A
Glossary

 
 
AB Appellate Body
Accounting (translation) exposure Changes in a corporation’s financial statements as a result of changes in currency values.
ACP African, Caribbean and Pacific countries
Acquisition of assets In an acquisition of assets, one firm acquires the assets of another company. None of the liabilities supporting that asset are transferred to the purchaser.
Acquisition of stock In an acquisition of stock, one firm buys an equity interest in another.
Acquisition premium In a merger or acquisition, the difference between the purchase price and the preacquisition value of the target firm.
Active fund management An investment approach that actively shifts funds either between asset classes (asset allocation) or between individual securities (security selection).
Active income In the U.S. tax code, income from an active business as opposed to passive investment income.
Activity based cost (ABC) An accounting method that allocates costs to specific products based on breakdowns of cost drivers.
Ad valorem According to value
ADB Asia Development Bank, head quartered in Manila, Philippines.
Adjusted present value A valuation method that separately identifies the value of an unlevered project from the value of financing side effects.
Advance payment Trading method in which the buyer pays for the goods before they are sent out , method is used when buyer is of unknown credit worthiness.
Adventure It is also called "marine adventure." It is a term of art in the marine insurance business. All insured cargo owners and every shipper on that vessel are part of the adventure.
Adviory Capacity Used to indicate that a shippers agent or reprentative is not empowered to make definitive changes or adjustments without approval of the group or individual represented.
Advising bank Bank, usually in the country of the seller, whose primary function is to authenticate the letter of credit and advise it to the seller.
Agency costs The costs of monitoring management and ensuring that it acts in the best interest of other stakeholders.
Agent Someone who represents another. In corporate governance terminology, management is the agent of the principal stakeholders in a principal-agent relationship.
Aggregate demand The total demand of all potential buyers of a commodity or service. Includes all individuals and organizations who have the ability, willingness, and authority to purchase such products.
Air waybill A nonnegotiable instrument of domestic and international air transport which functions as a bill of lading.
All-in cost The percentage cost of a financing alternative, including any bank fees or placement fees.
Allocation-of-income rules In the U.S. tax code, these rules define how income and deductions are to be allocated between domestic-source and foreign-source income.
Allocational efficiency The efficiency with which a market channels capital toward its most productive uses.
American option An option that can be exercised anytime until expiration. (Contrast with European option.)
American shares Shares of a foreign corporation issued directly to U.S. investors through a transfer agent in accordance with SEC regulations.
American terms A foreign exchange quotation that states the U.S. dollar price per foreign currency unit. (Contrast with European terms.)
Andean Pact A regional trade pact that includes Venezuela, Colombia, Ecuador, Peru, and Bolivia.
Annuity A level stream of equal dollar payments that lasts for a fixed time. An example of an annuity is the coupon part of a bond with level annual payments.
Annuity factor The term used to calculate the present value of the stream of level payments for a fixed period.
Anti-dumping laws Laws that are enacted to prevent dumping-offering prices in the overseas market that is lower than that at which a product is sold in its home domestic market.
APEC Asia-Pacific Economic Cooperation
Appreciation An increase in a currency value relative to another currency in a floating exchange rate system.
Arbitrage The process of purchasing and selling foreign exchange, stocks, bonds and other commodities in several markets intending to make profit from the difference in price.
Arbitrage Pricing Theory (APT) An asset pricing model that assumes a linear relation between required return and systematic risk as measured by one or more factors according to Rj = mj + b1jF1 + ... + bKjFK + ej.
Asia-Pacific Economic Cooperation Pact (APEC) A loose economic affiliation of Southeast Asian and Far Eastern nations. The most prominent members are China, Japan, and Korea.
Ask (offer) rates The rate at which a market maker is willing to sell the quoted asset.
Asset allocation policy The target weights given to various asset classes in an investment portfolio.
Assets-in-place Those assets in which the firm has already invested. (Compare to growth options.)
Association of Southeast Asian Nations (ASEAN) A loose economic and geopolitical affiliation that includes Singapore, Brunei, Malaysia, Thailand, the Philippines, Indonesia, and Vietnam. Future members are likely to include Burma, Laos, and Cambodia.
At-the-money option An option with an exercise price that is equal to the current value of the underlying asset.
ATC Agreement on Textiles and Clothing
Autarky In models of international trade, a situation in which there is no cross-border trade.
Aval A guarantee of the buyer's credit provided by the guarantor, unless the buyer is of unquestioned financial standing. The aval is an endorsement note as opposed to a guarantee agreement.
Avalisation Payment undertaking given by a bank in respect of a bill of exchange drawn.
Average accounting return (AAR) The average project earnings after taxes and depreciation divided by the average book value of the investment during its life.
Balance of payments The International Money Fund’s accounting system that tracks the flow of goods, services, and capital in and out of each country.
Balance of trade The difference between a country’s total imports and exports.
Balance sheet A statement showing a firm's accounting value on a particular date. It reflects the equation, Assets = Liabilities + Stockholders' equity.
Bank-based corporate governance system A system of corporate governance in which the supervisory board is dominated by bankers and other corporate insiders.
Banker's draft A payment instrument used to make international payments.
Banker’s acceptance A time draft drawn on and accepted by a commercial bank.
Bargain Purchase Option A lease provision allowing the lessee, to purchase the equipment for a price predetermined at lease inception, that is substantially lower than the expected fair market value at the date the option can be exercised.
Barter Trade in which merchandise is exchanged directly for others without use of money.
Basic IRR rule Accept the project if IRR is greater than the discount rate; reject the project if IRR is less than the discount rate.
Basis The simple difference between two nominal interest rates.
Basis point Equal to 1/100 of one percent.
Basis risk The risk of unexpected change in the relationship between futures and spot prices.
Basis swap A floating-for-floating interest rate swap that pairs two floating rate instruments at different maturities (such as six-month LIBOR versus thirty-day U.S. T-bills).
Bearer bonds Bonds that can be redeemed by the holder. The convention in most West European countries is to issue bonds in registered form. (Contrast with registered bonds.)
Benchmarking A systematic procedure of comparing a company’s practices against the best practice and modifying actual knowledge to achieve superior performance.
Beneficiary A party who receives a legal benefit.
Beta A measure of an asset’s sensitivity to changes in the market portfolio (in the CAPM) or to a factor (in the APT). The beta of an asset j is computed as bj = rj,k (sj/sk), where k represents a market factor (such as returns to the market portfolio in the Capital Asset Pricing Model).
Bid rate The rate at which a market maker is willing to buy the quoted asset.
Bill of lading A document that establishes the terms and conditions of a contract between a shipper and a shipping company under which freight is to be moved between specified points for a specified charge.
Blank endorsement The method whereby a bill of lading is made into a freely negotiable document of title.
Blanket bond A bond that coves a group of people, articles or properties.
Blanket contracts A long-term contract in which the supplier promises to re-supply the buyers as needed at agreed-upon prices over the contracting time.
Blocked funds Cash flows generated by a foreign project that cannot be immediately repatriated to the parent firm because of capital flow restrictions imposed by the host government.
Bond equivalent yield A bond quotation convention based on a 365-day year and semiannual coupons. (Contrast with effective annual yield.)
Bonded warehouse A warehouse authorized by customs authorities for storage of goods on which payment of duties is deferred until the goods are removed.
Bonded Warehouse - a warehouse authorized for storage of good on which payment of duty is deferred until the goods are removed from the warehouse.
Break-even analysis Analysis of the level of sales at which a project would make zero profit.
Bretton Woods An agreement made near the end of World War II to promote exchange rate stability and facilitate the international flow of currencies.
Bretton Woods conference An international conference held in 1944 at Bretton Woods, New Hampshire, that established the International Monetary Fund and the World Bank.
CAA Clean Air Act (USA)
Call option The right to buy the underlying currency at a specified price and on a specified date.
Capital (financial) structure The proportion of debt and equity and the particular forms of debt and equity chosen to finance the assets of the firm.
Capital account A measure of change in cross-border ownership of long-term financial assets, including financial securities and real estate.
Capital asset pricing model (CAPM) An asset pricing model that relates the required return on an asset to its systematic risk.
Capital budgeting Planning and managing expenditures for long-lived assets.
Capital gain The positive change in the value of an asset, a negative capital gain is a capital loss.
Capital market line The line between the risk-free asset and the market portfolio that represents the mean-variance efficient set of investment opportunities in the CAPM.
Capital markets Markets for financial assets and liabilities with maturity greater than one year, including long-term government and corporate bonds, preferred stock, and common stock.
Capital rationing The case where funds are limited to a fixed dollar amount and must be allocated among the competing projects.
Capital structure The mix of the various debt and equity capital maintained by a firm. Also called financial structure. The composition of a corporation's securities used to finance its investment activities; the relative proportions of short-term debt, long-term debt, and owners' equity.
Carrier An individual or entity that transports persons or goods for compensation under the contract of carriage.
Cash Against Documents (CAD) Payment for goods where a commission house or other intermediary transfers title documents to the buyer upon payment in cash.
Cash cover In a letter of credit transaction, money deposited by the applicant with the issuing bank.
Cash flow Cash generated by the firm and paid to creditors and shareholders. It can be classified as (1) cash flow from operations, (2) cash flow from changes in fixed assets, and (3) cash flow from changes in net working capital.
Cash in advance Payment for goods prior to shipment.
Cash in Advance (CIA) Payment for goods in which the price is paid in full before the shipment is made. This type of payment is usually only made for very small shipments or when goods are made in order.
Centrally planned economy An economy in which the government, rather than free-market activity, controls the allocation of resources.
Certiciate of manufacture : A statement which is usually notarized in which the producer of goods certifies that the goods have been produced and are now available to the buyer.
Certificate of Acceptance Term used in leasing. A document whereby the lessee acknowledges that the equipment to be leased has been delivered, is acceptable, and has been manufactured or constructed according to specifications.
Certificate of analysis/certificate of inspection Documents that may be asked for by the importer and/or the authorities of the importing country, as evidence of quality or conformity to specifications.
Certificate of origin Documents that may be asked for by the authorities of the importing country, as evidence of the country of manufacture of the goods.
Certificate of product origin A document required by certain foreign countries for tariff purpose, certifying the country of origin of specified goods.
Change in net working capital Difference between net working capital from one period to another.
Characteristic line The line relating the expected return on a security to different returns on the market.
CHIPS (Clearing House Interbank Payments System) Financial network through which banks in the United States conduct their financial transactions.
CITES Convention on the International Trade in Endangered Species
Clean bill of lading a receipt for goods issued by a carrier that indicates that the goods were received in apparently good order and without damage.
Clean collection Collection in which only the financial document is sent through the banks.
Clearance The completion of customs entry requirements which results in the release of goods to the importer.
Clearing The settlement of a transaction, often involving exchange of payments and/or documentation.
Closed-end fund A mutual fund in which the amount of funds under management is fixed and ownership in the funds is bought and sold in the market like a depository receipt.
Codex Codex Alimentarius Commission (a world food standards body)
Collection order In a collection, the document in which the seller instructs the banks as to how the collection is to be conducted.
Commercial document General term for documents describing various aspects of a transaction, e.g. commercial invoice, transport document, insurance document, certificate of origin, certificate of inspection etc.
Commodity price risk The risk of unexpected changes in a commodity price, such as the price of oil.
Commodity swap A swap in which the (often notional) principal amount on at least one side of the swap is a commodity such as oil or gold.
Common Carrier An organization that transports persons or goods for a fee.
Comparative advantage The rule of economics that states that each country should specialize in producing those goods that it is able to produce relatively most efficiently.
Compliant documents Documents presented under a letter of credit that comply with all its terms and conditions. The banks are only obliged to pay the beneficiary if documents are totally compliant.
Compound interest Interest that is earned both on the initial principal and on interest earned on the initial principal in previous periods. The interest earned in one period becomes in effect part of the principal in a following period.
Compound value Value of a sum after investing it over one or more periods. Also called future value.
