International finance prep. Flashcards
(145 cards)
1
Q
what is Foreign exchange reserves?
A
assets held on reserve by a central bank in foreign currencies.
2
Q
size of Foreign exchange reserves?
A
In 2019, global currency reserves amounted to approximately 11.8 trillion U.S. dollars.
3
Q
composition of Foreign exchange reserves?
A
1- US, 2-Euro, 3-Chinese renminbi
4
Q
first Foreign exchange reserves?
A
sterling pound
5
Q
problem with a dominant Foreign exchange reserves?
A
The term exorbitant privilege refers to the benefits the United States has due to its own currency being the international reserve currency.
6
Q
what does Foreign exchange reserves tell about a country? 2
A
1- ability to pay foreign debt
2- defend their national currency
7
Q
what is Financial globalization?
A
—the phenomenon of rising cross-border financial flows
8
Q
When did Financial globalization originate?
A
the Bretton Woods System and liberalization of capital
9
Q
Effects of Financial globalization? 3
A
1- removal of government restrictions on the mobility of capital
2- The importance of the financial sector in all national economies that participate in the global financial markets has increased
3- the scale and frequency of financial crises especially banking crises have increased
10
Q
Pros of financial globalization? 4
A
1- “deeper degree of financial integration”
2- further market stability and regulation, strengthening investors’ trust in a given country’s market
3- larger pool of investors and businesses
4- Advances the financial infrastructure
11
Q
Cons of financial globalization? 4
A
1- Even if capital inflows have been related with substantial growth rates in several developing nations, most of them have faced periodic collapses in growth rates and critical financial crunches → significant macroeconomic and social costs
2- Higher risk of global financial crisis (World crisis 2008)
3- Division that can be created between those capable of participating in the world financial system and those that must depend on local segments
4- Despite the fact that globalization boosts free tarde amidst nations, some nations attempt to save their countrywide markets
12
Q
what is capital flight
A
is a large-scale exodus of financial assets and capital from a nation due to events such as political or economic instability, currency devaluation or the imposition of capital controls.
13
Q
Effects of capital flight? 3
A
1-Lower investment
2-Lower tax revenue
3-Weakened currency
14
Q
Strategies to deal with capital flight?
A
1- Instituting capital controls restricting the flow of their currency outside the country.
2- making it expensive to transfer large sums of cash across borders
3- Raising interest rates to make local currency attractive for investors.
15
Q
Example of capital flight
A
In 2014, Russia annexed Crimea. The result was a list of heavy sanctions imposed by the West which cost Russia billions. The economic uncertainty and political risk meant that investors left the country in their droves, with $150 billion lost in capital flight in 2014 alone.
16
Q
what is Illicit financial flows
A
a form of illegal capital flight that occurs when money is illegally earned, transferred, or spent.
17
Q
what is monetary policy?
A
policy pursued by the central bank
18
Q
what are the two monetary policies?
A
Expansionary monetary policy - to increase economic growth.
Contractionary monetary policy - slow growth of money, cool down economy
19
Q
tools of monetary policies? 4
A
1- Interest rates
2- Foreign Reserves
3- Reserve requirements: when requirements are strict then banks are less able to provide money.
4- Sale of bonds ( buying bonds injects money into the economy)
20
Q
what is fiscal policy?
A
policy pursued by the government to keep econ healthy
21
Q
goal of fiscal policy?
A
stimulate demand, increase production, create jobs, increase GDP, avoid recessions, control inflation, and stabilise economic growth.
22
Q
what are the two fiscal policies?
A
1- Expansionary fiscal policy - designed to stimulate the economy, is most often used during a recession, times of high unemployment or other low periods of the business cycle. It entails the government spending more money, lowering taxes or both.
2- Contractionary fiscal policy - used to slow economic growth, such as when inflation is growing too rapidly. The opposite of expansionary fiscal policy, contractionary fiscal policy raises taxes and cuts spending. As consumers pay more taxes, they have less money to spend, and economic stimulation and growth slow.
23
Q
what are the fiscal tools?
