GLOSSARY OF SELECTED FINANCIAL TERMS

Absolute Advantage:

A theory, first presented by Adam Smith, that holds that because different countries can produce certain goods more efficiently than others, each should specialize in exporting those it can produce efficiently in exchange for those it cannot produce efficiently

Acquisition:

When one company buys, and therefore controls, another company

Ad Valorem Duty:

A duty (tariff) that represents a percentage of the value of the item

American Depository Receipt (ADR):

A security issued in the United States to represent shares of a foreign stock, which allows that stock to be traded in the United States. Foreign companies use ADR'), which are issued in U.S. dollars, to expand the pool of potential U.S. investors.

Arb or Arbitrageur:

A professional stock trader who invests in stocks of companies that are takeover candidates, or are rumored to be takeover candidates, in the hope of making profits on price movements

Arbitrage:

The simultaneous or near-simultaneous purchase of assets in one market and sale of the same assets in another market to take advantage of price differences between the two markets. Such operations usually involve currencies or securities.

Aussie:

The Australian dollar

Balance of Payments:

A summary of all economic transactions between a country and the rest of the world during a given period of time

Bankers' Acceptance:

A time draft that matures in six months or less, across the face of which a bank has written the word "accepted" to indicate that it will honor the draft upon presentation at maturity

Bear Hug:

An offer by one company to buy the stock of another company at so large a premium over the market price and under such favorable terms that the second company has no choice but to accept the offer

Belgian Dentist:

A stereotype of the traditional Eurobond investor. This self-employed professional must report income, has a disdain for tax authorities, and likes investing in foreign currencies. "Anonymous bearer" Eurobonds fit the bill nicely because they are unregistered and, therefore, untraceable.

Bid/ Asked Spread:

The difference between the bid and asked prices on securities or on the foreign exchange market. The spread is reconciled by traders, called market makers, who quote a price at which they will buy or sell, effectively setting the price. Brokers, in contrast, merely match up the two sides.

Big Bang:

The nickname for October 27, 1987, when the London markets in equities and government securities were liberalized through the elimination of fixed commissions on debt and equity dealings

Big Four:

The nickname given to Japan's major brokerages, Nomura Securities Ltd., Nikko Securities Ltd., Daiwa Securities Ltd., and Yamaichi Securities Ltd. These firms dominate equity and bond trading in Japan and are seeking to expand their international presence, particularly in New York and London.

BIS (Bank of International Settlements):

An international organization of central banks and financial institutions, based in Basel, Switzerland, that serves two distinct but related functions. It provides a forum for the discussion of international monetary issues, and it acts as a central bank for central banks. In its second role, BIS holds deposits, keeps gold reserves, and clears central bank deposits and withdrawals.

Cable:

A slang expression for sterling/ dollar trade, dating from the days when deals were made by cablegram. Hence those in the financial world talk about the "cable desk," the "cable rate," and so on.

Cedel S.A.:

One of the two main clearing systems for internationally traded securitiesmostly Eurobonds, but also some equities. (See Euroclear Clearance System Ltd.)

Chartists:

Financial analysts who believe that the best way to determine which currencies should be traded for profit is by charting ebbs and flows in their values and looking for patterns

Clearing House Interbank Payment System (CHIPS):

An international electronic check transfer system that moves money between major U.S. banks, branches of foreign banks, and other institutions

Cockdate:

To schedule settlement for some date between a week and a month after the deal is made

Glossary of Selected Financial Terms

Common Market:

In general, a form of regional economic integration in which countries abolish internal tariffs, use a common external tariff, and abolish restrictions on factor mobility. The term "Common Market" is also used to refer specifically to the European Economic Community.

Comparative Advantage:

The theory that gains from trade may still be realized if a country specializes in those products that it can produce more efficiently than other products, even if the country does not have an absolute advantage relative to other countries

Confirmed Letter of Credit:

A letter of credit to which a bank in the exporter's country adds its guarantee of payment

Convertible Note:

One of the two main equity-related debt issues (the other being warrants) commonly available overseas. Convertibles allow bondholders to exchange the debt for a fixed amount of equity (stock) within a certain period.