Compounding Process of reinvesting each interest payment to earn more interest. Compounding is based on the idea that interest itself becomes principal and therefore also earns interest in subsequent periods.
Confirming bank Bank that adds its payment undertaking to a letter of credit.
Consignee Party to whom goods are to be delivered.
Consignment Delivery of merchandise from an exporter (the consignor) to an agent (the consignee) under agreement that the consignee sells the merchandise of the account of the consignor, while the consignor retains title to the goods until the consignee sells them.
Consolidated income The sum of income across all of the multinational corporation’s domestic and foreign subsidiaries.
Consolidation A form of corporate reorganization in which two firms pool their assets and liabilities to form a new company.
Consular statement A document required by some foreign countries, describing a shipment of goods and showing information such as the consignor, consignee, and value of shipment. Certified by a consular official of the foreign country, it is used by the country's officials to verify the value, quantity, and nature of the shipment.
Contingency insurance Contingency insurance protects the exporter in any situation in which exporter responsibility relied on the buyer to insure, but sustained a loss because of inadequate coverage from that source. It will cover situations in which the FOB endorsement would have otherwise served had that been in force.
Contingent claim Claim whose value is directly dependent on, or is contingent on, the value of its underlying assets. For example, the debt and equity securities issued by a firm derive their value from the total value of the firm.
Continuous compounding Interest compounded continuously, every instant, rather than at fixed intervals.
Continuous quotation system A trading system in which buy and sell orders are matched with market makers as the orders arrive, ensuring liquidity in individual shares.
Contract manufacturing A firm allowing another firm to manufacture a pre-specified product.
Contribution margin Amount that each additional product, such as a jet engine, contributes to after-tax profit of the whole project: (Sales price - Variable cost) X (1 - T), where T is the corporate tax rate.
Controlled foreign corporation (CFC) In the U.S. tax code, a foreign corporation owned more than 50 percent either in terms of market value or voting power.
Convertible bonds Bonds sold with a conversion feature that allows the holder to convert the bond into common stock on or prior to a conversion date and at a prespecified conversion price.
Convertible currency A currency that can be traded for other currencies at will.
Convex tax schedule A tax schedule in which the effective tax rate is greater at high levels of taxable income than at low levels of taxable income. Such a schedule results in progressive taxation.
Corporate culture The set of values, beliefs, relationships between individuals and functions that guide the decisions of a company to achieve its objectives.
Corporate governance The way in which major stakeholders exert control over the modern corporation.
Corporation Form of business organization that is created as a distinct "legal person" composed of one or more actual individuals or legal entities. Primary advantages of a corporation include limited liability, ease of ownership, transfer, and perpetual succession.
Correlation A measure of the covariability of two assets that is scaled for the standard deviations of the assets (rAB = sAB / sAsB such that -1 < rAB < +1).
Correspondent bank A bank that, in its own country, handles the business of a foreign bank.
Cost and Freight A pricing term that indicates that the cost of the goods and freight charges are included in the quoted price.
Cost of equity capital The required return on the company's common stock in capital markets. It is also called the equity holders' required rate of return because it is what equity holders can expect to obtain in the capital market. It is a cost from the firm's perspective.
Counter credit Another name for back-to-back letter of credit.
Counter trade The sale of goods or services that are paid for in whole or part by the transfer of goods or services from a foreign country.
Countertrade Exchange of goods or services without the use of cash.
Countervailing Duties Duties levied on an imported good that has been unfairly subsidized by a foreign government. Imposing duties on the good is meant to raise the product's price to a "fair market value".
Country risk The political and financial risks of conducting business in a particular foreign country.
Coupon The stated interest on a debt instrument.
Coupon swap A fixed-for-floating interest rate swap.
Covariance A measure of the covariability of two assets (sAB = sAsB rAB).
Cover note Insurance document evidencing that insurance cover for a consignment has been taken out, but not giving full details.
Credit Risk Insurance : Insurance that covers the risk of nonpayment for delivered goods.
Cross-hedge A futures hedge using a currency that is different from, but closely related to, the currency of the underlying exposure.
CTD WTO Committee on Trade and Development
Culture A collective mental paradigms that a society imparts to individuals in the form of behavior patterns, shared values, norms and institutions.
Cumulative translation adjustment (CTA) An equity account under FAS #52 that accumulates gains or losses caused by translation accounting adjustments.
Currency (foreign exchange) risk The risk of unexpected changes in foreign currency exchange rates.
Currency coupon swap A fixed-for-floating rate nonamortizing currency swap traded primarily through international commercial banks.
Currency cross-hedge A hedge of currency risk using a currency that is correlated with the currency in which the underlying exposure is denominated.
Currency of reference The currency that is being bought or sold. It is most convenient to place the currency of reference in the denominator of a foreign exchange quote.
Currency option A contract giving the option holder the right to buy or sell an underlying currency at a specified price and on a specified date. The option writer (seller) holds the obligation to fulfill the other side of the contract.
Currency swap A contractual agreement to exchange a principal amount of two different currencies and, after a prearranged length of time, to give back the original principal. Interest payments in each currency are also typically swapped during the life of the agreement.
Current account A measure of a country’s international trade in goods and services.
Current account balance A broad measure of import-export activity that includes services, travel and tourism, transportation, investment income and interest, gifts, and grants along with the trade balance on goods.
Current rate method A translation accounting method, such as FAS #52 in the United States, that translates monetary and real assets and monetary liabilities at current exchange rates. FSA #52 places any imbalance into an equity account called the “cumulative translation adjustment.”
Custom union A form of regional economic integration group that eliminates tariffs among member nations and establishes common external tariffs.
Customhouse broker A person or firm obtains the license from the treasury department of its Country when required, and help clients (importers) to enter and declare goods through customs.
Customs The authorities designated to collect duties levied by a country on imports and exports.
Dealing desk (trading desk) The desk at an international bank that trades spot and forward foreign exchange.
Debt capacity The amount of debt that a firm chooses to borrow to support a project.
Debt-for-equity swap A swap agreement to exchange equity (debt) returns for debt (equity) returns over a prearranged length of time.
Decision trees A graphical analysis of sequential decisions and the likely outcomes of those decisions.
Deferred Payment Credit A type of letter of credit which provides for payment some time after presentation of the shipping documents by the exporter.
Deliverable instrument The asset underlying a derivative security. For a currency option, the deliverable instrument is determined by the options exchange and is either spot currency or an equivalent value in futures contracts.
Delta-cross-hedge A futures hedge that has both currency and maturity mismatches with the underlying exposure.
Delta-hedge A futures hedge using a currency that matches the underlying exposure and a maturity date that is different from, but preferably close to, the maturity of the underlying exposure.
Demand management A business process with the intention to coordinate and influence all sources of demand for a firm’s products.
Depository receipt A derivative security issued by a foreign borrower through a domestic trustee representing ownership in the deposit of foreign shares held by the trustee.
Depreciation A decrease in a currency value relative to another currency in a floating exchange rate system.
Derivative security A financial security whose price is derived from the price of another asset.
Devaluation A decrease in a currency value relative to another currency in a fixed exchange rate system.
Devaluation The official lowering of the value of one country's currency in terms of one or more foreign currencies.
DFID Department for International Development (UK)
Difference check The difference in interest payments that is exchanged between two swap counterparties.
Direct costs of financial distress Costs of financial distress that are directly incurred during bankruptcy or liquidation proceedings.
Direct exporting Marketer takes direct responsibility for its products abroad by selling them directly to foreign customers or through local representatives in foreign markets.
Direct Financing Lease A non-leveraged lease by a lessor in which the lease meets any of the definitional criteria of a capital lease, plus certain additional criteria.
Direct product profitability Measuring the direct costs associated with handling a product from the warehouse until a customer buys from the retail store.
Direct terms The price of a unit of foreign currency in domestic currency terms, such as $.6548/DM for a U.S. resident. (Contrast with indirect quote.)
Discount If a bond is selling below its face value, it is said to sell at a discount.
Discounted cash flow A valuation methodology that discounts expected future cash flows at a discount rate appropriate for the risk, currency, and maturity of the cash flows.
Discounted payback The length of time needed to recoup the present value of an investment; sometimes used when investing in locations with high country risk.
Discounted payback period rule An investment decision rule in which the cash flows are discounted at an interest rate and the payback rule is applied on these discounted cash flows.
Discounting Calculating the present value of a future amount. The process is the opposite of compounding.
Discretionary reserves Balance sheet accounts that are used in some countries to temporarily store earnings from the current year or the recent past.
Discriminatory pricing The practice that selling a product or service at different prices that do not reflect a proportional difference in costs.
Dispatch An amount paid by a vessel's operator to a charter if loading or unloading is completed in less time than stipulated in the charter party.
Distributor A foreign agent who sells for a supplier directly and maintains an inventory of the supplier’s product.
Diversifiable (unique) (unsystematic) risk A risk that specifically affects a single asset or a small group of assets. Also called unique or unsystematic risk.
DOC Department of Commerce (USA)
Dock receipt A receipt issued by an ocean carrier to acknowledge receipt of a shipment at the carrier's dock or warehouse.
Dock Statement A receipt issued by an ocean carrier to acknowledge the receipt of a shipment at the carrier's dock or warehouse facilities.
Domestic bonds Bonds issued and traded within the internal market of a single country and denominated in the currency of that country.
Domestic International Sales Corporation In the U.S. tax code, a specialized sales corporation whose income is lumped into the same income basket as a foreign sales corporation.
Domestic Liquidity The aggregate of money supply, quasi-money or savings and time deposits, and deposit substitutes.
Draft (trade bill, bill of exchange) A means of payment whereby a drawer (the importer) instructs a drawee (either the importer or its commercial bank) to pay the payee (the exporter).
DSB Dispute Settlement Body
DSP Dispute Settlement Panel
DSU Dispute Settlement Understanding
Dumping Selling merchandise in another country at a price below the price at which the same merchandise is sold in the home market or selling such merchandise below the costs incurred in production and shipment.
Duty A tax imposed on imports by the customs authority of a country.
Earnings response coefficient The relation of stock returns to earnings surprises around the time of corporate earnings announcements.
Eclectic paradigm A theory of the multinational firm that posits three types of advantage benefiting the multinational corporation: ownership-specific, location-specific, and market internalization advantages.
Economic exposure Change in the value of a corporation’s assets or liabilities as a result of changes in currency values.
Economic integration The integration of commercial and financial activities among countries through the abolishment of economic discrimination.
Economic union A group that combines the economic characteristics of a common market with some degree of harmonization of monetary and fiscal policies.
Economic value added A method of performance evaluation that adjusts accounting performance with a charge reflecting investors’ required return on investment.
Economies of scale Achieving lower average cost per unit through a larger scale of production.
Economies of vertical integration Achieving lower operating costs by bringing the entire production chain within the firm rather than contracting through the marketplace.
Effective annual interest rate the interest rate as if it were compounded once per time period rather than several times per period.
Effective annual yield Calculated as (1+i/n)n, where i is the stated annual interest rate and n is the number of compounding periods per year. (Contrast with bond equivalent yield and money market yield.)
Efficient frontier The mean-variance efficient portion of the investment opportunity set.
Efficient market A market in which prices reflect all relevant information.
Embargo A type of quota that totally disallows the imports of a specific product or all products from a specific country.
Emerging stock markets The stock markets of emerging economies. These markets typically have higher expected returns than established markets but also higher risk.
Employment Rate The ratio, in percent, of the number of employed persons to total labor force.
Endogenous uncertainty Price or input cost uncertainty that is within the control of the firm, such as when the act of investing reveals information about price or input cost.
Engagement The assumption of payment responsibility in respect of a letter of credit, e.g.
Equity-linked Eurobonds A Eurobond with a convertibility option or warrant attached. Eurobonds: Fixed rate Eurocurrency deposits and loans and Eurocurrencies with longer maturities than five years.