A
Taxes influence the economy by determining how much money the government has to spend in certain areas and how much money individuals should spend. For example, if the government is trying to spur spending among consumers, it can decrease taxes. A cut in taxes provides families with extra money, which the government hopes will, in turn, be spent on goods and services, thus spurring the economy as a whole.
Spending is used as a tool for fiscal policy to drive government money to certain sectors needing an economic boost. Whoever receives those dollars will have extra money to spend – and, as with taxes, the government hopes that money will be spent on other goods and services.
24
Q
what is the gold standard about?
A
all paper money can be converted into gold;
25
who was the strongest under gold standard?
UK COS THEY MINED A LOT
26
WHEN DID GOLD STANDARD BEGIN?
EARLY 1870
27
When did the rest of the world start using gold standard?
19th. century
28
what was the period called after gold standard and during war period?
transition period
29
when did Bretton wood system emerge?
1944 after the Great Depression
30
what was Bretton system about?
The Bretton Woods System required a currency peg to the U.S. dollar which was in turn pegged to the price of gold.
31
when did Bretton system go to shit?
in the 1960s the economy slowed down and in 1971 collapsed
32
what was after Bretton wood system?
Jamaican agreement
33
when was the Jamaican agreement
1976
34
what was the when was the Jamaican agreement about?
Since 1974, all major currencies (the dollar, the pound sterling, the German mark, the yen, the French franc) have floated freely in relation to each other. In the same year, "Special Drawing Rights" (the "SDR basket") has become the new standard of value of the currency.
35
what are free floating currencies
is a regime where the currency price of a nation is set by the forex market based on supply and demand relative to other currencies.
36
what is risky about pegging?
Pegging currency to limited resources is risky and to another currency as well due to dependency on other economies you have no influence on.
37
advantages of gold standard? 3
1- Allows for long-term price stability
2- indepence from pegging to a currency
3- Reducing the uncertainty of international trade.
38
disadvantages of gold standard? 3
1- Benefiting countries that produce gold. Gold is rare. Not all countries have gold mines.
2- Limits the economy’s ability to grow. demand is not met
3- Monetary policy is useless for stabilizing the economy. Under the standard, the gold supply determines the money supply.
39
Why did the attempt to restore the gold standard in the interwar period fail? 3
1- the 1920s and 30s saw frequent recessions and banking crises
2- there was a leadership vacuum in the international regime
3- absence of policy cooperation, each country became selfish.
40
Why was the gold standard abandoned?
Too much demand for gold and not enough of it enough during the great depression
41
Major Types of Financial Institutions? 6 + 1
1. Central Banks: are the financial institutions responsible for the oversight and management of all other banks.
2. Retail and Commercial Banks: worked directly with businesses. Currently, the majority of large banks offer deposit accounts, lending.
3. Internet Banks: A newer entrant to the financial institution market is internet banks, which work similarly to retail banks.
4. Investment Banks: inancial institutions that provide services and act as an intermediary in complex transactions, for instance, when a startup is preparing for an initial public offering (IPO), or in merges. Goldman Sachs,
5. Brokerage Firms: assist individuals and institutions in buying and selling securities among available investors.
6. Insurance Companies: help individuals transfer the risk of loss are known as insurance companies.
9. Mortgage Companies specialized in originating or funding mortgage loans are mortgage companies.
10 - European Union and others
42
What it is a financial crises?
is a situation when asset prices decrease, businesses and consumers are unable to pay their debts, and financial institutions experience liquidity shortages. the bursting of a speculative financial bubble, a stock market crash, a sovereign default, or a currency crisis.
43
Types of financial crises?
1- banking crisis
2- sudden stop
3- currency crisis
4- debt crisis
44
what is banking crises
occurs when many banks in a country are in serious solvency or liquidity problems at the same time
45
what is sudden stop
an abrupt reduction in net capital flows into an economy, especially an emerging economy.
46
what is currency crisis
any situation in the foreign exchange markets where a currency suddenly and/or unexpectedly loses substantial value relative to other currencies.
47
what is debt crisis
occurs when a country is unable to pay its bills
48
why does banking crises happen? 4
1- Bank Run: occurs when many people try to withdraw their deposits at the same time, due to different reasons.
