1 the Balance of Payments and Exchange Rate 1

Notes

1 The Balance of Payments and Exchange Rate 1. See IMF, Balance of Payments and International Investment Position Statistics, http://www.imf.org/external/np/sta/bop/bop.htm; http://www.digitaleconomist, org/bop_4020.html; and http://bea.gov/scb/pdf/2012/10%20October/1012_ quarterly_international_transactions-tables.pdf. 2. These illegal deposits in tax-haven nations (Switzerland and offshore centers) is a serious social crime and nations try to force foreign banks to reveal the list of names (“Lagarde list”). See, TV MEGA, January 28, 2013. In March 2013, Troika (EU, ECB, and IMF) went against one of these centers, Cyprus. See http://www.workers.org/2013/04/01/what-the-troika-did-to-cyprus-robbing- depositors-calling-it-a-rescue/ and http://www.nytimes.com/2013/04/03/opinion/ putins-role-in-cypruss-collapse.html?_r=0. 3. See IMF, http://elibrary-data.imf.org/DataReport.aspx?c=7183654&d=33061& e=170784 and Federal Reserve Bank of New York, http://www.newyorkfed.org/ aboutthefed/fedpoint/fed40.html; US Department of Commerce, BEA, http:// www.bea.gov/international/index.htm#bop; http://www.bea.gov/iTable/iTable. cfm?reqid= 6&step=3&isuri=1&600= 3; and U.S. Census Bureau, Foreign Trade Division, http://www.census.gov/foreign-trade/statistics/historical/gands.pdf; and http://www.youtube.com/watch?v=tYmMEqro8D4 . 4. A Sovereign Wealth Fund (SWF) is a state-owned investment fund (surplus entity) composed of financial assets such as stocks, bonds, property, precious metals, or other financial instruments. SWFs are invested globally. Most SWFs are funded by foreign exchange assets. Some SWFs may be held by a central bank, which accu- mulates the funds in the course of its management of a nation’s banking system; this type of fund is usually of major economic and fiscal importance. Other SWFs are simply the state savings that are invested by various entities for the purpose of investment return, and that may not have a significant role in fiscal management. The accumulated funds may have their origin in or may represent foreign currency deposits, gold, SDRs, and IMF reserve positions held by central banks and monetary authorities, along with other national assets such as pension investments, oil funds, or other industrial and financial holdings. These are assets of the sovereign nations that are typically held in domestic and different reserve currencies (such as the dollar, euro, pound, and yen). Such investment management entities may be 246 • Notes

set up as official investment companies, state pension funds, or sovereign oil funds, among others. There have been attempts to distinguish funds held by sovereign entities from foreign exchange reserves held by central banks. SWFs can be characterized as maximizing long-term return, with foreign exchange reserves serving short-term currency stabilization and liquidity management. Many central banks in recent years possess reserves massively in excess of needs for liquidity or foreign exchange management. Moreover it is widely believed that most have diversified hugely into assets other than short term, especially after the Asian crisis in June 1997, in highly liquid monetary ones, though almost no data is publicly available to back up this assertion. Some central banks have even begun buying equities or derivatives of differing ilk (even if they are fairly safe ones, like overnight interest rate swaps). See http://en.wikipedia.org/wiki/Sovereign_wealth_fund. 5. The total public and private debts in the United States were $184.676 trillion ($143.476 trillion and $41.2 trillion) and its GDP was $13.750 trillion in the first quarter of 2013. The federal government had a debt of 122% of the GDP and the total debt was 1,343.10% of the GDP. 6. See Williamson (1983, pp. 74–103). 7. The Middle Ages refers to the period of European history encompassing fifth– fifteenth centuries. It is marked from the collapse of the Western Roman Empire to the beginning of the Renaissance and the Age of Discovery, the periods that ushered in the Modern Era. Many events throughout the empire’s history are considered to have worsened the empire’s “decline.” The Battle of Adrianople in AD 378, the death of Theodosius I in AD 395, the crossing of the Rhine in AD 406 by German tribes, the execution of Stilicho in AD 408, the sack of Rome in AD 410, the death of Constantius III in AD 421, the death of Aetius in AD 454, the second sack of Rome in AD 455, and the death of Majorian in AD 461 are all historical events concerning the decline of the Western Roman Empire. The medieval period, thus, is the mid-time of the traditional division of Western history into Classical, Medieval, and Modern periods. See Kallianiotis (2011). 8. Mercantilism is the economic doctrine in which government control of foreign trade is important for ensuring the prosperity of the citizens and guaranteeing the military security of the state. It demands a positive balance of trade. Mercan- tilism dominated Western European economic policy and discourse from the sixteenth to late-eighteenth centuries. Mercantilism was motivated colonial expansion. Mercantilist policies included (1) building a network of overseas colonies; (2) forbidding colonies to trade with other nations; (3) monopolizing markets with staple ports; (4) promoting accumulation of gold and silver; (5) forbidding trade to be carried in foreign ships; (6) exporting subsidies; (7) maximizing the use of domestic resources; and (8) restricting imports with nontariff barriers to trade and other protective policies. 9. There are nations (e.g., Greece) that borrowed money from England in the nineteenth century and are still paying installments on these loans. See http:// www.antibaro.gr/article/3606, Endnote 8. Notes • 247

