ratio of the countries’ price levels.
A
PURCHASING POWER PARITY
10
Q
a tool used to make multilateral comparisons
between the national incomes and living standards of different countries.
A
concept of Purchasing Power Parity
11
Q
The concept originated in the 16th century was developed by Swedish economist Gustav Cassel in
1918. This concept is based on the “law of one price” which states that similar goods will cost the same
in different markets when the prices are expressed in the same currency (assuming the absence of
transaction cost or trade barriers)
A
ORIGIN OF PURCHASING POWER PARITY
12
Q
ORIGIN OF PURCHASING POWER PARITY
There are two popular techniques:
A
ABSOLUTE PPP
RELATIVE PPP
13
Q
states that similar products in different countries should be priced equally when measured in common currency
A
ABSOLUTE PPP
14
Q
that account for imperfections like transportation costs, tariffs and quotas. It states that the rate of price changes should be similar.
A
RELATIVE PPP
15
Q
RELIABILITY OF PURCHASING POWER PARITY
Although it is widely used, PPP ratios may not always portray the real standard of living in
countries for the following reasons.
A
- The underlying expenditure and price levels that represent consumption patterns may not be
reported correctly. - It is difficult to construct identical baskets of goods and services while comparing dissimilar
countries, as people show different tastes and preferences, and the quality of the items varies. - The prices of traded goods are rarely seen to be equal, as there are trade restrictions and other
barriers to trade that result in deviation from PPP
16
Q
is the risk incurred due to the fluctuations in exchange rates before the contract is settled.
A
Transaction Exposure
17
Q
When the transaction exposure exists, the firm faces three major tasks:
A
- Identify its degree of transaction exposure.
- Decide whether to hedge this exposure.
- Choose a hedging techniques if it decides to hedge part or all of the exposure.
18
Q
FINANCIAL TECHNIQUES FOR MANAGING TRANSACTION EXPOSURE
The following are the financial techniques for hedging transaction exposure
A
FUTURE CONTRACTS
FORWARD CONTRACTS
MONEY MARKET HEDGING
OPTIONS
19
Q
if a firm is required to pay a specific amount of foreign currency in the future, it can enter into a contract that fixes are the price for the foreign currency for a future date. This eliminates
the chances of suffering due to currency fluctuations.
A
FORWARD CONTRACTS
20
Q
are similar to forward contracts. However it is have standardized and limited maturity dates, initial collateral and contract sizes.
A
FUTURE CONTRACTS
21
Q
The forward price is equal to the current spot price multiplied by the ratio of the currency’s riskless returns. This also creates the finance for the foreign currency transaction
A
MONEY MARKET HEDGE
22
Q
involve an upfront fee and do not oblige the owner to trade currencies
at a specified price, time period and quantity.
A
OPTION CONTRACTS
23
Q
OPERATIONAL TECHNIQUES FOR MANAGING TRANSACTION EXPOSURE
The following are the operational techniques for managing transaction exposure
A
RISK SHIFTING
CURRENCY RISK SHIFTING
LEADING AND LAGGING
REINVOICING CENTER
24
Q
the firm can completely avoid transaction exposure by not involving itself in foreign
exchange at all. All the transactions can be conducted in the home currency. However, this is not possible
for all types of businesses
A
RISK SHIFTING
25
the two parties involved in the deal can have the understanding to share the transaction risk
CURRENCY RISK SHARING
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manipulating currency cash flows in accordance
with the fluctuations.
LEADING AND LAGGING
27
Paying off liabilities when the currency is appreciating is known as
LEADING
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collecting receivables when the currency is at a low value in called
LAGGING
29
It is a single third-party subsidiary used to conduct all intra-
company trades.
It carries out transactions in domestic currency, thereby bearing
the losses from the transaction exposures.
REINVOICING CENTERS
30
refers to an effect caused on a company’s cash
flows due to unexpected currency rate fluctuations
Economic exposure, also known as operating exposure
31
long-term in nature and
have a substantial impact on a company’s market value.;
ECONOMIC EXPOSURE
32
is higher for firms having both, product prices and input costs sensitive to currency
fluctuations. It is lower when costs and prices are not sensitive to currency fluctuations.
do not adjust its markets, product mix, and source of
inputs in accordance with currency fluctuations. Flexibility in adapting to currency rate fluctuations
indicates lesser economic exposure.
Economic exposure .
33
The risk of economic exposure can be hedged either by operational
strategies or currency risk mitigation strategies.