Erosion Cash-flow amount transferred to a new project from customers and sales of other products of the firm.
Euro The single currency of the European Economic and Monetary Union (EMU) introduced in January 1999. EMU members are Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain.
Eurobond A bond that is denominated in a currency other than that of the country of issue.
Eurocurrencies Deposits and loans denominated in one currency and traded in a market outside the borders of the country issuing that currency (e.g., Eurodollars).
Eurodollars Dollar-denominated deposits held in a country other than the United States.
European currency unit (ECU) A trade-weighted basket of currencies in the European Exchange Rate Mechanism (ERM) of the European Union.
European exchange rate mechanism (ERM) The exchange rate system used by countries in the European Union in which exchange rates are pegged within bands around an ERM central value.
European Monetary System (EMS) An exchange rate system based on cooperation between European Union central banks.
European option An option that can be exercised only at expiration. (Contrast with American option.)
European terms A foreign exchange quotation that states the foreign currency price of one U.S. dollar. (Contrast with American terms.)
European Union (EU) Formerly the European Economic Community, a regional trade pact that includes Belgium, France, Germany, Italy, the Netherlands, Portugal, Spain, and the United Kingdom (England, Wales, Northern Ireland, and Scotland).
Exchange rate The price of one currency in terms of another, i.e. the number of units of one currency that may be exchanged for one unit of another currency.
Exchange rate The price of one currency in terms of another.
Exchange rate The price of one currency in terms of another.
Exchange risk The risk that losses may result from the changes in the relative values of different currencies.
Exercise price The price at which an option can be exercised (also called the striking price).
EXIMBANK Export-Import Bank of the United States. Provides guarantees of working capital loans for U.S. exporters, guarantees the repayment of loans or makes loans to foreign purchasers of U.S. goods and services, and provides credit insurance against non-payment by foreign buyers for political or commercial risk. Currently, the Bank is focusing on critical areas such as emphasizing exports to developing countries, aggressively countering trade subsidies of other governments, stimulating small business transactions, promoting the export of environmentally beneficial goods and services, and expanding project finance capabilities. Ex-Im Bank is not an aid or development agency, but a government held corporation, managed by a Board of Directors.
Exogenous uncertainty Price or input cost uncertainty that is outside the control of the firm.
Expiry date The date when a letter of credit is no longer valid - i.e. the date beyond which it cannot be used.
Explicit tax A tax that is explicitly collected by a government; includes income, withholding, property, sales, and value-added taxes and tariffs.
Export An entry mode into international markets that relies on domestic production and shipments to foreign markets through sales agents or distributors, foreign sales branches, or foreign sales subsidiaries.
Export Administration Regulations (EAR) It stands for Export Administrative Regulations which carry both civil and criminal penalties. The EAR are available by subscription from the Superintendent of Documents, U.S. Government Printing Office, Washington, D.C. 20401 (tel no: 202-275 2091).
Export broker An individual or firm that helps to locate and introduce buyers and seller in international business for a commission but does not take part in actual sales transaction.
Export financing interest In the U.S. tax code, interest income derived from goods manufactured in the United States and sold outside the United States as long as not more than 50 percent of the value is imported into the United States.
Export License A general export license covers the exportation of goods not restricted under the terms of a validated export license. No formal application or written authorization is needed to ship exports under a general export license.
Export management company A foreign or domestic company that acts as a sales agent and distributor for domestic exporters in international markets.
Export Management Company A private firm that transacts export business on behalf of its client companies in return for a commission, salary, or retainer.
Export Restraints Quantitative restrictions imposed by exporting countries to limit exports to specified foreign markets, usually as a follow-up to formal or informal agreements reached with importing countries.
Export Subsidies Any form of government payment that helps an exporter or manufacturing concern to lower its export costs.
Export Trading Company (ETC) A company that facilitates the export of goods and services. An ETC can either act as the export department for producers or take title to the product and export for its own account.
Expropriation A specific type of political risk in which a government seizes foreign assets.
External market A market for financial securities that are placed outside the borders of the country issuing that currency.
Extraterritoriality A government practice which applies its laws outside its territorial boundaries.
Face value The value of a bond that appears on its face. Also referred to as par value or principal.
Factor model A model that assumes a linear relation between an asset’s expected return and one or more systematic risk factors.
Factoring Sale of an accounts receivable balance to buyers (factors) that are willing and able to bear the costs and risks of credit and collections.
Fast Track Negotiating Authority provided by the U.S. Congress to the Executive Branch to negotiate amendment-proof trade agreements.
FDA (Food and Drug Administration) A United States agency which has power to set standards for food, drugs, cosmetics, and devices. Before new drugs can be approved by the FDA and be released to the market, they must undergo extensive laboratory testing within the pharmaceutical company. The company must then file a formal and thorough application for approval with the FDA.
Financial (capital) structure The proportion of debt and equity and the particular forms of debt and equity chosen to finance the assets of the firm.
Financial engineering The process of innovation by which new financial products are created.
Financial innovation The process of designing new financial products, such as exotic currency options and swaps.
Financial markets Markets for financial assets and liabilities.
Financial policy The corporation’s choices regarding the debt-equity mix, currencies of denomination, maturity structure, method of financing investment projects, and hedging decisions with a goal of maximizing the value of the firm to some set of stakeholders.
Financial price risk The risk of unexpected changes in a financial price, including currency (foreign exchange) risk, interest rate risk, and commodity price risk.
Financial risk Financial risk refers to unexpected events in a country’s financial, economic, or business life.
Financial service income In the U.S. tax code, income derived from financial services such as banking, insurance, leasing, financial service management fees, and swap income.
Financial strategy The way in which the firm pursues its financial objectives.
First-to-market advantage Also know as "first-mover advantage." The idea of first-mover advantage is that the initial occupant of a strategic position or niche (market segment) gains access to resources and capabilities that a follower cannot match.
Fixed cost A cost that is fixed in total for a given period of time and for given volume levels. It is not dependent on the amount of goods or services produced during the period.
Fixed exchange rate system An exchange rate system in which governments stand ready to buy and sell currency at official exchange rates.
Fixed forward contract Currency is bought or sold at a given future date.
FOB Endorsement Used with FOB, FAS, C&F, or CFR (but not CIF) quotations, FOB sales endorsement to an open marine policy can cover transit risk from the point of origin until title transfers. In these instances, the exporter relies on the importer to insure.
Force Mjeure The title of a standard clause in marine contracts exempting the parties for non-fulfillment of their obligations as a result of conditions beyond their control, such as Acts of God, war.
Foreign base company income In the U.S. tax code, a category of Subpart F income that includes foreign holding company income and foreign base company sales and service income.
Foreign bonds Bonds that are issued in a domestic market by a foreign borrower, denominated in domestic currency, marketed to domestic residents, and regulated by the domestic authorities.
Foreign branch A foreign affiliate that is legally a part of the parent firm. In the U.S. tax code, foreign branch income is taxed as it is earned in the foreign country.
Foreign direct investment (FDI) The act of building productive capacity directly in a foreign country.
Foreign Equity Requirements Investment rules that limit foreign ownership to a minority holding is a company.
Foreign exchange Currency of another country, or a financial instrument that facilitates payment from one currency to another.
Foreign exchange (currency) risk The risk of unexpected changes in foreign currency exchange rates.
Foreign exchange broker Brokers serving as matchmakers in the foreign exchange market that do not put their own money at risk.
Foreign exchange dealer A financial institution making a market in foreign exchange.
Foreign sales corporation (FSC) In the U.S. tax code, a specialized sales corporation whose income is lumped into the same income basket as that of a domestic international sales corporation.
Foreign tax credit (FTC) In the U.S. tax code, a credit against domestic U.S. income taxes up to the amount of foreign taxes paid on foreign-source income.
Foreign trade zone A physical area in which the government allows firms to delay or avoid paying tariffs on imports.
Foreign-source income Income earned from foreign operations.
Forfaiting A form of factoring in which large, medium- to long-term receivables are sold to buyers (forfaiters) that are willing and able to bear the costs and risks of credit and collections.
Forward contract A commitment to exchange a specified amount of one currency for a specified amount of another currency on a specified future date.
Forward discount A currency whose nominal value in the forward market is lower than in the spot market. (Contrast with forward premium.)
Forward market A market for forward contracts in which trades are made for future delivery according to an agreed-upon delivery date, exchange rate, and amount.
Forward parity When the forward rate is an unbiased predictor of future spot exchange rates.
Forward premium A currency whose nominal value in the forward market is higher than in the spot market. (Contrast with forward discount.)
Franchise agreement An agreement in which a domestic company (the franchisor) licenses its trade name and/or business system to an independent company (the franchisee) in a foreign market.
Franchising A parent company grants another independent entity the privilege to do business in a pre-specified manner, including manufacturing, selling products, marketing technology and other business approach.
Free cash flow Cash flow after all positive-NPV projects have been exhausted in the firm’s main line of business.
Free port An area such as a port city into which merchandise may legally be moved without payment of duties.
Free trade zone An area to which goods may be imported for processing and subsequent export on duty-free basis.
Free-trade zone A port designated by the government of a country for duty-free entry on any non-prohibited good. Merchandise may be stored, used or manufactured in the zone and reexported without duties being paid.
Freely floating exchange rate system An exchange rate system in which currency values are allowed to fluctuate according to supply and demand forces in the market without direct interference by government authorities.
Freight forwarder An independent business that handles export shipment on behalf of the shipper without vested interest in the products. A freight forwarder is a good source of information and assistance on export regulations and documentation, shipping methods, and foreign import regulations.
Freight shippers (freight forwarders) Agents used to coordinate the logistics of transportation.
Frequency distribution The organization of data to show how often certain values or ranges of values occur.
Full Payout Lease A lease in which the lessor recovers, through the lease payments, all costs incurred in the lease plus an acceptable rate of return, without any reliance upon the leased equipment's future residual value.
Fundamental analysis A method of predicting exchange rates using the relationships of exchange rates to fundamental economic variables such as GNP growth, money supply, and trade balances.
Future value Value of a sum after investing it over one or more periods. Also called compound value.
Futures commission merchant A brokerage house that is authorized by a futures exchange to trade with retail clients.
Futures contract A commitment to exchange a specified amount of one currency for a specified amount of another currency at a specified time in the future. Futures contracts are periodically marked-to-market, so that changes in value are settled throughout the life of the contract. Exchange-traded currency futures are marked-to-market on a daily basis.
General Agreement on Tariffs and Trade (GATT) A worldwide trade agreement designed to reduce tariffs, protect intellectual property, and set up a dispute resolution system. The agreement is overseen by the World Trade Organization (WTO).
Generalized autoregressive conditional heteroskedasticity A time series model in which returns at each instant of time are normally distributed but volatility is a function of recent history of the series.
Generally Accepted Accounting Principles (GAAP) A common set of accounting concepts, standards, and procedures by which financial statements are prepared.
Geocentric multinational A multinational in which the subsidiaries are neither satellites nor independent city states, but parts of a whole whose focus is on worldwide objectives as well as local objectives, each part making its unique contribution with its unique competence.
Global bond A bond that trades in the Eurobond market as well as in one or more national bond markets.
Gold exchange standard An exchange rate system used from 1925 to 1931 in which the United States and England were allowed to hold only gold reserves while other nations could hold gold, U.S. dollars, or pounds sterling as reserves.
Gold standard An exchange rate system used prior to 1914 in which gold was used to settle national trade balances. Also called the “classical gold standard.”
Goodwill The accounting treatment of an intangible asset such as the takeover premium in a merger or acquisition.
Gray-market imports Gray-market imports are parallel distribution of genuine goods by intermediaries other than authorized channel members.