10. Keynesian economics, Keynesianism, or Keynesian theory are the group of Macroeconomic schools of thought based on the ideas of the twentieth-century British economist John Maynard Keynes. Advocates of Keynesian economics argue that private sector decisions sometimes lead to inefficient Macroeconomic outcomes, which require active policy responses by the public sector, particularly Monetary Policy (Ms and i ) actions by the central bank and Fiscal Policy (TandG) actions by the government to stabilize output over the business cycle. Keynesian economics advocates a mixed economy (predominantly private sector, but with a significant role of government and public sector) and it served as the economic model after the Great Depression up to 1970s. The return to the neoclas- sical theories (supply side economics) in early 1980s, the enormous deregulation, the creation of the global financial crisis in 2007—which continues up to 2013— have caused a resurgence in Keynesian thought, but globalization has become so powerful that there are no economic thoughts (“authorities”) that can go against its sweeping dominion. 11. On September 26, 2008, French president Nicolas Sarkozy, then also the president of the EU, said, “We must rethink the financial system from scratch, as at Bret- ton Woods.” On October 13, 2008, British prime minister Gordon Brown said to world leaders that they must meet to agree to a new economic system: “We must have a new Bretton Woods, building a new international financial architecture for the years ahead.” Brown was emphasizing the continuation of globalization and free trade as opposed to a return to fixed exchange rates. There were tensions between Brown and Sarkozy, who argued that the “Anglo-Saxon” model of unrestrained markets had failed. However, European leaders were united in calling for a “Bret- ton Woods II” summit to redesign the world’s financial architecture. US president George W. Bush was agreeable to the calls, and the resulting meeting was the 2008 G-20 Washington summit. Agreement was achieved for the common adoption of Keynesian fiscal stimulus, where the United States and China were to emerge as the world’s leading actors. But, there was no substantial progress toward reforming the international financial system, and nor was there at the 2009 meeting of the World Economic Forum at Davos (Switzerland). The Italian economics minister Giulio Tremonti said that Italy would use its 2009 G-7 chairmanship to push for a “New Bretton Woods.” He had been critical of the United States’ response to the global financial crisis of 2008, and had suggested that the dollar may be superseded as the base currency of the Bretton Woods system. Other Nongovernmental Organizati- ons (NGOs) called for the establishment of “international permanent and binding mechanisms of control over capital flows” and as of March 2009, they had achieved over 550 signatories from civil society organizations. In April 2009 G-20 summit in London, Gordon Brown continued to advocate for reform and the granting of extended powers to IMF and other international institutions and was said that he had President Obama’s support. Chinese leaders are also in favor of Keynes’ idea of a centrally managed global reserve currency (like the bancor, and not a national currency as the US dollar, due to Triffin dilemma). Chinese recommend the SDR, 248 • Notes