2-Stock Market Loops: One particularly interesting cause of banking disasters is a similar positive feedback loop effect in the stock markets, which was a much more dynamic factor in more recent banking crises (i.e. 2007-2009 sub-prime mortgage disaster).
3- Regulatory Failure: One of the simplest ways in which bank crises can occur is a lack of governmental oversight.
4- Contagion: Due to globalization and international interdependence, the failure of one economy can create something of a domino effect.
49
Consequences of banking crises domestically ? 2
- reduce economic output and growth.
| - investment suffers
50
Consequences of banking crises globally ? 2
- Imports and exports
| - domino effect
51
example of banking crisis?
Great Depression
52
reasons for sudden stop?
1- political
| 2- economic
53
example of sudden stop?
investors and creditors who had for years financed large balance-of-payment deficits in Portugal, Ireland, Italy, Greece, and Spain (PIIGS)—lost confidence in the fiscal
54
example of currency crises?
between 2010 and the first quarter of 2018, the Turkish economy grew at a steady pace, and the country’s economy experienced a sustained period of ever-increasing inflation. In addition, during the same period, inflation expectations – i.e., what people thought Turkey’s inflation rate would be in the future – increased significantly as well.
55
example of debt crises?
when Iceland took over the country’s bank debt, causing the value of its currency to plummet.
56
How do countries overcome financial crises? 4
- interest rates have to be cut in order to stimulate the economy
- central bank should implement a policy of quantitative easing
- central bank should publicly encourage people and companies to invest money and ensure that they do not lose faith in the system.
- the central bank will have to bail out important financial institutions in crisis to prevent further erosion of the banking system and the economy.
57
What is the role of WB and IMF in terms of coordinating financial crises? 7
```
1- increased lending
2- Provide policy advice,
3- provide financing
4- Provide technical assistance to governments
5- Support packages
6- facilitate dialogue
7- identify contingent risks
```
58
what is financial reporting?
is the process of documenting and communicating financial activities and performance over specific time periods, typically on a quarterly or yearly basis.
59
why we should financial reporting? 5
```
Tracking cash flow
Evaluating assets and liabilities
Analyzing shareholder equity
Measuring profitability
Ensures compliance
```
60
what re the four types financial reports?
1- balance sheet
2- income statement
3- statement of shareholders and equity
4- cash flow statement
61
who uses financial reports:
investors
shareholders
auditors
62
Who is checking the financial report?
Independent auditors → has to be a third party.
government
investors
63
what is included in Balance sheet 4
1-Liquid assets, including cash, certificates of deposit, short-term securities and treasury bills
2-Current assets, including accounts receivable, inventory, fixed assets and prepaid expenses
3-Current liabilities, including short-term and long-term debt, accounts payable, payable wages and dividends, tax expenses and prepayments from clients
4-Shareholder and owner equity values, like retained income, receivable dividends, capital gains and stocks
64
what is included in Income statement 5
1-Operating revenue, which accounts for selling products or services
2-Net and gross revenues, including total sales revenue and remaining revenue after subtracting costs
3-Nonoperating revenue from accrued interest, investment returns, royalty payments, capital gains
4-Primary expenses, including cost of goods sold (COGS), depreciation and selling, general and administrative costs (SG&A)
5-Secondary expenses, like debt or loan interest, asset loss and capital loss
65
what is included in Cash flow statement 3
1-Operational activities, including accounts receivable and payable, inventories, wages, income tax and cash receipts
2-Primary investment activities, including the generation and use of investment earnings, asset sales, issued loans or credit and payments from acquisitions or mergers
3-Secondary investment activities, including fixed-asset purchases for equipment, office space or property
66
what is included in Statement of shareholder equity 4
1- Common and preferred stock sales and repurchases
2-Purchased treasury stock, minus any reissued treasuries during the reporting period
3-Retained earnings after subtracting dividends and losses
4-Accumulated income, including incomes from unrealized capital gains, minus capital losses
67
what are International financial institutions?
is a financial institution that has been established (or chartered) by more than one country.