Greenfield Form of investment in which the firm designs and builds a new factory from scratch, starting with nothing but a "greenfield." A "greenfield strategy" is a form of Foreign Direct Investment (FDI) that involves building new facilities.
Greenmail Buying shares on the open market in the hope that the target’s business partners will buy back the shares at inflated prices.
Gross Domestic Product (GDP) A measure of the market value of goods and services produced by a nation. Unlike Gross National Product, GDP excludes profits made by U.S. firms overseas, as well as the share of reinvested earning in U.S. firms' foreign-based operations.
Growing perpetuity A constant stream of cash flows without end that is expected to rise indefinitely. For example, cash flows to the landlord of an apartment building might be expected to rise a certain percentage each year.
Growth options The positive-NPV opportunities in which the firm has not yet invested. The value of growth options reflects the time value of the firm’s current investment in real assets as well as the option value of the firm’s potential future investments.
Growth stocks Stocks with high price/book or price/earnings ratios. Historically, growth stocks have had lower average returns than value stocks (stocks with low price/book or PE ratios) in a variety of countries.
Guideline Lease A lease written under criteria established by the IRS to determine the availability of tax benefits to the lessor.
Hedge A position or operation that offsets an underlying exposure. For example, a forward currency hedge uses a forward currency contract to offset the exposure of an underlying position in a foreign currency. Hedges reduce the total variability of the combined position.
Hedge funds Private investment partnerships with a general manager and a small number of limited partners.
Hedge portfolio The country-specific hedge portfolio in the International Asset Pricing Model serves as a store of value (like the risk-free asset in the CAPM) as well as a hedge against the currency risk of the market portfolio.
Hedge quality Measured by the r-square in a regression of spot rate changes on futures price changes.
Hedge ratio The ratio of derivatives contracts to the underlying risk exposure.
Hedging Reducing the risk of a cash position by using the futures instruments to offset the price movement of the cash asset.
High-withholding-tax interest income In the U.S. tax code, interest income that has been subject to a foreign gross withholding tax of 5 percent or more.
Historical volatility Volatility estimated from a historical time series.
Holding-period return The rate of return over a given period.
Home asset bias The tendency of investors to overinvest in assets based in their own country.
Homogeneous expectations Idea that all individuals have the same beliefs concerning future inestments, profits, and dividends.
Hysteresis The behavior of firms that fail to enter markets that appear attractive and, once invested, persist in operating at a loss. This behavior is characteristic of situations with high entry and exit costs along with high uncertainty.
Implicit tax Lower (higher) before-tax required returns on assets that are subject to lower (higher) tax rates.
Implied volatility The volatility that is implied by an option value given the other determinants of option value.
Import license A document required and issued by some national government authorizing the importation of goods into their individual countries.
Import Licenses Licenses required by some countries to bring in a foreign-made good. In many cases, import licenses are also used by the issuing country to control the quantity of imported items.
In-the-money option An option that has value if exercised immediately.
Income baskets In the U.S. tax code, income is allocated to one of a number of separate income categories. Losses in one basket may not be used to offset gains in another basket.
Income statement Financial report that summarizes a firm's performance over a specified time period.
Incremental IRR IRR on the incremental investment from choosing a large project instead of a smaller project.
Indeminity Clause : A clause in which the one party indemnifies the other. In leasing, generally a clause whereby the lessee indemnifies the lessor from loss of tax benefits.
Independent project A project whose acceptance or rejection is independent of the acceptance or rejection of other projects.
Index futures A futures contract that allows investors to buy or sell an index (such as a foreign stock index) in the futures market.
Index options A call or put option contract on an index (such as a foreign stock market index).
Index swap A swap of a market index for some other asset (such as a stock-for-stock or debt-for-stock swap).
Indication pricing schedule A schedule of rates for an interest rate or currency swap.
Indirect costs of financial distress Costs of financial distress that are indirectly incurred prior to formal bankruptcy or liquidation.
Indirect customers The end-users (e.g., consumers) of the products and services which they have purchased from the wholesalers, retailers, and consignees, the direct customers of the seller.
Indirect diversification benefits Diversification benefits provided by the multinational corporation that are not available to investors through their portfolio investment.
Indirect exporting Export products to foreign markets by using an intermediary, usually export trading company based in the exporter’s country.
Indirect terms The price of a unit of domestic currency in foreign currency terms such as DM1.5272/$ for a U.S. resident. (Contrast with direct terms.)
Inflation Rate The general increase in the price level herein measured by the growth rate in the GNP Implicit Price Index or the general price deflator.
Informational efficiency Whether or not market prices reflect information and thus the true (or intrinsic) value of the underlying asset.
Integrated financial market A market in which there are no barriers to financial flows and purchasing power parity holds across equivalent assets.
Intellectual property Material or communicable result in forms of discoveries, inventions, designs and literary and art works. Of scientific, humanistic, literary, and artistic endeavor. It includes, but is not limited to, works in the form of scientific discoveries and inventions, designs, patents, trademarks, books, monographs, papers, paintings, drawings and sculpture, performances, computer software, and lecture and conference presentations. In the text, individual items of intellectual property are referred to as works or properties.
Intellectual property rights Patents, copyrights, and proprietary technologies and processes that are the basis of the multinational corporation’s competitive advantage over local firms.
Interbank spread The difference between a bank’s offer and bid rates for deposits in the Eurocurrency market.
Interest rate risk The risk of unexpected changes in an interest rate.
Interest rate swap An agreement to exchange interest payments for a specific period of time on a given principal amount. The most common interest rate swap is a fixed-for-floating coupon swap. The notional principal is typically not exchanged.
Intermediated market A financial market in which a financial institution (usually a commercial bank) stands between borrowers and savers.
Intermodal The use of two or more modes of transportation to complete a cargo move; truck/rail/ship, or truck/air, for example.
Internal market A market for financial securities that are denominated in the currency of a host country and placed within that country.
Internal rate of return (IRR) A discount rate at which the net present value of an investment is zero. The IRR is a method of evaluating capital expenditure proposals.
International Asset Pricing Model (IAPM) The international version of the CAPM in which investors in each country share the same consumption basket and purchasing power parity holds.
International Bank for Reconstruction and Development Also called the World Bank, an international organization created at Breton Woods in 1944 to help in the reconstruction and development of its member nations.
International bonds Bonds that are traded outside the country of the issuer. International bonds are either foreign bonds trading in a foreign national market or Eurobonds trading in the international market.
International Chamber of Commerce International non-governmental body concerned with promotion of trade and harmonisation of trading practice. Responsible for drafting and publishing:
International Monetary Fund (IMF) An international organization that compiles statistics on cross-border transactions and publishes a monthly summary of each country’s balance of payments.
International monetary system The global network of governmental and commercial institutions within which currency exchange rates are determined.
Intrinsic value of an option The value of an option if exercised immediately.
Investment agreement An agreement specifying the rights and responsibilities of a host government and a corporation in the structure and operation of an investment project
Investment opportunity set The set of possible investments available to an individual or corporation.
Investment philosophy The investment approach-active or passive-pursued by an investment fund and its managers.
Joint venture An agreement of two or more companies to pool their resources to execute a well-defined mission. Resource commitments, responsibilities, and earnings are shared according to a predetermined contractual formula.
Just In Time (JIT) An organization-wide practice that keeps the inventory to the minimum and provides customers the right goods or service at the right time.
Keiretsu Collaborative groups of vertically and horizontally integrated firms with extensive share cross-holdings and with a major Japanese bank or corporation at the center.
Landed cost The quoted or invoiced cost of a commodity, plus any inbound transportation charges.
Law of one price (purchasing power parity) The principle that equivalent assets sell for the same price. The law of one price is enforced in the currency markets by financial market arbitrage.
Lead manager The lead investment bank in a syndicate selling a public securities offering.
Leading and lagging Reduction of transaction exposure through timing of cash flows within the corporation.
Lease A contract in which one party conveys the use of an asset to another party for a specific period of time at a predetermined rate.
Lease Rate The periodic rental payment to a lessor for the use of assets. Others may define lease rate as the implicit interest rate in minimum lease payments.
Less-Developed Country (LDC) A country whose annual per capita income is between $300 and $700. LDCs are formally recognized as such by the United Nations Conference on Trade and Development, which promotes the economic development of LDCs.
Letter of credit (L/C) A letter issued by an importer’s bank guaranteeing payment upon presentation of specified trade documents (invoice, bill of lading, inspection and insurance certificates, etc.).
Leveraged Lease The lessor provides an equity portion (usually 20 to 40 percent) of the equipment cost and lenders provide the balance on a nonrecourse debt basis.
License agreement A sales agreement in which a domestic company (the licensor) allows a foreign company (the licensee) to market its products in a foreign country in return for royalties, fees, or other forms of compensation.
Licensing One firm gives another firm a permission, which allows the latter to engage in an activity otherwise legally forbidden to it. Such activities usually involve the transfer of intellectual and proprietary knowledge in return for royalty as revenue.
Limited flexibility exchange rate system The International Monetary Fund’s name for an exchange rate system with a managed float.
Liquid market A market in which traders can buy or sell large quantities of an asset when they want and with low transactions costs.
Liquidity The ease with which an asset can be exchanged for another asset of equal value.
Loanable funds The pool of funds from which borrowers can attract capital; typically categorized by currency and maturity.
Location-specific advantages Advantages (natural and created) that are available only or primarily in a single location.
London Interbank Bid Rate (LIBID) The bid rate that a Euromarket bank is willing to pay to attract a deposit from another Euromarket bank in London.
London Interbank Offer Rate (LIBOR) The offer rate that a Euromarket bank demands in order to place a deposit at (or, equivalently, make a loan to) another Euromarket bank in London.
Long position A position in which a particular asset (such as a spot or forward currency) has been purchased.
Macro country risks Country (or political) risks that affect all foreign firms in a host country.
Management contract An agreement by which one firm allows another to manage its foreign activities on behalf of it. The managing firm is forbidden to make capital investment or financing decisions.
Managerial flexibility Flexibility in the timing and scale of investment provided by a real investment option.
Manifest Document that lists in detail al the bills of lading issued by a carrier of its agent or master, i.e., a detailed summary of the total cargo of a vessel.
Margin account An account maintained by an investor with a brokerage firm in which securities may be purchased by borrowing a portion of the purchase price from the brokerage, or may be sold short by borrowing the securities from the brokerage firm.
Margin requirement A performance bond paid upon purchase of a futures contract that ensures the exchange clearinghouse against loss.
Market Access The extent to which a domestic industry can penetrate a related market in a foreign country. Access can be limited by tariffs or other non trade barriers.
Market economy An economy in which resources allocations, prices and other marketing decisions are primarily determined by the free market.
Market failure A failure of arms-length markets to efficiently complete the production of a good or service. In the eclectic paradigm, the multinational corporation’s market internalization advantages take advantage of market failure.
Market internalization advantages Advantages that allow the multinational corporation to internalize or exploit the failure of an arms-length market to efficiently accomplish a task.
Market maker A financial institution that quotes bid (buy) and offer (sell) prices.
Market model (one-factor market model) The empirical version of the security market line: Rj = aj + bjRM + ej.
Market portfolio A portfolio of all assets weighted according to their market values.
Market risk premium The risk premium on an average stock; (E[RM]-RF).
Market timing An investment strategy of shifting among asset classes in an attempt to anticipate which asset class(es) will appreciate or depreciate during the coming period.
Market-based corporate governance system A system of corporate governance in which the supervisory board represents a dispersed set of largely equity shareholders.
Marketing mix The set of marketing tools that the firm uses to pursue its marketing objectives in the target market. One of the most popular classifications of marketing mix tools is called the "4 P's" of marketing: product, price, place, and promotion.