Copey:

The Danish kroner, named after the city of Copenhagen

Corporate Receivables:

The amounts owed to a firm by its clients

Council for Mutual Economic Assistance (COMECON):

A regional economic association made up of countries considered to be within the Soviet bloc of influence

Countertrade:

A sale that involves obligations by the seller to generate foreign exchange for the buying country

Creeping Tender Offer:

The gradual accumulation of a company's stock through purchases on the open market. U.S. law does not require disclosure of holdings of a company's stock until 5% has been acquired; then disclosure of each change in holdings is required.

Cross Rate:

Toe exchange rate between two foreign currencies

Culture:

The norms of behavior in a society, which are based on attitudes, values, and beliefs

Currency Swap:

A transaction in which two parties exchange specific amounts of two different currencies at the outset and then repay them, over time, according to a predetermined schedule that reflects interest payments and amortization of principal

Current Rate Method:

A method of translating financial statements into a different currency. All assets and liabilities are translated using the exchange rate in effect on the balance sheet date (the current exchange rate). Income statement accounts are translated using the average exchange rate for the period.

Customs Union:

A form of regional economic integration that eliminates tariffs among member nations and establishes common external tariffs

Devaluation:

A formal reduction in the value of a currency in relation to another currency, which causes the foreign currency equivalent of the devalued currency to decrease

Dual Currency Bonds:

Bonds that are denominated in one currency but pay interest in another currency at a fixed rate of exchange. Dual currency bonds can be redeemed in a currency different from the currency of denomination.

Dumping:

The underpricing of exports (usually below cost or below the home country price)

Duty:

A governmental tax (tariff) levied on goods shipped internationally

Economic Exposure:

The extent to which the value of a firm is sensitive to changes in the exchange rate

Economic Integration:

The lessening or abolition of economic discrimination between national economies by means of free trade areas, common markets, economic unions, and the like

Edge Act:

An act that allows banks to set up offices in U.S. money centers other than those where the bank is legally allowed to operate, for the purpose of performing international banking activities. An Edge Act corporation is a banking corporation set up under the provisions of the Edge Act.

Ethnocentrism:

The belief that what works at home should work abroad

Eurobonds:

Long-term bonds marketed internationally in countries other than the country of the currency in which they are denominated. These issues are not subject to national restrictions. In recent years, some Eurobonds have been designed as dual currency bonds that pay interest in one currency and are redeemable in another. For many multinational companies and governments, Eurobonds have become the primary way to raise capital.

Euroclear Clearance System Ltd.:

One of the two main clearing systems for internationally traded securities. (See Cedel S.A.)

Eur.ocommercial Paper:

A short -term unsecured note issued by a nonbank in the Euromarkets

Glossary of Selected Financial Terms

Eurocurrency:

Money deposited in a financial center outside of the country that issued the currency. For instance, Eurodollars-the most widely used Eurocurrency-are

U.S. dollars deposited outside the United States.

Eurodollars:

Dollars held in the form of time deposits in banks outside of the United States. These banks can be foreign-owned or overseas branches of U.S. banks.

European Community (EC):

A regional economic association comprising twelve countries in Europe. It most closely resembles the economic union form of regional integration. The EC is also known as the European Economic Community (EEC).

European Currency Unit (ECU):

A currency composed of specific quantities of the currencies of European Monetary System members. This "basket" of ten European currencies, devised in 1979, is intended to serve as a monetary unit for the European Monetary System (EMS), The ECU is used as part of the system's divergence indicator (for measuring relative movements of member currencies) and as a unit of account to value members' exchange reserve assets. By charter, EMS members reevaluate the composition of the ECU every five years or when there has been a shift of 25% or more in the value of any currency in relation to other currencies in the "basket."

European Free Trade Association (EFTA):

A regional economic association that includes European countries that are not members of the EC. These countries have established a free trade area.