68
key International financial institutions? 4
1- World Bank
2- IMF
3- European Central Bank
4- Asian Infrastructure Development Bank
69
what is International investing?
involves selecting global investment instruments as part of a geographically diversified portfolio
70
International Investing Risks 6
1-Fluctuations in currency exchange rates, known as foreign exchange risk (or currency risk)
2-Changes in market value (price risk)
3-Changes in foreign interest rates
4-Significant political, economic and social events (geopolitical risk)
5-Lower liquidity
6-Less access to important information
7-Varying market operations and procedures (jurisdiction risk)
71
two main categories of international investment?
portfolio investment and foreign direct investment.
72
what is Foreign portfolio investment (FPI)
consists of securities and other financial assets held by investors in another country. It does not provide the investor with direct ownership of a company's assets and is relatively liquid depending on the volatility of the market.
73
pros of Foreign portfolio investment (FPI) 3
Feasible for retail investors
Quicker return on investment
Highly liquid
74
cons of Foreign portfolio investment (FPI)
No direct control/management of investments
Volatile
Cause of economic disruption (if withdrawn)
75
Example of FPI
The year 2018 was a good one for India in terms of FPI. More than 600 new investment funds registered with the Securities and Exchange Board of India (SEBI), bringing the total to 9,246. An easier regulatory climate and a strong performance by Indian equities over the last few years were among the factors sparking foreign investors' interest.
76
what is Foreign direct investment (FDI)
are substantial investments made by a company into a foreign concern. The investment may involve acquiring a source of materials, expanding a company's footprint, or developing a multinational presence.
77
Types of FDI? 3
1. Horizontal - a company establishes the same type of business operation in a foreign country as it operates in its home country. A U.S.-based cell phone provider buying a chain of phone stores in China is an example.
2. Vertical - a business acquires a complementary business in another country. For example, a U.S. manufacturer might acquire an interest in a foreign company that supplies it with the raw materials it needs.
3. Conglomerate - a company invests in a foreign business that is unrelated to its core business. Since the investing company has no prior experience in the foreign company's area of expertise, this often takes the form of a joint venture.
78
Pros of FDI
1-can foster and maintain economic growth, both in the recipient country and in the country making the investment.
2- Developing countries have encouraged FDI as a means of financing the construction of new infrastructure and the creation of jobs for their local workers.
3- Multinational companies benefit from FDI as a means of expanding their footprints into international markets.
79
cons of FDI
It involves the regulation and oversight of multiple governments, leading to a higher level of political risk.
80
Example of FDI
One of the largest examples of Foreign Direct Investment (FDI) in the world today is the Chinese initiative known as One Belt One Road (OBOR).This program, sometimes referred to as the Belt and Road initiative, involves a commitment by China to substantial FDI in a range of infrastructure programs throughout Africa, Asia, and even parts of Europe. The program is typically funded by Chinese state-owned enterprises and organizations with deep ties to the Chinese government.
81
What are mergers and acquisitions?
- The terms "mergers" and "acquisitions" are often used interchangeably, but they differ in meaning.
- In an acquisition, one company purchases another outright.
- A merger is the combination of two firms, which subsequently form a new legal entity under the banner of one corporate name.
82
Why is it important for a country to make investments and to be attractive for investments?
FDI creates new jobs and more opportunities as investors build new companies in foreign countries. This can lead to an increase in income and more purchasing power to locals, which in turn leads to an overall boost in targeted economies.
83
How is FDI analyzed? 5
1-Balance of payment
2- financial and capital account
3- Consulting companies that make annual report
4- Statistical agencies, imf statistical reports,
5- Global wealth report
84
what is the bond market?
often called the debt market, fixed-income market, or credit market - is the collective name given to all trades and issues of debt securities.
85
Key players in debt? 3
1-Issuers (governments, banks, or corporate entities) → sell bonds or other debt instruments to raise money
2-Underwriters (investment banks and other firms) → help issuers to sell bonds
3-Bond purchasers (corporations, governments, and individuals) → buy the debt that is being issued
86
The three most common forms of debt?
bonds, loans, and other securitized debt.
87
Analyse different types of debt, what types are there ?