Marking to market The process by which changes in the value of futures contracts are settled daily.
Maturity date The date on which the last payment on a bond is due.
Mean-variance efficient An asset that has higher mean return at a given level of risk (or lower risk at a given level of return) than other assets.
Mercosur The “common market of the South,” which includes Argentina, Brazil, Paraguay, and Uruguay in a regional trade pact that reduces tariffs on intrapact trade by up to 90 percent.
Merger A form of corporate acquisition in which one firm absorbs another and the assets and liabilities of the two firms are combined.
Method of payment The way in which a merger or acquisition is financed.
Micro country risks Country risks that are specific to an industry, company, or project within a host country.
Middle Market A market segment generally represented by financing under $2 million. In leasing this sector is dominated by single investor leases.
Miller and Modigliani’s irrelevance proposition If financial markets are perfect, then corporate financial policy (including hedging policy) is irrelevant.
Monetary assets and liabilities Assets and liabilities with contractual payoffs.
Money market hedge A hedge that replicates a currency forward contract through the spot currency and Eurocurrency markets.
Money market yield A bond quotation convention based on a 360-day year and semiannual coupons. (Contrast with bond equivalent yield.)
Money markets Financial markets for debt securities that pay off in the short term (usually less than one year).
Money Supply The total amount of currency in circulation and peso deposits subject to check of the monetary system.
More flexible exchange rate system The International Monetary Fund’s name for a floating exchange rate system.
Multinational corporation A corporation with operations in more than one country.
Multinational netting Elimination of offsetting cash flows within the multinational corporation.
Mutually exclusive investment decisions Investment decisions in which the acceptance of a project precludes the acceptance of one or more alternative projects.
National tax policy The way in which a nation chooses to allocate the burdens of tax collections across its residents.
Nationalization A process whereby privately owned companies are brought under state ownership and control. (Contrast with privatization.)
Negative-NPV tie-in project A negative-NPV infrastructure development project that a local government requires of a company pursuing a positive-NPV investment project elsewhere in the economy.
Net asset value The sum of the individual asset values in a closed-end mutual fund. Closed-end funds can sell at substantial premiums or discounts to their net asset values.
Net currency exposure Exposure to foreign exchange risk after netting all intracompany cash flows.
Net exposed assets Exposed assets less exposed liabilities. The term is used with market values or, in translation accounting, with book values.
Net monetary assets Monetary assets less monetary liabilities.
Net position A currency position after aggregating and canceling all offsetting transactions in each currency, maturity, and security.
Net present value (NPV) The present value of future cash returns, discounted at the appropriate market interest rate, minus the present value of the cost of the investment.
Net working capital Current assets minus current liabilities.
Nominal cash flow A cash flow expressed in nominal terms if the actual dollars to be received (or paid out) are given.
Nominal interest rate Interest rate unadjusted for inflation.
Noncash item Expense against revenue that does not directly affect cash flow, such as depreciation and deferred taxes.
Nonintermediated debt market A financial market in which borrowers (governments and large corporations) appeal directly to savers for debt capital through the securities markets without using a financial institution as intermediary.
Nonmonetary assets and liabilities Assets and liabilities with noncontractual payoffs.
Normal distribution Symmetric bell-shaped frequency distribution that can be defined by its mean and standard deviation.
North American Free Trade Agreement (NAFTA) A regional trade pact among the United States, Canada, and Mexico.
Notional principal In a swap agreement, a principal amount that is only “notional” and is not exchanged.
Offer (ask) rates The rate at which a market maker is willing to sell the quoted asset.
Offering statement In the United States, a shortened registration statement required by the Securities and Exchange Commission on debt issues with less than a nine-month maturity.
Official settlements balance (overall balance) An overall measure of a country’s private financial and economic transactions with the rest of the world.
Open account The seller delivers the goods to the buyer and then bills the buyer according to the terms of trade.
Open-end fund A mutual fund in which the amount of money under management grows/shrinks as investors buy/sell the fund.
Operating cash flow Earnings before interest and depreciation minus taxes. It measures the cash flow generated form operations, not counting capital spending or working capital requirements.
Operating exposure Changes in the value of real (nonmonetary) assets or operating cash flows as a result of changes in currency values.
Operating leverage The trade-off between fixed and variable costs in the operation of the firm.
Operational efficiency Market efficiency with respect to how large an influence transactions costs and other market frictions have on the operation of a market.
OPIC Overseas Private Investment Corporation. A US agency that assists US companies protect their investment against risk in a particular country besides providing other services.
Opportunity cost Most valuable alternative that is given up. The rate of return used in NPV computation is an opportunity interest rate.
Opportunity set The set of all possible investments.
Out-of-the-money option An option that has no value if exercised immediately.
Outright quote A quote in which all of the digits of the bid and offer prices are quoted. (Contrast with points quote.)
Overall balance (See official settlements balance.)
Overall FTC limitation In the U.S. tax code, a limitation on the FTC equal to foreign-source income times U.S. tax on worldwide income divided by worldwide income.
Ownership-specific advantages Property rights or intangible assets, including patents, trademarks, organizational and marketing expertise, production technology and management, and general organizational abilities, that form the basis for the multinational’s advantage over local firms.
Packing list Document listing the contents of a consignment of goods. May be called for on a letter of credit.
Parallel loan A loan arrangement in which a company borrows in its home currency and then trades this debt for the foreign currency debt of a foreign counterparty.
Partnership Form of business organization in which two or more co-owners form a business. In a general partnership each partner is liable for the debts of the partnership. Limited partnership permits some partners to have limited liability.
Passive income In the U.S. tax code, income (such as investment income) that does not come from active participation in a business.
Patent A government grant that gives inventors exclusive right of making, using, or selling the invention.
Payback period rule An investment decision rule which states that all investment projects that have payback periods equal to or less than a particular cutoff period are accepted, and all those that pay off in more than the particular cutoff period are rejected. The payback period is the number of years required for a firm to recover its initial investment required by a project from the cash flow it generates.
Payoff profile A graph with the value of an underlying asset on the x-axis and the value of a position taken to hedge against risk exposure on the y-axis. Also used with changes in value. (Contrast with risk profile.)
Payout ratio Proportion of net income paid out in cash dividends.
Pegged exchange rate system The International Monetary Fund’s name for a fixed exchange rate system.
Pension liabilities A recognition of future liabilities resulting from pension commitments made by the corporation. Accounting for pension liabilities varies widely by country.
Perfect market assumptions A set of assumptions under which the law of one price holds. These assumptions include frictionless markets, rational investors, and equal access to market prices and information.
Periodic call auction A trading system in which stocks are auctioned at intervals throughout the day.
Perpetuity A constant stream of cash flows without end. A British consol is an example.
Points quote An abbreviated form of the outright quote used by traders in the interbank market.
Political risk The risk that a sovereign host government will unexpectedly change the rules of the game under which businesses operate. Political risk includes both macro and micro risks.
Portfolio Combined holding of more than one stock, bond, real estate asset, or other asset by an investor.
Predatory pricing It is a form of price discrimination which requires selling below cost with the intention of destroying competition. However, predatory pricing is against law.
Premium If a bond is selling above its face value, it is said to sell at a premium.
Present value The value of a future cash stream discounted at the appropriate market interest rate.
Present value factor Factor used to calculate an estimate of the present value of an amount to be received in a future period.
Price elasticity of demand The sensitivity of quantity sold to a percentage change in price; -%changeQ/%changeP.
Price uncertainty Uncertainty regarding the future price of an asset.
Private placement A securities issue privately placed with a small group of investors rather than through a public offering.
Privatization A process whereby publicly owned enterprises are sold to private investors. (Contrast with nationalization.)
Pro Forma invoice An invoice provided by a supplier prior to the shipment of merchandise, informing the buyer of the kinds and quantities of goods to be sent their value and important specifications.
Product cycle theory Product cycle theory views the products of the successful firm as evolving through four stages: (1) infancy, (2) growth, (3) maturity, and (4) decline.
Product Life Cycle (PLC) The complete life of a product, from early planning through sales build-up, maximum sales, declining sales, and withdrawal of the product. Product life cycle lengths and types can vary depending on the type of product, the frequency of replacement, and other factors.
Production possibilities schedule The maximum amount of goods (for example, food and clothing) that a country is able to produce given its labor supply.
Profitability index A method used to evaluate projects. It is the ratio of the present value of expected future cash flows after initial investment divided by the amount of the initial investment.
Progressive taxation A convex tax schedule that results in a higher effective tax rate on high income levels than on low income levels.
Project financing A way to raise nonrecourse financing for a specific project characterized by the following: (1) the project is a separate legal entity and relies heavily on debt financing and (2) the debt is contractually linked to the cash flow generated by the project.
Promissory note Financial document in which the buyer agrees to make payment to the seller at a specified time.
Proprietary knowledge Knowledge which is private or exclusive, such that competitors are legally forbidden to duplicate or use it.
Prospectus A brochure that describes a mutual fund’s investment objectives, strategies, and position limits.
Protectionism Protection of local industries through tariffs, quotas, and regulations that discriminate against foreign businesses.
Psychic distance The similarities or lack thereof between country markets. This concept takes into account geographic distance, cultural similarities, linguistic aspects, legal systems and methods of conducting business.
Public relations A variety of programs designed to promote and/or protect a company's image or its individual products.
Public securities offering A securities issue placed with the public through an investment or commercial bank.
Purchasing power parity (law of one price) The principle that equivalent assets sell for the same price. Purchasing power parity is enforced in the currency markets by financial market arbitrage.
Pure discount bond Bonds that pay no coupons and only pay back the face value at maturity. Also referred to as "bullets" and "zeros."
Put option The right to sell the underlying asset at a specified price and on a specified date.
Put-call parity The relation of the value of a long call, a short put, the exercise price, and the forward price at expiration; CallTd/f - PutTd/f + Kd/f = FTd/f.
Quota The quantity of goods of a specific kind that a country permits to be imported without restriction or imposition of additional duties.
R-square (the coefficient of determination) The percent of the variation in a dependent variable (a y-variable) that is “explained by” variation in an independent variable (an x-variable).
Random walk A process in which instantaneous changes in exchange rates are normally distributed with a zero mean and constant variance.
Re-invoicing centers An offshore financial affiliate that is used to channel funds to and from the multinational’s foreign operations.
Real appreciation/depreciation A change in the purchasing power of a currency.
Real cash flow A cash flow is expressed in real terms if the current, or date 0, purchasing power of the cash flow is given.
Real exchange rate A measure of the nominal exchange rate that has been adjusted for inflation differentials since an arbitrarily defined base period.
Real interest rate Interest rate expressed in terms of real goods; that is, the nominal interest rate minus the expected inflation rate.
Real options An option or optionlike feature embedded in a real investment opportunity.
Reciprocal marketing agreement A strategic alliance in which two companies agree to comarket each other’s products in their home market. Production rights may or may not be transferred.
Recourse The right to demand return of money paid. In negotiation of a letter of credit, payment by the negotiating bank will normally be with recourse.
Registered bonds Bonds for which each issuer maintains a record of the owners of its bonds. Countries requiring that bonds be issued in registered form include the United States and Japan. (Contrast with bearer bonds.)
Registration statement In the United States, a statement filed with the Securities and Exchange Commission on securities issues that discloses relevant information to the public.
Repatriation The act of remitting cash flows from a foreign affiliate to the parent firm.
Reservation price The price below (above) which a seller (purchaser) is unwilling to go.
Residual Value The value of an asset at the conclusion of a lease.
Restrictive endorsement Endorsement transferring title or right to a named party.
Retention ratio Retained earnings divided by net income.
Return on equity (ROE) Net income after interest and taxes divided by average common stockholder's equity.
