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FIN 31 Unit 3 - Coggle Diagram
FIN 31 Unit 3
Important terminology
American Depository Receipt (ADR)- A security issued in the US representing shares in a foreign stock and allowing that stock to be traded in the US
Cross-rate- Implicit exchange rate between two countries (usually non-US) quoted in some third currency (usually the US dollar)
Eurobonds- International bonds issued in multiple countries but denominated in a single currency (usually the issuer's currency)
Eurocurrency- Money deposited in a financial center outside of the country whose currency is involved
Foreign bonds- International bonds issued in a single currency, usually denominated in that country's currency
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London Interbank Offered Rate (LIBOR)- The rate most international banks charge one another for overnight Eurodollar loans
Secured Overnight Financing Rate (SOFR)- Interest rate based on transactions in the Treasury repurchase market where investors offer banks over night loans backed by their bond assets
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Purchasing Power Parity (PPP)- States that the price levels between two countries should be equal. (Goods + services in each country cost the same once currencies have been exchanged)
Absolute PPP- $1 should have the same purchasing power in each country. (An orange should cost the same whether you buy it in New York or Tokyo)
Relative PPP- The expected percentage change in exchange rates between the currencies of two countries is equal to the difference in their inflation rates.
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Economic variables that relate to relative PPP are inflation and currency value- they have an inverse relationship
Interest rate parity- The condition stating that the interest rate differential between two countries is equal to the percentage difference between the forward exchange rate and the spot exchange rate
The returns of investing in the home currency are equal to the returns from investing abroad and then converting foreign returns back to the home currency
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