Public debt is the debt owed by national, state, and local governments.
Private debt is the debt owed by households, businesses, and nonprofits.
88
How do countries deal with their debts? 3
1- imposing stricter rules on the domestic level
2- Sovereign Debt
3- go to IMF and WB
89
The Causes of Debt Default?
1- During a currency crisis
The domestic currency loses its convertibility due to rapid changes in the exchange rate. It becomes too expensive to convert the domestic currency to the currency in which the debt is issued.
2- Changing economic climate
If the country relies heavily on exports, especially in commodities, a significant reduction in foreign demand can shrink GDP and make repayment costly. If a country issues short-term sovereign debt, it is more vulnerable to fluctuations in market sentiment.
3- Domestic politics
Default risk is often associated with unstable government structure. A new party that seizes power may be reluctant to satisfy the debt obligations accumulated by the previous leaders.
90
example of default
Russia (1998)
A large portion of Russian exports came from the sale of commodities, leaving it susceptible to price fluctuations. Russia's default sent a negative sentiment throughout international markets as many became shocked that an international power can default. This catastrophic event resulted in the well documented collapse of long-term capital management.
91
what is financialization
process whereby financial markets, financial institutions, and financial elites gain greater influence over economic policy and economic outcomes. This happens when a country shifts away from industrial capitalism. Additionally, it refers to the increased presence of the financial sector in our lives, the increasing diversity of transactions and market players, along with the intersection with all parts of the economy and society.
92
when did financilaizaiton begin?
Financialization began with the fall of the Bretton Woods system and the rise of NEOLIBERALISM
93
what did neoliberalism advocate for
Neoliberalism advocated for deregulation which worked in favor of financial institutions.
94
Consequences of financilaizaiton? 5
1- Facilitated capital to promote the growth of other sectors.
2- Increased diversity of financial instruments sold - a process known as securitization.
3- Disproportionate growth of incomes of those in the financial sector (income inequality).
4- Result of “unproductive capitalism”
5- In the wake of the 2007-2010 financial crisis, a number of economists and others began to argue that financial services had become too large a sector of the US economy,
95
how could financilaizaiton impact the economy? 4
1- to elevate the significance of the financial sector relative to the real sector,
2-to transfer income from the real sector to the financial sector, and
3-to increase income inequality and contribute to wage stagnation.
4- may put the economy at risk of debt deflation and prolonged recession.
96
how does financilaizaiton operate? 3
→ changes in the structure and operation of financial markets,
→ changes in the behavior of nonfinancial corporations, and
→ changes in economic policy.
97
Countering financialization calls for a multifaceted agenda that
1- restores policy control over financial markets,
2- challenges the neoliberal economic policy paradigm encouraged by financialization,
3- makes corporations responsive to interests of stakeholders other than just financial markets, and
4- reforms the political process so as to diminish the influence of corporations and wealthy elites.
98
what are financial assets?
A financial asset is a liquid asset that gets its value from a contractual right or ownership claim. Cash, stocks, bonds, mutual funds, and bank deposits are all examples of financial assets. Unlike land, property, commodities, or other tangible physical assets, financial assets do not necessarily have inherent physical worth or even a physical form. Rather, their value reflects factors of supply and demand in the marketplace in which they trade, as well as the degree of risk they carry.
99
what are non-financial assets?
Determined by the value of its physical traits, real estate, factory equipment etc. This also includes intellectual property.
100
Common types of financial assets? 3
1- Stocks are financial assets with no set ending or expiration date. An investor buying stocks becomes part-owner of a company and shares in its profits and losses. Stocks may be held indefinitely or sold to other investors.
2- Bonds are one way that companies or governments finance short-term projects. The bondholder is the lender, and the bonds state how much money is owed, the interest rate being paid, and the bond's maturity date.
3- A certificate of deposit (CD) allows an investor to deposit an amount of money at a bank for a specified period with a guaranteed interest rate. A CD pays monthly interest and can typically be held between three months to five years depending on the contract.
101
Types of Money? 3
1- Commodity money is a good whose value serves as the value of money. Gold coins are an example of commodity money. In most countries, commodity money has been replaced with fiat money.