European Monetary System:

A cooperative foreign exchange arrangement involving most of the members of the EC and designed to promote exchange stability within the EC

European Terms:

The quotation of currencies on an indirect basis

Exchange Rate:

The price of one currency in terms of another currency

Exit Bond:

A bond issued by a debtor country to a creditor bank in place of a bank credit that exempts the creditor bank from future requests for new money and restructuring

Experience Curve:

A graph depicting the percentage reduction in production costs as output increases

Export Management Company:

A firm that buys merchandise from manufacturers for internatIonal distribution or acts as an agent for manufacturers

Export Trading Company:

A trading company authorized by law to become involved in international commerce. The law that established ETCs in the United States was designed to eliminate some of the antitrust barriers to cooperation.

Financial Accounting Standards Board (FASB):

The private-sector organization in the United States that sets financial accounting standards

Fisher Effect:

A theory of the relationship between inflation and interest rates in two countries: if the nominal interest rate in the home country is lower than that of the foreign country, the home country's inflation rate can be expected to be lower, so real interest rates are equal

Floating Rate Bonds:

The most commonly issued bonds, whose interest coupons are adjusted regularly according to the level of some base interest rate plus a fixed spread

Floating Rate Notes:

Debt instruments with variable interest rates. The notes are pegged to a fluctuating interest rate, such as the six-month Libor rate, and move along with that rate.

Footsie 100:

The Financial Times Stock Index (FT-SE 100), based on the 100 largest British companies. it was introduced on January 1, 1984 with a set value of 1000.0 because there was no suitable index on which to base futures and options contracts.

Foreign Bonds:

Bonds issued by foreign borrowers in a nation's capital market and traditionally denominated in that nation's currency. Yankee bonds, for example, are mostly issued in the United States by foreign countries, banks, or companies.

Foreign Currency Swap:

The trading of one currency for another, with the agreement that the transaction will be reversed at some point in the future

Foreign Sales Corporation:

A special corporation established by U.S. tax law that can be used by a U.S. exporter to shelter some of its income from taxation

Foreign Trade Zone:

Special physical sites in the United States where the U.S. government allows firms to delay or avoid paying tariffs on imports

Forward Contract:

An agreement to exchange currencies at a specified exchange rate (the forward rate) on a specified future date

Forward Cover:

An agreement to purchase or sell a fixed amount of a particular foreign currency on a future date at an agreed-upon price, in order to ensure against exchange rate movements' having a negative impact on the domestic value of the foreign currency

Forward Exchange Market:

The market in contracts for the purchase or sale of currency at some date in the future. Involvement in this market is a way for companies to hedge against major swings in foreign-exchange rates.

Glossary of Selected Financial Terms

Forward Rate:

The exchange rate, established by contract between a foreign exchange trader and a customer, for foreign currency to be delivered at a specific date in the future

Franchising:

A way of doing business in which one party (the franchisor) gives another party (the franchisee) (1) the use of a trademark that is an essential asset in the franchisee's business and (2) continual assistance in the operation of the business

Friendly Takeover:

An acquisition of one company by another company that is supported by the management and directors of the target company

Fundamentalists:

Financial analysts who argue that currencies ought to be valued according to the economic fundamentals of a country

Futures Contract:

A highly standardized foreign exchange contract written for the delivery of a fixed number of foreign currency units on a fixed date; a forward contract

Gilt-edged Market:

A phrase used mainly in the United Kingdom to mean all marketable government securities except Treasury bills

Gilts:

Technically, British and Irish government securities, although the term also is used to refer to issues of local British authorities and some overseas public sector offerings. Like u.s. Treasury issues, gilts have a primary market (for money raised by the government) and a secondary market.

Glider:

A not -so-affectionate name for the Dutch guilder

Golden Parachute:

Provisions in executives' employment contracts with their companies that guarantee substantial severance benefits if the executives lose their jobs or authority in a takeover

Greenmail:

When a company buys its own shares from a suitor for more than the going market price to stop the threat of a hostile takeover

Group of Seven:

The recently enlarged version of the Group of Five. The original five-the United States, France, Japan, West Germany, and Britain-meet several times a year to discuss economic issues. G-7, which includes the Netherlands and Italy, convenes at an annual economic summit.

Hard Currency:

A currency that is freely traded without many restrictions and for which there is usually strong demand. Hard currencies are often called freely convertible currencies.

