International Financial Management Case Study

The difference between the return from a short-term bond and a long-term bond, reflecting the market expectation about future interest rate changes.

The risk of losing investment value due to unexpected changes in interest rates.

The rate at which a currency is bought or sold in the market.

A strategy that involves borrowing money at low interest rates in one country and investing it in another country at higher interest rates.

The risk associated with changes in the value of a currency.

A strategy involving borrowing money at a low interest rate and investing it in a higher-yielding investment, potentially amplifying profits but also increasing risk.

The profit earned after subtracting all expenses from the total income.

The potential loss on a bond investment due to unexpected changes in interest rates, calculated by multiplying the bond's duration by the change in interest rates.

A period of economic decline marked by widespread financial instability and significant contractions in economic activity.

The 1997-1998 Asian financial crisis was triggered by a combination of factors such as weak domestic financial systems, free capital flows, and fixed exchange rates.

In Argentina, the Convertibility Law pegged the peso to the US dollar, initially controlling inflation and attracting investment. However, the peso's appreciation made exports more expensive, leading to economic downturn and the eventual abandonment of the parity.

The Argentine peso crisis was caused by a combination of factors, including lack of fiscal discipline, labor market inflexibility, and contagion from other financial crises.

The Chinese renminbi (RMB) has not gained international prominence due to limited openness in capital markets.

For the Chinese renminbi to become a truly global currency, China needs to achieve full convertibility, open and liquid capital markets, and strong rule of law and property rights.

Free international capital flows can lead to a credit boom and speculation in real estate and stock markets, potentially posing risks to financial stability.

Fixed exchange rate policies can encourage unhedged transactions and excessive risk-taking by borrowers and lenders, making economies more vulnerable to crises.

A statistical record of a country's international transactions over a specific period, presented in double-entry bookkeeping.

The part of the BOP that tracks the flow of goods, services, primary income, and secondary income between a country and the rest of the world.

The import and export of tangible goods, such as cars, computers, and food.

Includes payments and receipts for services, like legal and financial services, engineering, consulting, royalties, and tourism.

Payments and receipts related to investments, including interest, dividends, and income from foreign investments.

Non-reciprocal transfers between a country and the rest of the world, such as foreign aid, remittances, and grants.

A decline in the value of a currency relative to others.

A situation where a country's exports exceed its imports, resulting in a surplus in the current account balance.

The primary goal of corporate governance is to safeguard external investors from unfair advantages by managers and controllers.

Strengthening the independence of the Board of Directors (BOD) by increasing the number of external members.

Enhancing transparency and disclosure standards for financial reporting.

The Sarbanes-Oxley Act (SOX) was passed by the U.S. Congress in 2002 to strengthen corporate governance in the wake of accounting scandals.

The Cadbury Code of Best Practice, introduced by the British government in 1992, sets out guidelines for good corporate governance in the UK.

Section 404 of SOX requires listed companies and their auditors to assess the effectiveness of internal controls for financial reporting and fraud prevention.

The Chief Executive Officer (CEO) and Chairman of the Board (COB) should be separate individuals to ensure a clear division of responsibilities.

External directors are independent members of the board who do not have any management responsibilities. They are crucial for objective decision-making.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, passed by the US Congress in July 2010, aimed to stabilize the financial system and protect consumers. It introduced regulations to prevent future financial crises and ensure responsible lending practices.

A rule prohibiting banks from engaging in proprietary trading, limiting their investments in hedge funds and private equity. This aims to prevent banks from taking excessive risks with depositors' money.

This provision grants the government the ability to intervene and take over failing financial institutions that pose a systemic risk, ensuring an orderly resolution without cascading failures.

This provision requires over-the-counter derivatives to be traded on electronic platforms with centralized clearinghouses for contract settlement. This brings transparency and reduces risk in the derivatives market.

The Consumer Financial Protection Bureau, established by the Dodd-Frank Act, monitors and protects consumers from predatory lending practices like risky mortgages and credit products.

The J-curve effect describes the short-term decline and subsequent long-term improvement in a country's trade balance after currency depreciation. Initially, imports become expensive, reducing demand, while exports don't immediately increase due to existing contracts. This leads to a worsening trade balance. Over time, cheaper exports become more attractive, boosting demand, while expensive imports see reduced demand, resulting in a trade balance improvement.

The Capital Account records transactions involving non-produced, non-financial assets (like land, trademarks, or contracts) between residents and non-residents. These transactions are not categorized as current account or financial account transactions.

Foreign Direct Investment (FDI) involves an investor gaining control of a foreign business.

Portfolio investment involves buying and selling foreign financial assets (stocks, bonds) without acquiring control.

Other Investment includes transactions involving US dollars, bank deposits, trade credits, and other similar transactions.

The Financial Account records transactions involving sale and purchase of assets by residents and non-residents. Sales of domestic assets to foreigners create a credit and capital inflow but result in future obligations. Purchases of foreign assets by domestic residents create a debit and capital outflow but lead to future income.

The Statistical Discrepancy is used to balance the balance of payments, accounting for any differences between the sum of the debits and the sum of the credits.

The Balance of Payments (BOP) is a record of all economic transactions between residents of a country and the rest of the world during a specific period. It summarizes all financial transactions and helps analyze a country's economic position.