2- Fiat money is a good, the value of which is less than the value it represents as money. Bank notes are an example of fiat money because their value as slips of printed paper is less than their value as money.
3- Bank money consists of the book credit that banks extend to their depositors. Transactions made using checks drawn on deposits held at banks involve the use of bank money.
102
Functions of Money?
1- Unit of Account
2- Store of Value
3- Standard of Deferred Payment
103
Finance VS Money (equal?)
Finance is about dealing with all financial assets, not only money (also bonds, shares etc).
Government needs to know finance to be able to prevent financial crises or minimize the consequences, and also the importance of financial flows in a globalized world.
104
way to prevent a crisis?
→ regulation, barriers etc, by government policy and the financial system
105
In order to be most useful as money, a currency should be: 5
1) fungible, 2) durable, 3) portable, 4) recognizable, and 5) stable
106
who creates money
central bank
107
how do central banks regulate money?
1-Print Money- so the money itself becomes less valuable (for inflation)
2- Mandate institutions (commercial banks) to keep a certain amount of funds in reserve
3- Influence interest rates
108
what's global equity market
An equity market is a market in which shares of companies are issued and traded, either through exchanges or over-the-counter markets. Also known as the stock market, it is one of the most vital areas of a market economy. It gives companies access to capital to grow their business, and investors a piece of ownership in a company with the potential to realize gains in their investment based on the company's future performance.
109
How exchange rate affects the stock market?
1- When firms gain international competitiveness, they export more and thus exchange rate affects stock prices positively. However, increased costs due to depreciation in exchange rate are expected to affect stock prices negatively.
2-
110
How inflation affects stock market:
Periods of high inflation usually lead to lower returns on the stock market
111
Main players in equity market
Stock exchanges
Brokers
Regulators
Mutual funds
112
what is the difference between private and public debt?
- Public debt is the debt owed by national, state, and local governments.
- Private debt is the debt owed by households, businesses, and nonprofits.
113
what is international debt
A country's gross external debt is the liabilities that are owed to nonresidents by residents.
114
How do countries deal with their debts?
- take our loan
| - domestic changes
115
The Causes of Debt Default
1- currency crisis
2- changing economic climate
3- Domestic politics
116
Debt Default Examples
Russia (1998)
A large portion of Russian exports came from the sale of commodities, leaving it susceptible to price fluctuations. Russia's default sent a negative sentiment throughout international markets as many became shocked that an international power can default. This catastrophic event resulted in the well documented collapse of long-term capital management.
117
what is Global FX market
The foreign exchange (also known as FX or forex) market is a global marketplace for exchanging national currencies against one another.
118
Who Trades Forex?
commercial banks, central banks, money managers and hedge funds.
119
Difference between export and import?
- Import is when a company buys goods from another country, with an aim of reselling it in the domestic market. - Export is when a company provides goods and services to the other countries for selling purposes.
120
balance of payment vs international investment position
- only info about financial market changes in yearly or quarter
- a value at a certain date
121
what is trade balance
the difference in value between a country's imports and exports.
122
structure of balance of payment:
1- Current account
2- Capital account
3- Financial account
123
what is included in current
- records the value of the flow of goods, services and income between the residents and the rest of the world.
- Trade balance analyzes exports and imports of good and services
- primary income(immigrant living abroad that is sending capital at home)
- secondary income(non-direct earning for the economy like foreign aid and remittances
124
what is included in capital account
- keeps track of the net change in a nation's assets and liabilities during a year.
- will inform economists whether the country is a net importer or net exporter of capital.
- Capital transfers; Transactions where one party has transferred ownership of something to another party without receiving anything specific in return. For example: forgiveness of debt (so that the borrower no longer has to pay back what they borrowed)
- Acquisition: Transactions that involve intangible assets (e.g. brand names, copyrights and trademarks)
125
what is included in financial account
- reports foreign ownership of domestic assets and domestic ownership of foreign assets.
- Direct investment: Financial transactions related to long-term capital investment in a business (e.g. purchase of machinery, buildings and factories)
- Portfolio investment: The purchase of equity or debt (shares or bonds) in a business.