Hedge or Hedging:

A method of buying and selling commodities, securities, or currencies to reduce the risk of negative price movements that might reduce a trader's profits. (See Forward Cover. )

Infant Industry Argument:

An argument in favor of the imposition of tariffs on goods imported into a country. The argument holds that tariffs raise the prices of foreign products, in effect lowering the prices of domestic goods and allowing young industries of the country to compete successfully with more established foreign firms.

In Play:

A term used by Wall Street deal makers to indicate that a company is on the auction block and will be acquired, whether or not it wants to be. For example, analysts would say that "the ABC Corporation is in play."

Interest Rate Swap:

A transaction in which two parties exchange interest payment streams based on an underlying principal amount. The three main types of swaps are coupon swaps (fixed rate and floating rate in the same currency), basis swaps (two floating rate indexes in the same currency), and cross-currency swaps (fixed rate in one currency and floating rate in the other).

International Fisher Effect:

A theory of the relationship between interest rates and exchange rates that implies that the currency of the country with the lower interest rate will strengthen in the future

Investment Climate:

Those external conditions in a host country that could significantly affect the success or failure of a foreign enterprise

Joint Venture:

An arrangement in which two or more organizations share in the ownership of a direct investment

JunkBond:

Formerly, bonds of corporations down on their luck. Now the name describes very high-yield, below-investment-grade bonds issued by many corporations to finance acquisitions and other activities. Corporate raiders have used junk bonds to finance hostile takeovers, but the Federal Reserve Board recently limited their use.

Just-in-Time Inventory Management:

An inventory control system perfected by Japanese manufacturing companies that controls the inflow and outflow of parts, components, and finished goods so that very little inventory is kept on hand

Kiwi:

A nickname for the New Zealand dollar

Leontief Paradox:

A surprising finding by Wassily Leontief that overall, U.S. exports are less capital intensive and more labor intensive than U.S. imports

Letter of Credit:

A document by which an importer's bank extends credit to the importer and agrees to pay the exporter

Leveraged Buy-Out:

An acquisition of a public company by a small group of investors, typically including the company's management, which then turns the company into a private corporation. Most of the purchase price is borrowed, and the debt is repaid from the company's profits or by selling assets.

Libor (London Interbank Offered Rate):

The rate the most creditworthy banks charge one another for overnight loans of Eurodollars in the London market

Licensing Agreement:

An agreement whereby one firm, for a fee, gives another rights to use such assets as trademarks, patents, copyrights, or know-how

Lock-Up:

An agreement between two companies designed to thwart a third-party suitor in a merger or acquisition. A typical lock-up involves the acquirer's receiving an option to buy the target's most valuable operations.

Management Contract:

An arrangement whereby one firm assists another by providing personnel to perform general or specialized management functions for a fee

Maquiladora Industry:

Also known as the in-bond industry, an industry developed by the Mexican government in which components from the United States are shipped duty-free to Mexico for assembly and are reexported to the United States

Mark:

The German currency

Market Maker:

An institution that stands willing to buy or sell an asset at some price, or an institution that deals in an asset so frequently and in such volume that others can buy or sell that asset at almost any time

Menu Approach:

The introduction of a broad range of financing modes-the "menu"-into a debt-restructuring process

Merchant Bank:

A bank involved primarily in placing and managing securities, activities not permitted U.S. banks in the United States

Merger:

The combining of the operations of two companies to create, in effect, a third company

Newly Industrialized Countries (NICS):

Developing countries that are importers of oil but are major exporters of manufactured goods

Glossary of Selected Financial Terms

New Money/Concerted Money:

A new loan package for a country that has lost access to external financial resources, created by equiproportional increases in the exposure of several banks and arranged through a bank adviSOry committee

Note Issuance Facility:

A medium-term arrangement enabling borrowers to issue short-term paper, typically of three or six months' maturity, in their own names. A group of underwriting banks may guarantee the availability of funds to the borrower by purchasing any unsold notes on each rollover date, or by providing standby credit

Organization for Economic Cooperation and Development (OECD):

A multilateral organization of twenty-four countries that helps its member countries formulate social and economic policies. All but three of the OECD countries (Greece, Portugal, and Turkey) are industrial market economies, also known as First World countries, as defined by the World Bank.