MANAGING ECONOMIC EXPOSURE
34
What are the Operational Strategies
Diversifying Production Facilities and Market for Products
Sourcing Flexibility
Diversifying Financing
35
What are the Currency Risk Mitigation Strategies
Matching Currency Flows
Currency Risk Sharing Agreements
Back-to Back Loans
Currency Swaps.
36
190
IMF MEMBERS
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189
MEMBER OF WORLD BANK
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WHOS USING IMF
BORROWING, PRECAUTIONARY, INVESTING
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GRANTS AND LOANS
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
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support private sectors development
INTERNATIONAL FINANCE CORPORATION
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the world’s leading
institution devoted to international investment disputes settlement,
INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT DISPUTES
42
It was conceived in July 1944 at the United Nations Bretton Woods
Conference in New Hampshire, United States. The 44 countries in attendance sought to build a framework for international economic cooperation and avoid repeating the competitive currency
devaluations that contributed to the Great Depression of the 1930s.
THE INTERNATIONAL MONETARY FUND
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is to ensure the stability of the international monetary system—the system of
exchange rates and international payments that enables countries and their citizens to transact with
each other.
IMF's primary mission
44
In order to maintain stability and prevent crises in the international monetary system, the
IMF monitors member country policies as well as national, regional, and global economic and financial
developments through a formal system known
-Watch Dog
The IMF provides advice to member countries and promotes policies designed to foster economic
stability, reduce vulnerability to economic and financial crises, and raise living standards.
surveillance
45
Providing loans to member countries that are experiencing actual or potential
balance-of- payment problems are a core responsibility of the IMF.
In response to the global economic crisis, in April 2009 the IMF strengthened its lending capacity and
approved a major overhaul of its financial support mechanisms, with additional reforms adopted in subsequent years.
In response to the COVID-19 pandemic, the IMF temporarily increased the access limits under
emergency financing instruments and the annual limit on overall access under non-concessional
resources.
FINANCIAL ASSISTANCE
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Capacity development:
The IMF’s capacity development efforts focus on:
• Public Finances
• Monetary and Financial Policies
• Macroeconomic Frameworks and Tools
• Legal Frameworks
• Statistics
47
The IMF's capacity development work also help countries tackle their developmental priorities by
focusing on:
• Fostering Inclusion and Reducing Inequality
• Gender Equality
• Climate Action
48
the IMF issues an international reserve asset known as.. it can supplement the official reserves of member countries participating in the SDR Department
(currently all members of the IMF)
-BASKET OF CURRENCY
SPECIAL DRAWING RIGHTS
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are the primary source of IMF financial resources it is broadly reflects its
size and position in the world economy
MEMBER QUOTAS
50
between the IMF and a group of members and institutions provide supplementary
resources
Credit Arrangement
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As a third line of defense, member countries have also committed resources to the IMF through
Bilateral Borrowing agreements
52
Governance and organization
Primary aims:
• Promote international monetary cooperation;
• Facilitate the expansion and balanced growth of international trade;
• Promote exchange stability;
• Assist in the establishment of a multilateral system of payments; and make resources available (with
adequate safeguards) to members experiencing balance-of-payments difficulties.
53
1. Made up 24 governors
2. Day to day 24 members
3. supporting deputing headquarter, Washington DC around 2,700 employees
1. IMFC
2. EXECUTIVE
3. MANAGING DIRECTOR
54
is an international organization dedicated to providing financing, advice, and research
to developing nations to aid their economic advancement.
WORLD BANK
55
Currently, the World Bank has two stated goals that it aims to achieve by 2030.
1. The first is to end extreme poverty by decreasing the number of people living on less than $1.90 a day
to below 3% of the world population.
2. The second is to increase overall prosperity by increasing income growth in the bottom 40% of every
country in the world.
56
1. To end extreme poverty and boost prosperity on a livable planet
2. The World Bank is made up of 189 member countries. These member countries, or shareholders, are
represented by a Board of Governors, who are the ultimate policymakers at the World Bank.
1. Mission
2. ORGANIZATION
57
Examples of What the World Bank Does
• Human Capital Project- it was launch in 2017 encourage in their people education as well health care and
social programs
• National Immunization Support Project-
• Learning for the Future
58
organization operates different sectors
the International Bank of Reconstruction and
Development (IBRD),
International Development Association (IDA), International Finance
Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA).
59
an organization, rather than a bank. Therefore, its financials are not comparable
to traditional financial institutions
World Bank
60
History of the World Bank
• World Bank and IMF were created in 1944 from the Bretton Woods Agreement.
• Both aimed to support post-war reconstruction in Europe and Asia.
• Bretton Woods system ended, but World Bank and IMF continued.