Revaluation An increase in a currency value relative to other currencies in a fixed exchange rate system.
Rights of set-off An agreement defining each party’s rights should one party default on its obligation. Rights of set-off were common in parallel loan arrangements.
Risk averse Seeking stability rather than risk.
Risk premium The excess return on the risky asset that is the difference between expected return on risky assets and the return of risk-free assets.
Risk profile A graph with the value of an underlying asset on the x-axis and the value of a position exposed to risk in the underlying asset on the y-axis. Also used with changes in value. (Contrast with payoff profile.)
Roll’s Critique The CAPM holds by construction when performance is measured against a mean-variance efficient index. Otherwise, it holds not at all.
Royalty Payment made for the use of a person or business’s property based on an agreed percentage of the income arising from its use.
Rule #1 Always keep track of your currency units.
Rule #2 Always think of buying and selling the currency in the denominator of a foreign exchange quote.
Rules of Origin Rules used to determine in what country a good will be considered as actually made for tariff and other trade purposes.
SBA (Small Business Administration) An independent agency of the U.S. federal government which aids, counsels, assists, and protects the interests of small business concerns to preserve free competitive enterprise and to maintain and strengthen the overall economy of the nation.
Scenario analysis A process of asking “What if?” using scenarios that capture key elements of possible future realities.
Security market line (SML) In the CAPM, the relation between required return and systematic risk (or beta): Rj - RF + bj (E[RM] - RF).
Security selection An investment strategy that attempts to identify individual securities that are underpriced relative to other securities in a particular market or industry.
Seeking stability rather than risk An element of the Paris Convention for the Protection of Industrial Property which gives an inventor 12 months from the date of the first application filed in a Paris Convention country in which to file in other Paris Convention countries. This relieves companies of the burden of filing applications in many countries simulaneously. Approximately 100 countries, including the United States, signed the Paris Convention.
Segmented market A market that is partially or wholly isolated from other markets by one or more market imperfections.
Semi-strong form efficient market A market in which prices fully reflect all publicly available information.
Sensitivity analysis Analysis of the effect on the project when there is some change in critical variables such as sales and costs.
Separation principle The principle that portfolio choice can be separated into two independent tasks: (1) determination of the optimal risky portfolio, which is purely technical problem, and (2) the personal choice of the best mix of the risky portfolio and the risk-free asset.
Set-of-contracts perspective A view of the corporation as the nexus of a set of legal contracts linking the various stakeholders. Important contracts include those with customers, suppliers, labor, management, debt, and equity.
Sharpe index A measure of risk-adjusted investment performance in excess return per unit of total risk: SI = (RP - RF)/(sP).
Shipper Usually the supplier or owner of commodities shipped.
Short position A position in which a particular asset (such as a spot or forward currency) has been sold.
Short selling Selling an asset that you do not own, or taking a short position.
Side effect Any aspect of an investment project that can be valued separately from the project itself.
Sight draft A draft that is payable on demand.
Signaling The use of observable managerial actions in the marketplace as an indication of management’s beliefs concerning the prospects of the company.
Simple interest Interest calculated by considering only the original principal amount.
Sogo sosha A term referring to general trading companies that import and export merchandise.
Sole proprietorship A business owned by a single individual. The sole proprietorship pays no corporate income tax but has unlimited liability for business debts and obligations.
Special drawing right (SDR) An international reserve created by the International Monetary Fund and allocated to member countries to supplement foreign exchange reserves.
Spot exchange-rate Exchange-rate today for settlement in two days.
Spot market A market in which trades are made for immediate delivery (within two business days for most spot currencies).
Stakeholders Those with an interest in the firm. A narrow definition includes the corporation’s debt and equity holders. A broader definition includes labor, management, and perhaps other interested parties, such as customers, suppliers, and society at large.
Stamp tax A tax on a financial transaction.
Standard deviation The positve square root of the variance. This is the standard statistical measure of the spread of a sample.
Standard Industrial Classification (SIC) A standard numerical code system used by the U.S. government to classify products and services.
Stated annual interest rate The interest rate expressed as a percentage per annum, by which interest payment is determined.
Stationary time series A time series in which the process generating returns is identical at every instant of time.
Stock index futures A futures contract on a stock index.
Stock index swap A swap involving a stock index. The other asset involved in a stock index swap can be another stock index (a stock-for-stock swap), a debt index (a debt-for-stock swap), or any other financial asset or financial price index.
Strategic alliance A collaborative agreement between two companies designed to achieve some strategic goal. Strategic alliances include international licensing agreements, management contracts, and joint ventures as special cases.
Striking price The price at which an option can be exercised (also called the exercise price).
Subpart F income In the U.S. tax code, income from foreign subsidiaries owned more than 10 percent and controlled foreign corporations that is taxed on a pro rata basis as it is earned.
Subsidiary Any organization controlled by another with more than 50 percent of its whose voting capital held by the latter.
Subsidized financing Financing that is provided by a host government and that is issued at a below-market interest rate.
Sunk cost A cost that has already occurred and cannot be removed. Because sunk costs are in the past, such costs should be ignored when deciding whether to accept or reject a project.
Sunk costs Expenditures that are at least partially lost once an investment is made.
Supervisory board The board of directors that represents stakeholders in the governance of the corporation.
Swap An agreement to exchange two liabilities (or assets) and, after a prearranged length of time, to reexchange the liabilities (or assets).
Swap book A swap bank’s portfolio of swaps, usually arranged by currency and by maturity.
Swaption A swap with one or more options attached.
SWIFT (Society for Worldwide Interbank Financial Transactions) Network through which international banks conduct their financial transactions.
Switching options A sequence of options in which exercise of one option creates one or more additional options. Investment-disinvestment, entry-exit, expansion-contraction, and suspension-reactivation decisions are examples of switching options.
Syndicate The selling group of investment banks in a public securities offering.
Synergy In an acquisition or merger, when the value of the combination is greater than the sum of the individual parts: Synergy = VAT - (VA + VT).
Synthetic forward position A forward position constructed through borrowing in one currency, lending in another currency, and offsetting these transactions in the spot exchange market.
Systematic risk Risk that is common to all assets and cannot be diversified away (measured by beta).
Tangibility Tangible assets are real assets that can be used as collateral to secure debt.
Tare weight The weight of a container and packing materials which excludes the weight of the goods it contains.
Targeted registered offerings Securities issues sold to “targeted” foreign financial institutions according to U.S. SEC guidelines. These foreign institutions then maintain a secondary market in the foreign market.
Tax arbitrage Arbitrage using a difference in tax rates or tax systems as the basis for profit.
Tax clienteles Clienteles of investors with specific preferences for debt or equity that are driven by differences in investors’ personal tax rates.
Tax Haven A country or region imposing low or no taxes on foreign source income.
Tax holiday A reduced tax rate provided by a government as an inducement to foreign direct investment.
Tax neutrality Taxes that do not interfere with the natural flow of capital toward its most productive use.
Tax preference items Items such as tax-loss carryforwards and carrybacks and investment tax credits that shield corporate taxable income from taxes.
Tax-haven affiliate A wholly owned affiliate that is in a low-tax jurisdiction and that is used to channel funds to and from the multinational’s foreign operations. (The tax benefits of tax-haven affiliates were largely removed in the United States by the Tax Reform Act of 1986.)
Technical analysis Any method of forecasting future exchange rates based on the history of exchange rates.
Temporal (and monetary/nonmonetary) method A translation accounting method (such as FAS #8 in the United States) that translates monetary assets and liabilities at current exchange rates and all other balance sheet accounts at historical exchange rates.
Territorial tax system A tax system that taxes domestic income but not foreign income. This tax regime is found in Hong Kong, France, Belgium, and the Netherlands.
The National Trade Data Bank Is the U.S. Government's most comprehensive source of international trade data and export promotion information. Types of information on the NTDB include: International Market Research, Export Opportunities; Indices of foreign and domestic companies; how-to market guides; Reports on demographic, political, and socio-economic conditions for hundreds of countries; and much more.
Time draft A draft that is payable on a specified future dare.
Time value of an option The difference between the value of an option and the option’s intrinsic value.
Timing option The ability of the firm to postpone investment (or disinventment) and to reconsider the decision at a future date.
Total cash flow of the firm Total cash inflow minus total cash outflow.
Total Quality Management (TQM) An organization-wide approach to continuously improving the overall quality of its process, products, and service.
Total risk The sum of systematic and unsystematic risk (measured by the standard deviation or variance of return).
Trade acceptance A time draft that is drawn on and accepted by an importer.
Trade balance A country’s net balance (exports minus imports) on merchandise trade.
Trade-in allowance Price discount granted for a new item by turning in an old item at the time of purchase.
Trademark A registration process under which a name, logo, or characteristic can be identified as exclusive.
Trading desk (dealing desk) The desk at an international bank that trades spot and forward foreign exchange.
Transaction exposure Changes in the value of contractual (monetary) cash flows as a result of changes in currency values.
Transaction Statement A document that clearly outlines the terms and conditions agreed upon between an importer and an exporter.
Transfer prices Prices on intracompany sales
Translation (accounting) exposure Changes in a corporation’s financial statements as a result of changes in currency values.
Trustee A bank or trust company that holds title to or a security interest in leased property for the benefit of the lessee, lessor, and/or creditors of the lessor.
Turnkey contract An agreement in which a contractor is responsible for setting up a facility from start to finish for another firm.
Unbiased expectations hypothesis The hypothesis that forward exchange rates are unbiased predictors of future spot rates. (See forward parity.)
Unemployment Rate The ratio of the total number of unemployed persons to the total number of persons in the labor force.
Unlevered beta (systematic business risk) The beta (or systematic risk) of a project as if it were financed with 100 percent equity.
Unlevered cost of equity The discount rate appropriate for an investment assuming it is financed with 100 percent equity.
Unsystematic risk Risk that is specific to a particular security or country and that can be eliminated through diversification.
Value chain A value-added process in a firm to transform raw materials and other inputs to finished goods, which creates value to customers.
Value date Date on which a foreign exchange contract is executed, i.e. seller delivers.
Value stocks Stocks with low price/book ratios or price/earnings ratios. Historically, value stocks have enjoyed higher average returns than growth stocks (stocks with high price/book or PE ratios) in a variety of countries.
Value-added tax (VAT) A sales tax collected at each stage of production in proportion to the value added during that stage.
Variable costs A cost that varies directly with volume and is zero when production is zero.
Virtual corporation Partnerships so close those two partners become a single firm for all operational purposes.
Warehouse receipt A receipt issued by a warehouse listing the goods received.
Warehouse-to-warehouse An Insurance policy which covers goods over the entire journey from the seller's to the buyer's premises.
Warrant An option issued by a company that allows the holder to purchase equity from the company at a predetermined price prior to an expiration date. Warrants are frequently attached to Eurobonds.
Weak form efficient market A market in which prices fully reflect the information in past prices.
Weight note Document issued by either the exporter or a third party declaring the weight of goods in a consignment
Weighted average cost of capital (WACC) A discount rate that reflects the after-tax required returns on debt and equity capital.
Wharfage charge A charge assessed by a pier or dock owner for handling incoming or outgoing cargo.
Withholding tax A tax on dividend or interest income that is withheld for payment of taxes in a host country. Payment is typically withheld by the financial institution distributing the payment.
Working capital An accounting term that indicates the difference between current assets and current liabilities.
World Bank See International Bank for Reconstruction and Development.
World Trade Organization (WTO) Created in 1994 by 121 nations at the Uruguay Round of the General Agreement on Tariffs and Trade (GATT). The WTO is responsible for implementation and administration of the trade agreement.
Worldwide tax system A tax system that taxes worldwide income as it is repatriated to the parent company. Used in Japan, the United Kingdom, and the United States.
Yield to maturity The discount rate that equates the present value of interest payments and redemption value with the present price of the bond.
Zaibatsu Large family-owned conglomerates that controlled much of the economy of Japan prior to World War II.