Organization for European Economic Cooperation (OEEC):

A sixteen-nation organization established in 1948 to facilitate the distribution of aid from the Marshall Plan. It evolved into the EEC and the EFTA, both regional economic associations.

Outsourcing:

A domestic company's use of foreign suppliers for components or finished products

Pac-Man Defense:

A tactic whereby the target company in a hostile takeover bid becomes the aggressor and tries to take over the would-be acquirer

Paris:

An affectionate name for the French franc

Poison Pill:

An issue of securities by a target company, often in the form of preferred stock granted to holders of common stock, designed to thwart a hostile takeover. The shares are initially worthless, but their "poison" takes effect when a hostile bidder acquires a specified percentage of the target company's stock. Then the shareholders can convert the preferred shares into the target's common stock, forcing the bidder to extend an offer to a much larger number of shares and increasing the cost of the takeover so much that the bidder ends the takeover try

Portfolio Investment:

An investment in either debt or equity that does not bring with it control

Position:

A company's or other investor's holdings of currencies

Premium (in foreign exchange):

The difference between the spot and forward exchange rate in the forward market, when the forward rate exceeds the spot rate and the domestic currency is quoted on the direct basis

Prioritization of Debt:

According one or more categories of claims preference over other claims

Product Life Cycle Theory:

The theory that certain kinds of products go through a cycle consisting of four stages (introduction, growth, maturity, and decline), and that the location of production and consumption will shift from one nation to another depending on the stage of the cycle

Pull:

A product promotion method that relies on mass media

Push:

A product promotion method that relies on direct selling techniques

Quota:

In the IMF, the payment made by each country that joins. The quota is determined by a formula based on the national income, gold and dollar balances, imports, and exports of a country. Twenty-five percent is paid in dollars, SDRs, or other reserve assets, and the remainder is paid in the member's currency.

Quoted Currency:

In exchange rate quotations, the currency whose numerical value is not one. For example, if the exchange rate between the pound and dollar were quoted at $1.40 per pound, the pound would be the base currency and the dollar would be the quoted currency.

Raider:

An investor who buys a big block of a company's stock in the hope either of accomplishing a hostile takeover or being bought out at a premium by the target company-a practice called greenmail

Rationalized Production:

The production of different components or different portions of a product line in different parts of the world to take advantage of varying costs of labor, . capital, and raw materials

Revaluation:

A formal change in an exchange rate in which the foreign currency value of the reference currency rises. A revaluation strengthens the reference currency.

Royalties:

Payments for use of assets abroad

Sections:

The divisions of Japan's three largest stock exchanges (Tokyo, Osaka, and Nagoya). The first section includes the stocks of established companies, which are subject to strict requirements on dividends and per-share earnings; the second section is less restricted and includes the stocks of smaller or new companies.

Securitization:

Narrowly, the process by which traditional bank assets, mainly loans or mortgages, are converted into negotiable securities. More broadly, the term refers to the development of markets for a variety of new negotiable instruments.

Self-tender Officer:

A company's offer to buy back its own shares, a move often used to keep the shares out of unfriendly hands

Settlement Date:

The date on which an exchange of money and securities actually takes place

Shark Repellent:

Provisions in a company's bylaws designed to reduce the odds of a hostile takeover bid. These include staggering the terms of directors so that a proxy fight cannot result in the takeover of an entire board and requiring that takeovers be approved by "super majorities"-75% or 80% of stockholders.

Short:

Lacking in a commodity required to satisfy contractual arrangements. For example, you're short in sterling when you don't have enough to cover your obligations and have to sell other currencies to acquire pounds.

Sogo Sosha:

Japanese trading companies that import and export merchandise

Special Drawing Right (SDR):

A unit of account issued to governments by the International Montetary Fund

Spot:

Denotes a deal to be settled within two working days. Such deals are used to establish a position.