as an international reserve currency, too. Leaders meeting in April at the 2009 G-20 London summit agreed to allow $250 billion of SDRs to be created by the IMF and to be distributed to all IMF members, according to each country’s voting rights. In the aftermath of the summit, Gordon Brown declared “the Washington Consensus is over.” On January 27, 2010, at the 2010 World Economic Forum in Davos, President Sarkozy repeated his call for a new Bretton Woods, and was met by wild applause by a sizeable proportion of the audience. In December 2011, the Bank of England published a paper arguing for reform, saying that the current International Monetary System has performed poorly compared to the Bretton Woods system. The June 18–19, 2012, G-20 meeting in Los Cabos, Mexico, dealt mostly with the Eurozone debt crises and not with a new international reserve currency. During the January 2013 World Economic Forum in Davos, they discussed the economic austerities, future growths (expected to be very low), Eurozone debt crises, fiscal cliff in the United States, Britain’s future referendum to leave the EU, and human trafficking (the current crimes). On May 22, 2013, in an EU Summit, the EU’s leaders agreed to take steps in fight against tax evasion (by Apple, Ama- zon, Google, Starbuck, and many other businesses and wealthy individuals), which is estimated to be C1 trillion per year and to improve Europe’s energy market. See Times Colonist, http://www.timescolonist.com/business/eu-s-27-leaders-agree- to-important-step-in-fight-against-tax-evasion-by-year-s-end-1.227855. 12. See Kallianiotis and Harris (2010). 13. See http://www.keeptalkinggreece.com/2013/02/01/imf-spokesman-officially- admits-wrong-calculations-on-greeces-program/ and http://seekingalpha.com/ article/935291-the-imf-and-the-fiscal-multiplier. See also I. N. Kallianiotis, “The Intended Dissolution of the Intellectual and Spiritual Hellas,” Christian Vivliogra- fia, January 3, 2013, pp. 1–14, http://christianvivliografia.wordpress.com/2013/ 01/03/the-intended-dissolution-of-the-intellectual-and-spiritual-hellas/. 14. See chapter 6, note 45. 15. See Nasos Mihalakas, “Chinese ‘Trojan Horse’-Investing in Greece, or Invading Europe,” Foreign Policy Association, January 15, 2013, http://foreignpolicyblogs. com/2011/01/15/chinese-%E2%80%98trojan-horse%E2%80%99-investing-in- greece-or-invading-europe-part-i/; see also http://greece.greekreporter.com/2013/ 04/18/chinese-investors-eye-greek-airports/; and http://www.bloomberg.com/news/ 2013-05-17/samaras-tells-china-to-see-greece-as-europe-s-investment-gateway.html. 16. See Robin Sidel and Aaron Lucchetti, “Ratings Cut for Giant Banks,” Wall Street Journal, June 22, 2012, pp. A1 and A2; and Paul Krugman, “The Great Abdication,” New York Times, June 24, 2012, http://www.nytimes. com/2012/06/25/opinion/krugman-the-great-abdication.html. See also “Moody’s Downgraded Deutsche Bank,” Dailynews24.gr, June 22, 2012. 17. See http://www.foxbusiness.com/news/2013/02/16/policymakers-quotes-at-g20- summit-in-moscow/ . The G-20 pledged to ensure that monetary policy will be focused on price stability and growth and not weakening their currencies. See the Wall Street Journal, February 16–17, 2013, pp. A1 and A8. 18. EViews provides a variety of powerful tools for testing a series (or the first or second difference of the series) for the presence of a unit root [I(1)], series nonstationary. Notes • 249

A stationary series is I(0). See Dickey and Fuller (1979) and Phillips and Perron (1988).

2 Exchange Rate and Parity Conditions 1. See Paul Krugman, “The Conscience of a Liberal,” New York Times,February5, 2011, http://krugman.blogs.nytimes.com/2011/02/05/exchange-rates-and-price- stickiness-wonkish/?pagewanted=print. 2. The Balassa–Samuelson effect, also known as Harrod–Balassa–Samuelson effect (See Kravis and Lipsey [1991]), the Ricardo–Viner–Harrod–Balassa–Samuelson– Penn–Bhagwati effect (Samuelson [1994, p. 201]), productivity biased purchasing power parity (PPP) [Officer (1976)] and the rule of five eights (David [1972]) is either of two related things: (1) The observation that consumer price levels in richer countries are systematically higher than in poorer ones (the “Penn Effect” [is the economic finding associated with what became the Penn World table that real income ratios between high and low income countries are systematically exag- gerated by Gross Domestic Product conversion at market exchange rates]). (2) An economic model predicting the above, based on the assumption that productivity or productivity growth-rates vary more by country in the traded goods’ sectors than in other sectors (the Balassa–Samuelson hypothesis). BT + = 3. A tariff (import tax, t) will increase the price of importable j by [Pjt (1 t) AT BT Pjt ], the revenue for the government by Pjt t, and will increase competitiveness BT = AT = in the domestic economy (Pjt price of commodity j before tariff and Pjt after tariff). 4. “The index was never intended to be a precise predictor of currency movements, simply a take-away guide to whether currencies are at their ‘correct’ long-run level. Curiously, however, burgernomics has an impressive record in predicting exchange rates: currencies that show up as overvalued often tend to weaken in later years. But you must always remember the Big Mac’s limitations. Burgers cannot sensibly be traded across borders and prices are distorted by differences in taxes and the cost of nontradable inputs, such as rents.” See McCurrencies, Happy 20th Birthday to Our Big Mac Index, May 25, 2006, http://www.economist.com/node/6972477?story_id=6972477. 5. See Philip Turner and Jozef Van’t dack, “Measuring International Price and Cost Competitiveness,” BIS, http://www.bis.org/publ/econ39.pdf and Zsolt Darvas, “Real Effective Exchange Rates for 178 Countries: A New Database,” Bruegel.org, March 15, 2012, http://www.bruegel.org/publications/publication- detail/publication/716-real-effective-exchange-rates-for-178-countries-a-new- database/. 6. Karl Gustav Cassel (October 20, 1866–January 14, 1945) was a Swedish economist and professor of economics at Stockholm University. Cassel’s perspective on economic reality, and especially on the role of interest, was rooted in British neo- classicism and in the nascent Swedish schools. He is perhaps best known through John Maynard Keynes’ article “Tract on Money Reform” (1923), in which he raised 250 • Notes