• World Bank focuses on long-term development projects, IMF provides loans.
• World Bank is not a traditional bank, offers financial products for countries.
61
is the only global international organization dealing with the rules
of trade between nations.
• The overall objective of the WTO is to help its members use trade as a means to raise living standards,
create jobs and improve people’s lives.
World Trade Organization
62
OVERVIEW
• World Trade Organization (WTO) aims to promote international trade and economic growth
• Established in 1995, WTO replaced the General Agreement on Tariffs and Trade (GATT)
• WTO has 164 members and works to reduce trade barriers and ensure fair trade practices
• Key activities include negotiating trade agreements, settling trade disputes, and assisting developing
countries.
• WTO promotes open markets, free trade, and economic development for all members
63
It uses computer and electronic technology in place of
checks and other paper transactions. It is initiated through devices like cards or code that let you, or
those you authorize, access your account.
electronic fund transfer
64
is an electronic payment system that enables the
customer of a bank or a financial institution to make financial or non-financial transactions online via the
internet. This service gives online access to almost every banking service, traditionally available through a
local branch including fund transfers, deposits, and online bill payments to the customers.
net-banking or online banking,
65
ELECTRONIC BANKING (TYPES OF SERVICES)
ATM
DIRECT DEPOSIT
Pay by Phone Systems
Personal Computer Banking
Payment transactions
Electronic check conversion
Point of sale transfer terminals
66
Is a payment system which allows one-tone fund
transfer. It individuals and corporates can transfer funds electronically from any bank branch to
any individual or corporate with an account with any other bank branch in the country. NEFT service is
available 24×7 on internet banking. But, it is a time-restricted service at the bank branch.
NATIONAL ELECTRONIC FUND TRANSFER (NEFT)
67
Is a continuous settlement of funds individually on an order-by-
order basis. This payment system ensures that the receiver’s account gets credited with the funds almost
immediately and not after a certain duration, as is the case with other payment modes like NEFT. RTGS
transactions are tracked by the RBI, thereby successful transfers are irreversible. This method is majorly
used for large value transfers.
REAL TIME GROSS SETTLEMENT (RTGS)
68
Is another payment method that transfers funds in real-time.
It is used to transfer funds instantly within banks across India via mobile, internet and ATM, which is not only
safe but also economical both in financial and non-financial perspectives.
is an inexpensive mode of
fund transfer. Other fund transfer mediums such as NEFT and RTGS charge significantly higher than IMPS.
IMMEDIATE PAYMENT SYSTEM (IMPS)
69
which is used to enhance business
operations and the delivery of financial services
can take the form of software, a service, or a
business that provides technologically advanced ways to make financial processes more efficient by disrupting traditional methods.
FINANCIAL TECHNOLOGY
70
TECHNOLOGIES THAT CONTRIBUTE TO FINTECH
Artificial Intelligence and Machine Learning
Big Data and Data analytics
Robotic Process automation
Blockchain
71
are some of the most used technologies in
fintech, offering the potential to play an even bigger role in the finance industry as developments
continue.
Some of the fintech applications of AI and ML include credit scoring, fraud detection,
regulatory compliance, and wealth management.
Artificial Intelligence (AI) and Machine Learning (ML)
72
Data from customers and markets is of high value to fintech
companies.
Through large datasets, consumer preferences, spending habits, and investment
behavior can be extracted and used to develop predictive analytics.
The collected data also helps in formulating marketing strategies and fraud detection
algorithms.
Big Data and Data Analytics
73
refers to the process of
assigning manual, repetitive tasks to robotics instead of humans in order to streamline workflows
in financial institutions.
Robotic Process Automation (RPA)
74
adopted at a large scale in the financial industry,
primarily due to its ability to securely store transaction records and other sensitive data. Each
transaction is encrypted, and the chances of successful cyber attacks are relatively low when
blockchain technology is employed.
Is also the backbone of cryptocurrency
BLOCKCHAIN
75
APPLICATION OF FINTECH
CROWDFUNDING PLATFORMS
MOBILE PAYMENTS
ROBO ADVISOR
INSURETECH
REGTECH
76
Kickstarter, GoFundMe, and Patreon
are the result of developments in fintech. The platforms allow entrepreneurs and early-stage
businesses to raise funds from all over the world, allowing them to bypass geographical
boundaries and reach international markets and investors.
CROWDFUNDING PLATFORMS
77
some of the most prevalent
uses of fintech. Such applications allow users to carry out banking activities without physically
visiting a bank. For example, companies like Venmo and Interac allow customers to send and
receive money through smartphones at minimal transaction fees.