 

 

 
 
Adjusted Gross Income (AGI)
An interim calculation in the computation of income tax liability. It is computed by subtracting certain allowable adjustments from gross income.

 
Administrator
A person appointed by the court to settle an estate when there is no will.

 
After-Tax Return
The return from an investment after the effects of taxes have been taken into account.

 
Aggressive Growth Fund
A mutual fund whose primary investment objective is substantial capital gains.

 
Alternative Minimum Tax
A method of calculating income tax that disallows certain deductions, credits, and exclusions. This was intended to ensure that individuals, trusts, and estates that benefit from tax preferences do not escape all federal income tax liability. People must calculate their taxes both ways and pay the greater of the two.

 
Annuity
An insurance-based contract that provides future payments at regular intervals in exchange for current premiums. Annuity contracts are usually purchased from banks, credit unions, brokerage firms, or insurance companies.

 
Asset
Anything owned that has monetary value.

 
Asset Allocation
The process of repositioning assets within a portfolio to maximize return for a given level of risk. This process is usually done using the historical performance of the asset classes within sophisticated mathematical models.

 
Asset Class
A category of investments with similar characteristics.

 
Audit
The examination of the accounting and financial documents of a firm by an objective professional. The audit is done to determine the records' accuracy, consistency, and conformity to legal and accounting principles.
B
 
 
Balanced Mutual Fund
A mutual fund whose objective is a balance of stocks and bonds. Such funds tend to be less volatile than stock-only funds.

 
Bear Market
When the stock market appears to be declining overall, it is said to be a bear market.

 
Beneficiary
A person named in a life insurance policy, annuity, will, trust, or other agreement to receive a financial benefit upon the death of the owner. A beneficiary can be an individual, company, organization, and so on.

 
Blue Chip Stock
The common stock of a company with a long history of profitability and consistent dividend payments.

 
Bond
A bond is evidence of a debt in which the issuer promises to pay the bondholders a specified amount of interest and to repay the principal at maturity. Bonds are usually issued in multiples of $1,000.

 
Book Value
The net value of a company's assets, less its liabilities and the liquidation price of its preferred issues. The net asset value divided by the number of shares of common stock outstanding equals the book value per share, which may be higher or lower than the stock's market value.

 
Bull Market
When the stock market appears to be advancing overall, it is said to be a bull market.

 
Buy-Sell Agreement
A buy-sell agreement is an arrangement between two or more parties that obligates one party to buy the business and another party to sell the business upon the death, disability, or retirement of one of the owners.
C
 
Capital Gain or Loss
The difference between the sales price and the purchase price of a capital asset. When that difference is positive, the difference is referred to as a capital gain. When the difference is negative, it is a capital loss.

 
Cash Equivalents
Short-term investments, such as U.S. Treasury securities, certificates of deposit, and money market fund shares, that can be readily converted into cash.

 
Cash Surrender Value
The amount that an insurance policyholder is entitled to receive when he or she discontinues coverage. Policyholders are usually able to borrow against the surrender value of a policy from the insurance company. Loans that are not repaid will reduce the policy's death benefit.

 
CERTIFIED FINANCIAL PLANNER™ Practitioner
A credential granted by the Certified Financial Planner Board of Standards, Inc. (Denver, CO) to individuals who complete a comprehensive curriculum in financial planning and ethics. CFP™, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame logo)® are certification marks owned by the Certified Financial Planner Board of Standards. These marks are awarded to individuals who successfully complete the CFP Board's initial and ongoing certification.

 
Certified Public Accountant (CPA)
A professional license granted by a state board of accountancy to an individual who has passed the Uniform CPA Examination (administered by the American Institute of Certified Public Accountants) and has fulfilled that state's educational and professional experience requirements for certification.

 
Charitable Lead Trust
A trust established for the benefit of a charitable organization under which the charitable organization receives income from an asset for a set number of years or for the trustor's lifetime. Upon the termination of the trust, the asset reverts to the trustor or to his or her designated heirs. This type of trust can reduce estate taxes and allows the trustor's heirs to retain control of the assets.

 
Charitable Remainder Trust
A trust established for the benefit of a charitable organization under which the trustor receives income from an asset for a set number of years or for the trustor's lifetime. Upon the termination of the trust, the asset reverts to the charitable organization. The trustor receives a charitable contribution deduction in the year in which the trust is established, and the assets placed in the trust are exempt from capital gains tax.

 
Chartered Financial Consultant (ChFC)
A professional financial planning designation granted by The American College (Bryn Mawr, PA) to individuals who complete a comprehensive curriculum in financial planning. Prerequisites include passing a series of written examinations, meeting specified experience requirements and maintaining ethical standards. The curriculum encompasses wealth accumulation, risk management, income taxation, planning for retirement needs, investments, estate and succession planning.

 
Chartered Life Underwriter (CLU)
A professional designation granted by The American College to individuals who complete a comprehensive curriculum focused primarily on risk management. Prerequisites include passing a series of written examinations, meeting specified experience requirements, and maintaining ethical standards. The curriculum encompasses insurance and financial planning, income taxation, individual life insurance, life insurance law, estate and succession planning, and planning for business owners and professionals.

 
COBRA
The Consolidated Omnibus Budget Reconciliation Act is a federal law requiring employers with more than 20 employees to offer terminated or retired employees the opportunity to continue their health insurance coverage for 18 months at the employee's expense. Coverage may be extended to the employee's dependents for 36 months in the case of divorce or death of the employee.

 
Coinsurance or Co-Payment
The amount an insured person must pay for a covered medical and/or dental expense if his or her insurance doesn't provide 100 percent coverage.

 
Commodities
The generic term for goods such as grains, foodstuffs, livestock, oils, and metals which are traded on national exchanges. These exchanges deal in both "spot" trading (for current delivery) and "futures" trading (for delivery in future months).

 
Common Stock
A unit of ownership in a corporation. Common stockholders participate in the corporation's profits or losses by receiving dividends and by capital gains or losses in the stock's share price.

 
Community Property
State laws vary, but generally all property acquired during a marriage - excluding property one spouse receives from a will, inheritance, or gift - is considered community property, and each partner is entitled to one half. This includes debt accumulated. There are currently nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

 
Compound Interest
Interest that is computed on the principal and on the accrued interest. Compound interest may be computed continuously, daily, monthly, quarterly, semiannually, or annually.

 
Consumer Price Index
The U.S. Department of Labor's main indicator of inflation. The Consumer Price Index is calculated each month from the cost of some 400 retail items in urban areas throughout the United States.
D
 
Deduction
An amount that can be subtracted from gross income, from a gross estate, or from a gift, thereby lowering the amount on which tax is assessed.

 
Defined Benefit Plan
A qualified retirement plan under which a retiring employee will receive a guaranteed retirement fund, usually payable in installments. Annual contributions may be made to the plan by the employer at the level needed to fund the benefit. The annual contributions are limited to a specified amount, indexed for inflation.

 
Defined Contribution Plan
A retirement plan under which the annual contributions made by the employer or employee are generally stated as a fixed percentage of the employee's compensation or company profits. The amount of retirement benefits is not guaranteed; rather, it depends upon the investment performance of the employee's account.

 
Diversification
Investing in different companies, industries, or asset classes. Diversification may also mean the participation of a large corporation in a wide range of business activities.

 
Dividend
A pro rata portion of earnings distributed in cash by a corporation to its stockholders. In preferred stock, dividends are usually fixed; with common shares, dividends may vary with the fortunes of the company.

 
Dollar Cost Averaging
A system of investing in which the investor buys a fixed dollar amount of securities at regular intervals. The investor thus buys more shares when the price is low and fewer shares when it rises, and the average cost per share is lower than the average price per share. This strategy does not protect against loss in declining markets and involves continuous investments, regardless of fluctuating price levels.
E
 
Efficient Frontier
A statistical result from the analysis of the risk and return for a given set of assets that indicates the balance of assets that may, under certain assumptions, achieve the best return for a given level of risk.

 
Employer-Sponsored Retirement Plan
A tax-favored retirement plan that is sponsored by an employer. Among the more common employer-sponsored retirement plans are 401(k) plans, 403(b) plans, simplified employee pension plans, and profit-sharing plans.

 
Equity
The value of a person's ownership in real property or securities; the market value of a property or business, less all claims and liens upon it.

 
ERISA
The Employee Retirement Income Security Act is a federal law covering all aspects of employee retirement plans. If employers provide plans, they must be adequately funded and provide for vesting, survivor's rights, and disclosures.

 
ESOP (employee stock ownership plan)
A defined contribution retirement plan in which company contributions must be invested primarily in qualifying employer securities.

 
Estate Conservation
Activities coordinated to provide for the orderly and cost-effective distribution of an individual's assets at the time of his or her death. Estate conservation often includes wills and trusts.

 
Estate Tax
Upon the death of a decedent, federal and state governments impose taxes on the value of the estate left to others (with limitations).

 
Executive Bonus Plan
The employer pays for a benefit that is owned by the executive. The bonus could take the form of cash, automobiles, life insurance, or other items of value to the executive.

 
Executor
A person named by the probate courts or the will to carry out the directions and requests of the decedent.
F
 
Fixed Income
Income from investments such as CDs, Social Security benefits, pension benefits, some annuities, or most bonds that is the same every month.

 
401(k) Plan
A defined contribution plan that may be established by a company for retirement. Employees may allocate a portion of their salaries into this plan, and contributions are excluded from their income for tax purposes (with limitations). Contributions and earnings will compound tax deferred. Withdrawals from a 401(k) plan are taxed as ordinary income, and may be subject to an additional 10 percent federal tax penalty if withdrawn prior to age 59 ½.

 
403(b) Plan
A defined contribution plan that may be established by a nonprofit organization or school for retirement. Employees may allocate a portion of their salaries into this plan, and contributions are excluded from their income for tax purposes (with limitations). Contributions and earnings will compound tax deferred. Withdrawals from a 403(b) plan are taxed as ordinary income, and may be subject to an additional 10 percent federal tax penalty if withdrawn prior to age 59 ½.