the idea of Purchasing Power Parity (PPP). P. Einzig has said that “Cassel was beyond doubt one of the outstanding ﬁgures in economic science during the inter- war period (central Europe). His authority was second only to that of Lord Keynes, and his advice was eagerly sought on many occasions by his own Government and by foreign Governments.” He was also a founding member of the Swedish school of economics and came to economics from mathematics. He earned an advanced degree in mathematics and then he went to Germany to study economics. Apart from the rudiments of a purchasing power parity theory of exchange rates (1921), he produced an “overconsumption” theory of the trade cycle (1918). He also worked on the German reparations problem. He was a member of many committees dealing with matters of state in Sweden and devoted much labor to the creation of a better system of budget exposition and control (1905–1921). In addition to his books in Swedish, he published the following works in other languages: Das Recht auf den vollen Arbeitsertrag (1900), The Nature and Necessity of Interest (1903), and Theoretische Sozialökonomie (1919). His Memorandum on the World’s Monetary Problems was published by the League of Nations for the International Financial Conference in Brussels in 1920 and attracted widespread attention. ε 7. The price elasticity of demand for imports ( M )ismeasuredasfollows: ϑ ε =−% Mt =− Mt pt =− ln Mt M % pt p Mt ϑ ln pt where ε = price elasticity of demand for imports, M = imports, p = the terms M t t ∗ PMt St Pt of trade (relative price between the two countries), and TOT = pt = = . PX Pt t ρ = 8. The correlations between the exchange rate (St ) and interest rates are: S,iFF − ρ =− ρ =− ρ =− 0.473, S,iRF 0.453, S,iUS10YTB 0.482, S,iUS20YTB 0.460, ρ =− ρ =− ρ =− S,iUS30YTB 0.460, S,iAAA 0.744, and S,iBAA 0.823; an increase in the US interest rates appreciates the US dollar. (Data source: Economagic.com) 9. This relationship (IFE) is tested with the spot exchange rate between the ($/C) and the interest rate on ten-year maturity Eurozone Treasury bond rate: The correlation is, ρ ∗ =−0.755 (as the spot rate is increasing, the euro is appreciated; S,iEU 10YTB e ↑ ↑ ⇒ the European interest rate is on the fall). The causality goes, St+1 (C ) = ∗∗ ⇒ ∗ ↓ F 3.561 iEU10YTB (as the euro is appreciated, the Eurozone ten-year maturity Treasury bond rate falls). 10. Equation (32) is derived as follows: F ∗ F S ∗ S ∗ F ∗ CID=R − R = (1 + i ) − (1 + i) = ( − 1) − i + i − i + i EMU US S S S S S F − S ∗ F − S ∗ ∼ F − S ∗ = − i + i + i = − i + i S S S F−S ∗ =∼ The fourth term, S i 0, in the above equation can be ignored because it is a very small number, if the investment is for a few days; and then, we are left with F−S − + ∗ = the expression, S i i , which is an approximation. By setting CID 0, we = F−S − + ∗ ⇒ − ∗ = F−S have: 0 S i i i i S (CIP). This is what is known as the approximation of the covered interest parity condition. Notes • 251