Spot-a-Month:

Denotes a deal to be settled within a month

Spot-a-Week:

Denotes a deal to be settled within a week

Spotnext:

Denotes a deal to be settled within three days

Square:

Being neither short nor long in the commodities being handled. Junior dealers in many banks often start and end each day square, ideally having made a profit in between. (Overnight positions are decided by senior managers, who assess what is likely to happen to the value of currency holdings before the next dealing day.)

Standstill Agreement:

An agreement between a bidder and the target company that the bidder will stop buying the target's stock or leave the target alone for a specified period of time

Stock Buyback:

A company's repurchase of its own stock, which reduces the number of shares outstanding. With earnings spread over fewer shares, the earnings per share increase, and so should the price of the company's stock. The move can deter a hostile takeover.

Stocky:

The Swedish kroner-named after Stockholm, the capital of Sweden

Swap:

A market tactic that as revolutionized the way companies raise money overseas. There are two basic kinds of swaps: interest rate and currency. When currency holdings are mismatched with settlement dates, swaps are used to roll a position over from one day to the next. For example, a dealer who is long in dollars and short in deutsche marks due for settlement on the next day would sell the dollars to buy back tomnext and do the opposite with the marks. Interest rates would be paid on each holding currency based on the interest rate prevailing in the appropriate country. Spotnext and tomnext deals are, in effect, forms of swaps.

Swissie:

The Swiss franc

Target Company:

A company that is a takeover candidate

Tariff:

A governmental tax levied on goods shipped internationally (usually imports); a duty. It is the most common type of trade control.

Tax Haven Country:

A country with low income taxes or no taxes on income from a foreign source

Ten-Day Window:

The ten working days a company has to make public a major stock purchase.

U.S. law and the Securities and Exchange Commission require that if 5% or more of a company's stock is bought by an individual or a company, the purchase must be made public within ten working days after the stock changes hands, so that the company and investors will be aware of a possible change in control of the company.

Tender Offer:

A public offer to buy a company's stock. The offer is usually priced at a premium above the market price to get shareholders to sell their shares to the bidder. By law the offer must remain open for twenty working days.

Terms of Trade:

The quantity of imports that can be bought with a given quantity of a country's exports

Theory of Country Size:

The theory that larger countries are generally more nearly self-sufficient than smaller countries

Third-Country Nationals:

Employees of a company who are citizens neither of the country where they are working nor of the country where the firm is headquartered

Tomnext:

Denotes a deal to be settled on the next working day

Glossary of Selected Financial Terms

Transaction Exposure:

The extent to which the value of a firm's domestic currency cash flows are affected by changes in the values of foreign currencies used by its subsidiaries

Transfer Price:

The price charged for goods exchanged between entities that are related to each other through stock ownership, such as a parent company and its subsidiaries or subsidiaries owned by the same parent

Translation:

The rerendering of a financial statement in terms of a different currency

Transnational Corporation:

A company owned and managed by nationals in different countries. The term is synonymous with multinational corporation.

Turnkey Contract:

A contract for the construction of an operating facility, which is then turned over to the owner when it is ready to begin operations

Two-Tiered Tender Offer:

An offer to pay cash for part of a company's shares, usually enough to give the bidder control. The bidder then offers a lower price, often in bonds, for the rest of the shares. The idea is to get shareholders to "stampede" their holdings into the cash offer.

United Nations Conference on Trade and Development (UNCTAD):

A U.N. organization that helps to establish and monitors economic relations between developing and industrial countries

Unlisted Securities Market:

The second tier of the London Stock Exchange

Value Added Tax:

A form of tax in which each firm that contributes something to the manufacture of a product is taxed only on the value it has added to the product

Vertical Integration:

A form of corporate organization in which the various subsidiaries of the MNC are either suppliers or customers of each other. This structure allows the MNC to maintain control of different stages of production as the product moves toward final distribution.

Warrant:

An option that allows the holder to buy a company's stock or debt in the future at a specified price, usually above the current value of the debt or equity

White Knight:

A third party who takes over the target of a hostile takeover on a friendly basis, usually at the target's invitation, to avoid a hostile bid from another suitor

Yard:

A billion dollars

Zero Coupon Bonds:

Bonds that pay no periodic interest (hence their name), so the entire yield is obtained as a capital gain on the final maturity date