MOBILE PAYMENTS
78
It services that use algorithms to allocate assets and generate portfolios for customers optimally. They allow
users of all age groups to engage in investment activities at low fees with minimal manual
effort.
ROBO ADVISORS
79
Refers to the application of technology to the insurance
model, which allows companies to provide tailored insurance services and data security.
It helps streamline the insurance process through online claims filing and policy management.
INSURETECH
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focuses on the automation of compliance processes for financial institutions.
It offers fast and cost-effective management of large amounts of data,
Including transaction records and compliance documents, such as corporate tax returns
REGTECH
81
is the growing interconnectivity of financial institutions and markets around the world
It refers to the increasing flow of capital, investment, and financial services across countries, which is made possible by technological improvements, deregulation, and globalization.
This process has far-reaching ramifications for economic growth, stability, and policymaking at the national and international levels.
Access to Capital
Risk Diversification
Efficiency Gains Innovation and Development
It is a major factor that shapes the current world economy. While technology provides several advantages, it also introduces considerable dangers and problems that must be carefully managed.
Policymakers, regulators, and international institutions must
work together to maximize the benefits of financial integration while minimizing its potential
drawbacks.
GLOBAL FINANCIAL INTEGRATION
82
Global financial integration can offer numerous benefits such as access to a broader range of
investment opportunities, diversification of risks, and potentially higher economic growth through
increased capital flows and technology transfer.
POTENTIAL BENEFITS
83
World Capital Markets may allow a country to engage it allowing the countries to borrow in bad times and lend in good times
CONSUMPTION SMOOTHING
84
The ability to draw upon the international pool of resources that financial openness gives access
to may also affect domestic investment and growth.
FDI may facilitate the transfer or diffusion of managerial and technological know-how-particularly
in the form of new varieties of capital inputs and improve the skills composition of the labor force as the result of “learning by doing” effects, investment in formal education and on-the-job training
DOMESTIC INVESTMENT GROWTH
85
The free flow of capital across borders can encourage countries to adopt more disciplined
microeconomic policies and reduce the frequency of policy mistakes, by increasing the reward for
good policies and penalizing bad ones.
ENHANCE MACROECONOMIC DISCIPLINE
86
It improves the efficiency of banking operations by optimizing procedures, reducing costs, and
improving services.
Financial stability refers to a system's ability to maintain smooth operation while absorbing shocks.
Increased efficiency allows banks to operate more smoothly, reduce risks, and contribute to overall financial stability.
Increased Banking System Efficiency and Financial Stability
87
Examples for Increased banking system efficiency include
1. Faster transaction processing times
2. Improved customer experience
3. Cost-saving measures
88
Example of financial stability
Diversification of risk
Contingency planning
89
banks utilize sophisticated risk management tools to diversify their lending
portfolios, reducing the concentration of risk in any single sector or asset class.
Diversification of risk
90
banks develop comprehensive contingency plans to address potential crises or disruptions in the financial markets
Contingency planning
91
include the high degree of concentration capital flows and the lack of access
to financing for smaller countries either permanently or when they need it the most.
Potential cost
92
Period of surge Small number of recipient countries. Increase in capital inflows in early 1990s.
Concentration of capital
93
The capital inflows that are associated with an open capital account may raise domestic
investment, their impact on long-run growth may be limited (if non negligible) if such inflows are used to
finance speculative or low-quality domestic investments.
Domestic Misallocation of Capital Flows
94
Loss of Macroeconomic Stability
Rapid Monetary Expansion - difficulty and cost of pursuing aggressive sterilization policies
Inflationary Pressures - effect on capital inflows on domestic spending
Real Exchange Rate Appreciation - currency value rises, affecting tradie
Widening Current Account Deficits - larger external deficits
Flexible vs. Fixed Exchange Rate
Flexible Exchange Rate: Currency depreciation and trade balance correction
Fixed Exchange Rate: Currency crisis and increase financial instability
95
A high degree of financial openness may also be conductive to a high
degree of volatility in capital movements, a specific manifestation of which being large reversals in short term flows associated with speculative pressures on the domestic currency.
Harding, Contagion and Volatility
96
Foreign banks may ration credit to small firms to a larger extent than domestic banks, and concentrate instead on larger and stronger ones.
Risk of Entry by Foreign Banks
97
This concept is based on the__________which states that similar goods will cost the same
in different markets when the prices are expressed in the same currency (assuming the absence of transaction cost or trade barriers)
Law of one price
98
It refers to predicting how consumers are likely to behave using past information and a mathematical algorithm.
Predictive analytics