− ∗ − ∗ − ∗ ∗ 11. By taking, CID = 0 = F S − i + i + F S i = F S (1 + i ) + i − i ⇒ i − S ∗ S S ∗ = F−S + ∗ ⇒ i−i = F−S i S (1 i ) 1+i∗ S . This is the covered interest parity (CIP) condition. 12. Testing the unbiased rate hypothesis for the ($/C) spot and forward exchange rate, we have the following results:

∗∗∗ st = 0.006 + 0.972 ft−1 (0.014) (0.044)

R2 = 0.876,SSR = 0.053,F = 479.709,D − W = 1.536,N = 70

∼ These results support the unbiasdness hypothesis because α0 = 0.006 = 0(and ∼ statistically insignificant) and α1 = 0.972 = 1(and statistically significant at 1% level). 13. In economics, the term economic efficiency refers to the use of the existing (limited) resources, so as to maximize the production of goods and services. An economic system is said to be more efficient than another (in relative terms), if it can provide more goods and services for society without using more resources. In absolute terms, a situation can be called economically efficient if (1) No one can be made better-off without making someone else worse-off (commonly referred to as Pareto efficiency). (2) No additional output can be obtained without increasing the amount of inputs. (3) Production proceeds at the lowest possible per-unit cost. 14. See Mishkin (1983). 15. In finance, momentum is the empirically observed tendency for rising asset prices to rise further, and falling prices to keep falling. For instance, it was shown that stocks with strong past performance continue to outperform stocks with poor past performance in the next period with an average excess return of about 1% per month. The difficulty is that an increase in asset prices, in and of itself, should not warrant further increase. Such increase, according to the EMH, is warranted only by changes in demand and supply or new information (fundamental analysis). The explanation is that investors are irrational; they underreact to new information by failing to incorporate news in their transaction prices. However, much of this anomaly, as in the case of price bubbles, has been argued that it can be observed even with perfectly rational traders. 16. Market capitalization ( or market cap) is the total value of the tradable shares of a publicly traded company; it is equal to the share price (P0)timesthenumberof shares outstanding (N ). As outstanding stock is bought and sold in public markets, capitalization could be used as a proxy for the public opinion of a company’s net worth and is a determining factor in some forms of stock valuation. Preferred stocks are included in the calculation. The total capitalization of stock markets or economic regions may be compared to other economic indicators. The total market capitalization of all publicly traded companies in the world was US$57.5 trillion in May 2008 and dropped slightly to below US$40 trillion in September 2008, with the global financial crisis (systemic risk), which generated a loss of wealth of US$17.5 trillion. 252 • Notes

17. The low-volatility anomaly is the fact that portfolia of low-volatility stocks have produced higher risk-adjusted returns than portfolia with high-volatility stocks in most markets studied. It is considered an anomaly because it contradicts what the Capital Asset Pricing Model (CAPM) would predict about the relationship between risk and return. Research challenging CAPM’s underlying assumptions about risk has been mounting for decades. One challenge was that we could not borrow at a risk-free rate. Other researchers have found evidence supporting the existence of risk premia in the capital market, which means over the long run, stock portfolia with lesser variance in monthly returns have experienced greater average returns than their “riskier” counterparts. More recently, the evidence of the anomaly has been mounting; both academics and practitioners confirm the presence of the anomaly throughout the 40 years since its initial discovery. 18. There are three themes, which are prevalent in behavioral finances: (1) Heuri- stics: People often make decisions based on approximate rules of thumb and not strict logic. (2) Framing: The collection of anecdotes and stereotypes that make up the mental emotional filters individuals rely on to understand and respond to events. (3) Market Inefficiencies: These include mis-pricing and nonrational decision making. 19. See Moosa (2000), http://books.google.com/books?id= Aj5u0-wQ54sC&pg= PA17&lpg= PA17&dq=Exchange+Rate+ Expectations+(static,+ extrapolative) &source=bl&ots= fudrzx9yK6&sig=9SRu77mgQBJ_KP3zeVN69dDy_y4& hl=en&sa= X&ei=kQViUP_UNafw0gHXjoCwBA&ved=0CD4Q6AEwBA# v= onepage&q= Exchange%20Rate%20Expectations%20(static%2C%20extra polative)&f= false and Marey (2004) http://arno.unimaas.nl/show.cgi?fid=820. 20. The concept of static expectations has been widely used in the early economics literature, such as in the cobweb model of price determinations. In the cobweb model, the static expectations assumption states that sellers expect the price of a good next period to be the same as it is today and adjust their production accordin- gly. The early literature did not focus much on unexpected shocks. The concept of static expectations and its more advanced variation, the concept of adaptive expectations, play an important role in the monetary economics, the branch of economics that addresses the design and the impact of monetary policy. Because only unexpected inflation, or inflation rate in excess of the expected inflation rate, can increase the aggregate output of the economy, it is important for policymakers to know what inflation rate economic agents expect in the future. For economists, this means that they have to make an assumption about how economic agents form their predictions of future inflation. 21. The bandwagon effect is a well-documented form of “groupthink” in behavioral science and has many applications. The general rule is that conduct or beliefs spread among people, as fads and trends clearly do, with “the probability of any individual adopting it increasing with the proportion, which have already done so.” As more people come to believe in something, others also “hop on the bandwagon” regardless of the underlying evidence. The tendency to follow the actions or beliefs of others can occur because individuals directly prefer to conform or because individuals derive information from others. In layman’s term the bandwagon effect Notes • 253