- Financial derivative: The purchase or sale of financial derivatives (i.e. financial contracts between two parties where the value is derived from another financial instrument, such as a bond or share, or a market index).
126
what is international investment position (IIP)
a statistical statement that shows at a point in time the value and composition of
(a) financial assets of residents of an economy that are claims on nonresidents and gold bullion held as reserve assets, and
(b) liabilities of residents of an economy to non- residents.
127
Structure of international investment position (IIP)
direct investment, portfolio investment, other investment, and reserve assets,
128
Why is international investment position (IIP)
| important
- an important barometer of a nation’s financial condition and creditworthiness.
- A negative NIIP figure indicates that foreign nations own more of the domestic nation’s assets than the domestic nation does of foreign assets, thus making it a debtor nation.
- Conversely, a positive NIIP figure indicates that the domestic nation's ownership of foreign assets is greater than the foreign nation's ownership of that domestic nation's assets, thus making it a creditor nation.
129
what is Letter of credit
A Letter of Credit (LC) is a document that guarantees the buyer’s payment to the sellers. It is issued by a bank and ensures timely and full payment to the seller. If the buyer is unable to make such a payment, the bank covers the full or the remaining amount on behalf of the buyer.
130
types of letter of credit
- Revocable/irrevocable
| - Confirmed/unconfirmed
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what is Irrevocable L/C
- is an official correspondence from a bank that guarantees payment for goods or services being purchased by the individual or entity,
- cannot be canceled
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what is Revocable L/C
- a type of letter of credit in which the issuing bank can amend the terms of the letter of credit or cancel the letter of credit completely without giving prior notice to the beneficiary
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what is Confirmed L/C
- refers to an additional guarantee to the original letter of credit obtained by a borrower from a second bank
- second letter guarantees that the second bank will pay the seller in a transaction if the first bank fails to do so
- Used when there is an additional risk
134
what is Unconfirmed L/C
- is the one where there is a guarantee of payment by only one bank, i.e., issuing bank
- no additional confirmation or guarantee.
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types of payment in international trade? 5
```
1- Cash in advance
2- Letter of Credit
3- Documentary Collection
4- Open Account Terms
5- Consignment
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136
what is Cash in advance
The cash in advance method is the safest for exporters because they are securely paid before goods are shipped and ownership is transferred.
137
what is letter of credit
A letter of credit, or documentary credit, is basically a promise by a bank to pay an exporter if all terms of the contract are executed properly. This is one of the most secure methods of payment.
138
what is documentary collection
exporter's bank receives funds from the importer's bank in exchange for documentation tracking the shipped goods.
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what is open account
An open account is a sale in which the goods are shipped and delivered before payment is due usually in 30, 60, or 90 days.
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what is consignment
Consignment is similar to an open account in some ways, but payment is sent to the exporter only after the goods have been sold by the importer and distributor to the end customer.
141
what are International reserves
International reserves are funds central banks exchange with each other on an international level. The reserves can either be in gold or in an internationally-accepted commodity, like the dollar or the euro. Special drawing rights (SDRs), or baskets of national currencies, can also be accepted as reserves.
142
what is Foreign currency liquidity:
Forex liquidity refers to a currency pair's ability to be bought and sold without creating a major impact on its exchange rate. A currency pair is regarded as having a high level of liquidity when it can be bought or sold easily, and there is a significant amount of trading activity for that pair.
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What financial system is
A financial system is a set of institutions, such as banks, insurance companies, and stock exchanges, that permit the exchange of funds. Financial systems exist on firm, regional, and global levels. Borrowers, lenders, and investors exchange current funds to finance projects, either for consumption or productive investments, and to pursue a return on their financial assets.
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what is de dollarization
De-dollarisation refers to reducing the dollar's dominance of global markets. It is a process of substituting the US dollar as the currency used for: Trading oil and/ or other commodities. Buying US dollars for the forex reserves etc.
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Financial instruments? 6
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1- Shares
2- Bonds
3- Indices
4- forex
5- Commodities
6- Derivatives
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