 
Fundamental Analysis
An approach to the stock market in which specific factors - such as the price-to-earnings ratio, yield, or return on equity - are used to determine what stock may be favorable for investment.
G
 
Gift Taxes
A federal tax levied on the transfer of property as a gift. This tax is paid by the donor. The first $11,000 a year from a donor to each recipient is exempt from tax. Most states also impose a gift tax. The gift tax exemption is indexed annually for inflation.
H
 
Holographic Will
A will entirely in the handwriting of the testator. Without witnesses, holographic wills are valid and enforceable only in some states.
I
 
Index
A calculation that uses a selection of stocks or bonds to gauge a certain market. The Dow Jones Industrial Average, for example, is an index of 30 large industrial companies on the New York Stock Exchange.

 
Individual Retirement Account (IRA)
Contributions to a traditional IRA are deductible from earned income in the calculation of federal and state income taxes if the taxpayer meets certain requirements. The earnings accumulate tax deferred until withdrawn, and then they are taxed as ordinary income. Individuals not eligible to make deductible contributions may make nondeductible contributions, the earnings on which would be tax deferred.

 
Inflation
An increase in the price of products and services over time. The government's main measure of inflation is the Consumer Price Index.

 
Intestate
The condition of an estate left by a decedent without a valid will. State law then determines who inherits the property or serves as guardian for any minor children.

 
Investment Category
A broad class of assets with similar characteristics. The five investment categories include cash equivalents, fixed principal, equity, debt, and tangibles.

 
Irrevocable Trust
A trust that may not be modified or terminated by the trustor after its creation.
J
 
Joint and Survivor Annuity
Most pension plans must offer this form of pension plan payout that pays over the life of the retiree and his or her spouse after the retiree dies. The retiree and his or her spouse must specifically choose not to accept this payment form.

 
Joint Tenancy
Co-ownership of property by two or more people in which the survivor(s) automatically assumes ownership of a decedent's interest.

 
Jointly Held Property
Property owned by two or more persons under joint tenancy, tenancy in common, or, in some states, community property.
K
 
Keogh Plan
This retirement plan, named for Eugene Keogh, is designed for self-employed individuals. Up to $40,000 of self-employed income may be deducted from compensation and set aside into the plan.
L
 
Liability
Any claim against the assets of a person or corporation: accounts payable, wages, and salaries payable, dividends declared payable, accrued taxes payable, and fixed or long-term obligations such as mortgages, debentures, and bank loans.

 
Limited Partnership
Limited partnerships pool the money of investors to develop or purchase income-producing properties. When the partnership subsequently receives income from these properties, it distributes the income to its investors as dividend payments.

 
Liquidity
The ease with which an asset or security can be converted into cash without loss of principal.

 
Living Trust
A trust created by a person during his or her lifetime.

 
Lump-Sum Distribution
The disbursement of the entire value of a profit-sharing plan, pension plan, annuity, or similar account to the account owner or beneficiary. Lump-sum distributions may be rolled over into another tax-deferred account.
M
 
Marginal Tax Bracket
The range of taxable income that is taxable at a certain rate. Currently, there are six marginal tax brackets: 10 percent, 15 percent, 27 percent, 30 percent, 35 percent, and 38.6 percent.

 
Marital Deduction
A provision of the tax codes that allows all assets of a deceased spouse to pass to the surviving spouse free of estate taxes. This provision is also referred to as the unlimited marital deduction.

 
Money Market Fund
A mutual fund that specializes in investing in short-term securities and that tries to maintain a constant net asset value of $1.

 
Municipal Bond
A debt security issued by municipalities. The income from municipal bonds is usually exempt from federal income taxes. In many states, it is also exempt from state income taxes in the state in which the municipal bond is issued.

 
Municipal Bond Fund
A mutual fund that specializes in investing in municipal bonds.

 
Mutual Fund
A collection of stocks, bonds, or other securities purchased and managed by an investment company with funds from a group of investors.
N
 
Net Asset Value
The price at which a mutual fund sells or redeems its shares. The net asset value is calculated by dividing the net market value of the fund's assets by the number of outstanding shares.
P
 
Pooled Income Fund
A trust created by a charitable organization that combines the contributions of several donors and distributes income to those donors based on the earnings of the trust. The trust is managed by the charitable organization, and contributions are partially deductible for income tax purposes.

 
Portfolio
All the investments held by an individual or a mutual fund.

 
Preferred Stock
A class of stock with claim to a company's earnings, before payment can be made on the common stock, and that is usually entitled to priority over common stock if the company liquidates. Generally, preferred stocks pay dividends at a fixed rate.

 
Prenuptial Agreement
A legal agreement arranged before marriage stating who owns property acquired before marriage and during marriage and how property will be divided in the event of divorce. ERISA benefits are not affected by prenuptial agreements.

 
Price/Earnings Ratio (P/E Ratio)
The market price of a stock divided by the company's annual earnings per share. Because the P/E ratio is a widely regarded yardstick for investors, it often appears with stock price quotations.

 
Principal
In a security, the principal is the amount of money that is invested, excluding earnings. In a debt instrument such as a bond, it is the face amount.

 
Probate
The court-supervised process in which a decedent's estate is settled and distributed.

 
Profit-Sharing Plan
An agreement under which employees share in the profits of their employer. The company makes annual contributions to the employees' accounts. These funds usually accumulate tax deferred until the employee retires or leaves the company.

 
Prospectus
A document provided by mutual fund companies to prospective investors. The prospectus gives information needed by investors to make informed decisions prior to investing in a specific mutual fund. The prospectus includes information on the minimum investment amount, the fund's objectives, past performance, risk level, sales charges, management fees, and any other expense information about the fund, as well as a description of the services provided to investors in the fund.
Q
 
Qualified Domestic Relations Order (QDRO)
At the time of divorce, this order would be issued by a state domestic relations court and would require that an employee's ERISA retirement plan accrued benefits be divided between the employee and the spouse.

 
Qualified Retirement Plan
A pension, profit-sharing, or qualified savings plan that is established by an employer for the benefit of the employees. These plans must be established in conformity with IRS rules. Contributions accumulate tax deferred until withdrawn and are deductible to the employer as a current business expense.
R
 
Revocable Trust
A trust in which the creator reserves the right to modify or terminate the trust.

 
Risk
The chance that an investor will lose all or part of an investment.

 
Risk-Averse
Refers to the assumption that rational investors will choose the security with the least risk if they can maintain the same return. As the level of risk goes up, so must the expected return on the investment.

 
Rollover
A method by which an individual can transfer the assets from one retirement program to another without the recognition of income for tax purposes. The requirements for a rollover depend on the type of program from which the distribution is made and the type of program receiving the distribution.

 
Roth IRA
A nondeductible IRA that allows tax-free withdrawals when certain conditions are met. Income and contribution limits apply.
S
 
Security
Evidence of an investment, either in direct ownership (as with stocks), creditorship (as with bonds), or indirect ownership (as with options).

 
Simplified Employee Pension Plan (SEP)
A type of plan under which the employer contributes to an employee's IRA. Contributions may be made up to a certain limit and are immediately vested.

 
Single-Life Annuity
An insurance-based contract that provides future payments at regular intervals in exchange for current premiums. Generally used as a supplement to retirement income and pays over the life of one individual, usually the retiree, with no rights of payment to any survivor.

 
Split-Dollar Plan
An arrangement under which two parties (usually a corporation and employee) share the cost of a life insurance policy and split the proceeds.

 
Spousal IRA
An IRA designed for a couple when one spouse has no earned income. The maximum combined contribution that can be made each year to an IRA and a spousal IRA is $6,000 (in 2002 through 2004) or 100 percent of earned income, whichever is less. This total may be split between the two IRAs as the couple wishes, provided the contribution to either IRA does not exceed $3,000.
T
 
Tax Bracket
The range of taxable income that is taxed at a certain rate. Brackets are expressed by their marginal rate.

 
Tax Credit
Tax credits, the most appealing type of tax deductions, are subtracted directly, dollar for dollar, from your income tax bill.

 
Tax Deferred
Interest, dividends, or capital gains that grow untaxed in certain accounts or plans until they are withdrawn.

 
Tax-Exempt Bonds
Under certain conditions, the interest from bonds issued by states, cities, and certain other government agencies is exempt from federal income taxes. In many states, the interest from tax-exempt bonds will also be exempt from state and local income taxes.

 
Taxable Income
The amount of income used to compute tax liability. It is determined by subtracting adjustments, itemized deductions or the standard deduction, and personal exemptions from gross income.

 
Technical Analysis
An approach to investing in stocks in which a stock's past performance is mapped onto charts. These charts are examined to find familiar patterns to use an an indicator of the stock's future performance.

 
Tenancy in Common
A form of co-ownership. Upon the death of a co-owner, his or her interest passes to his or her chosen beneficiaries and not to the surviving owner or owners.

 
Term Insurance
Term life insurance provides a death benefit if the insured dies. Term insurance does not accumulate cash value and ends after a certain number of years or at a certain age.

 
Testamentary Trust
A trust established by a will that takes effect upon death.

 
Testator
One who has made a will or who dies having left a will.

 
Total Return
The total of all earnings from a given investment, including dividends, interest, and any capital gain.

 
Trust
A legal entity created by an individual in which one person or institution holds the right to manage property or assets for the benefit of someone else. Types of trusts include: Testamentary Trust – A trust established by a will that takes effect upon death; Living Trust – A trust created by a person during his or her lifetime; Revocable Trust – A trust in which the creator reserves the right to modify or terminate the trust; Irrevocable Trust – A trust that may not be modified or terminated by the trustor after its creation

 
Trustee
An individual or institution appointed to administer a trust for its beneficiaries.

 
Trustee-to-Trustee Transfer
A method of transferring retirement plan assets from one employer's plan to another employer plan or to an IRA. One benefit of this method is that no federal income tax will be withheld by the trustee of the first plan.
U
 
Unified Credit
A credit that may be applied against an individual's gift or estate taxes. The unified credit will increase in gradual steps until it eventually exempts an estate valued up to $3,500,000 from federal estate taxes in 2009.

 
Universal Life Insurance
A type of life insurance that combines a death benefit with a savings element which accumulates tax deferred at current interest rates. Under a universal life insurance policy, the policyholder can increase or decrease his or her coverage, with limitations, without purchasing a new policy.
V
 
Variable Universal Life Insurance
A type of life insurance that combines a death benefit with a savings element that accumulates tax deferred at current interest rates. Under a variable universal life insurance policy, the cash value in the policy can be placed in a variety of subaccounts with different investment objectives. The policyholder can transfer funds among the subaccounts as he or she wishes. Fees are charged after a certain number of transfers.

 
Volatility
The range of price swings of a security or market over time.
W
 
Welfare Benefit Plan
An employee benefit plan that provides such benefits as medical, sickness, accident, disability, death, or unemployment benefits.

 
Whole Life Insurance
A type of life insurance that offers a death benefit and also accumulates cash value, tax deferred at fixed interest rates. Whole life insurance policies generally have a fixed annual premium that does not rise over the duration of the policy. Whole life insurance is also referred to as "ordinary" or "straight" life insurance.

 
Will
A legal document that declares a person's wishes concerning the disposition of property, the guardianship of his or her children, and the administration of the estate after his or her death.
Y
 
Yield
In general, the yield is the amount of current income provided by an investment. For stocks, the yield is calculated by dividing the total of the annual dividends by the current price. For bonds, the yield is calculated by dividing the annual interest by the current price. The yield is distinguished from the return, which includes price appreciation or depreciation.
Z
 
Zero-Coupon Bond
This type of bond makes no periodic interest payments but instead is sold at a steep discount from its face value. Bondholders receive the face value of their bonds when they mature.