refers to people doing certain things because other people are doing them, regardless of their own beliefs, which they may ignore or override. For instance, once a product becomes popular, more people tend to “get on the bandwagon” and buy it, too. The bandwagon effect has wide implications, but is commonly seen in politics and consumer behavior. This effect is noticed and followed very much by the youth; where, if young people see many of their friends buying a particular phone, they could become more interested in buying that (Apple products, for example). When individuals make rational choices based on the information they receive from others, economists have proposed that information cascades can quickly form, in which people decide to ignore their personal information signals and follow the behavior of others. Cascades explain why behavior is fragile; people understand that they are based on very limited information. As a result, fads form easily, but are also easily dislodged. Such informational effects have been used to explain political bandwagons. 22. See Muth (1961). 23. See Cobweb model, which explains why prices might be subject to periodic ﬂu- ctuations in certain types of markets. It describes cyclical supply and demand in a market, where the amount produced must be chosen before prices are observed. Producers’ expectations about prices are assumed to be based on observations of previous prices. 24. And by the power of the labor unions, which has vanished, lately, due to globalization, deregulation, illegal migration, and pressure from the capital market (creditors). 25. See Sarno and Taylor (2002). 26. See Giovannini and Jorion (1987). 27. See Chiang (1991).

3 Financing the Multinational Corporation and Its Cost of Capital 1. FDI is a direct investment into one country by a company in production located in another country either by buying a piece of land, building a factory, and undertaking an operation abroad, or by buying a company (M&A) in the foreign country, or by expanding operations of an existing business in another country. 2. Conflict of Laws originates from situations, where the ultimate outcome of a legal dispute depends on which law is applied and the common law courts’ manner of resolving the conflict between those laws, which are referred to as private international law. The three branches of the conflict of laws are (1) Jurisdiction, whether the forum court has the power to resolve the dispute at hand between the MNC and the host country; (2) Choice of Law, depending on what law will apply to resolve the dispute; and (3) Foreign Judgments, the ability to recognize and enforce a judgment from an external forum within the jurisdiction of the adjudicating forum. 3. A center of excellence refers to a team, a shared facility, or an entity that provides technology, leadership, evangelization, best practices, research, support, training for a focus area, and managerial expertise. The focus area in this case might be 254 • Notes

a technology (i.e., Java), a business concept (i.e., Business Process Management [BPM]), a skill (i.e., negotiation), or a broad area of study (i.e., a university). Within an organization, a center of excellence may refer to a group of people, a department, or a shared facility. It may also be known as a competency center or a capability center. The term may also refer to a network of institutions collaborating with one other to pursue excellence in a particular area. In technology-related companies, the center of excellence concept is often associated with new software tools, technologies, or associated business concepts (i.e., service-oriented architecture, business intelligence, etc.). In academic institutions, a center of excellence often refers to a team with a clear focus on a particular area of research; such a center may bring together faculty members from different disciplines and provide shared facilities. In the healthcare sector, the term often refers to a center that provides sufficient and easily accessible medical services to patients, with concentrations of hospital in that area. In financial centers, we see concentration of banks and other financial institutions in the specific region. 4. Tax noncompliance is a range of activities that are unfavorable to a nation’s tax system. This may include tax avoidance, which is tax reduction by “legal means,” and tax evasion, which is the nonpayment of tax liabilities. The use of the term “noncompliance” to refer to tax avoidance, however, is not universal or standard, and similar terms are also used differently by different people. In the United States, the term “noncompliance” often refers only to illegal misreporting. Laws known as a General Anti-Avoidance Rule (GAAR) statutes, which prohibit “tax aggressive” avoidance, have been passed in several developed countries including the Uni- ted States (since 2010 with the global financial crisis), Canada, Australia, New Zealand, South Africa, Norway, and Hong Kong. In addition, judicial doctrines have accomplished a similar purpose, notably in the United States through the “business purpose” and “economic substance” doctrines established in Gregory v. Helvering, 293 U.S. 465 (1935), which was a landmark decision by the US Supreme Court concerned with US income tax law. Though the specifics may vary according to jurisdiction, these rules invalidate tax avoidance, which is technically legal but not for a business purpose or in violation of the spirit of the tax code. See http://www.huffingtonpost.com/2011/11/03/major-corporations- tax-subsidies_n_1073548.html and http://finance.yahoo.com/news/companies- paying-the-least-in-taxes-180305270.html. The main issue in an EU Summit in May 2013 in Brussels was tax evasion by businesses and wealthy individuals. The EU is losing more than C1 trillion per year tax revenue from this unfair business practice. See http://www.euronews.com/2013/05/22/eu-leaders-talk-tax- at-brussels-summit. 5. See the list of 500 largest MNCs in http://money.cnn.com/magazines/fortune/ global500/2012/full_list/. 6. For more methods, see http://www.bized.co.uk/notes/2012/09/international- business-methods. 7. For privatization of SOEs, see http://rt.com/business/greece-gazprom-privatization- plans-511/ and Kallianiotis (2013). Notes • 255

8. The US antitrust laws have been put in place by federal and state governments to regulate corporations. They are believed to be necessary for keeping companies from becoming too large or monopolists and fixing prices, and also encourage competition so that consumers can receive quality products at reasonable prices. According to its proponents, these laws give businesses an equal opportunity to compete for market share. They believe preventing monopolies ensures that consumer demand is met in a fair and balanced way. There are four sections that the laws focus on, including agreements between competitors, contracts between buyers and sellers, mergers, and monopolies. Unfortunately, we have seen, lately, that these antitrust laws cannot be imposed on large MNCs. 9.SeeTedElliott,“CokeZero,theDeadliestBeverage...orSoTheySay.” http://www.mhlearningsolutions.com/commonplace/index.php?q=node/5587. 10. Quasi-rent is an analytical term in economics, for the income earned, in excess of post-investment opportunity cost, by a sunk cost investment. Economic rent is the difference between the income from a factor of production in a particular use and the absolute minimum required to draw a factor into a particular use (from no use at all, or from the next best use). Some capital investments take the form of sunk cost investments in more or less specialized capital equipment, research and development, or training. A sunk cost investment will be made only in the expectation that the resulting factor (i.e., capital equipment) can be employed to realize income above costs; the expectation of profitable income induced the creation of the capital investment. A true rent is an income in excess of what is necessary to bring a factor into productive use; a quasi-rent is only a Paretian rent excluding the sunk cost investment. The existence of sunk cost investments and their quasi-rents point to important problems for both business strategy and public policy, particularly in connection with natural monopolies (their efficient utilization). Government policies are designed or manipulated to ensure that particular sunk cost investments earn larger quasi-rents (patents and intellectual property laws). 11. In 1999, the growing use of high-speed Internet by individuals and businesses meant that if you had “dot com” at the end of your business name, you did not need business plan. Get a catchy name and the venture capital would follow, and you would make a lot of money on the IPO. That was, of course, until potential investors started demanding valuable things from a firm, like, actual business models. Beginning in March 2000, the stock market began wising up, and the “dot com or internet or information technology bubble” fully burst in 2001. Ultimately, this wiped out a whopping $5 trillion in market value of technology companies from March 10, 2000 (NASDAQ was 5,132.52 and DJIA was 11,497.10 on January 1, 2000) to October 9, 2002 (NASDAQ reached 1,114.11 and DJIA 7,286.27). What made this recession go deeper were the massive layoffs and “jobless recovery” in the time after the attacks of September 11, 2001. What stopped it? The drop- ping interest rates and freely available credit that fueled the housing bubble of the 2000s and caused the global financial crisis in August 2007, which is still going on in 2013 with a complete destruction of the Eurozone nations. Venture capitalists saw record-setting growth as “dot com” companies experienced abnormal rises in 256 • Notes

their stock prices and, therefore, moved faster and with less caution than usual, choosing to mitigate the risk by starting many contenders and letting the market decide that would succeed. The low interest rates in 1998–1999 helped increase the start-up capital amounts. The motto for “dot com” companies was “get big fast” and “do not care for the social consequences now.” 12. The Sarbanes–Oxley Act of 2002 (Pub.L. 107–204, 116 Stat. 745, enacted July 30, 2002), also known as the “Public Company Accounting Reform and Investor Protection Act” (in the Senate) and “Corporate and Auditing Accountability and Responsibility Act” (in the House) and more commonly called Sarbanes–Oxley, Sarbox or SOX, is a US federal law that set new or enhanced standards for all US public company boards, management, and public accounting firms. As a result of SOX, top management must now individually certify the accuracy of financial information. In addition, penalties for fraudulent financial activity are much more severe. Further, SOX increased the independence of the outside auditors who review the accuracy of corporate financial statements, and increased the oversight role of boards of directors. 13. The Cadbury Report,titledFinancial Aspects of Corporate Governance,isareportofa committee chaired by Sir George Adrian Hayhurst Cadbury (Director of the Bank of England from 1970 to 1994) that sets out recommendations on the arrangement of company boards and accounting systems to mitigate corporate governance risks and failures. This report was published in 1992. The report’s recommendations have been adopted in varying degree by the European Union, the United States, the World Bank, and others. 14. See Aktiengesellschaft (German abbreviated AG), which is a German word for a corporation that is limited by shares, owned by shareholders, and may be traded on a stock market. The term is used in Germany, Austria, and Switzerland. It is also used occasionally in Luxembourg (though the French-language equivalent, Société Anonyme, is more common) and for companies incorporated in the German- speaking region of Belgium. In Greece, the term is used as AE (Anonymous Etaireia=company). 15. See Bowen (2008). 16. A moral hazard isasituation,whereapartywillhaveatendencytotakerisks because the costs that could incur will not be felt by the party taking the risk. Then, moral hazard is a tendency to be more willing to take a risk, knowing that the potential costs or burdens of taking such risk will be borne, in whole or in part, by others. A moral hazard may occur, where the actions of one party may change to the detriment of another after a financial transaction has taken place. Recently, with respect to the originators of subprime mortgages, many may have suspected that the borrowers would not be able to maintain their payments in the long run and for this reason, the loans were not going to be worth much. But, because there were many buyers of these loans (or of pools of these loans) willing to take on that risk, the originators did not concern themselves with the potential long-term consequences of making these loans. After selling the loans, the originators bore none of the risk so there was no incentive for the originators to investigate the long-term Notes • 257

value of the loans. Also, the Eurozone debt crises are examples of moral hazards, in which the Troika (the IMF, the ECB, and the Eurogroup) for heavily indebted nations like the PIIGSC (Portugal, Ireland, Italy, Greece, Spain, and Cyprus) was waiting as long as possible to act. The risks of a money run (bank run or run on the bank) and the consequential market crash in Europe and the economic and social catastrophe of these indebted nations is by far not as detrimental to these institutions (Troika) as to the poor indebted nations themselves. Furthermore, economists explain moral hazard as a special case of information asymmetry, a situation in which one party in a transaction has more information than another. In particular, moral hazard may occur if a party that is insulated from risk has more information about its actions and intentions than the party paying for the negative consequences of the risk. More broadly, moral hazard occurs when the party with more information about its actions or intentions has a tendency or incentive to beh- ave inappropriately from the perspective of the party with less information. Also, moral hazard can arise in a principal-agent problem, where one party, the agent, acts on behalf of another party, the principal. The agent usually has more information about his actions or intentions than the principal does, because the principal usually cannot completely monitor the agent. The agent may have an incentive to act inappropriately (from the viewpoint of the principal) if the interests of the agent and the principal are not aligned. 17. Adverse selection refers to a market process in which undesired results occur when buyers and sellers have asymmetric information (access to different information); the “bad” products or services are more likely to be selected. For example, a bank that sets one price (interest rate) for all of its demand deposits account customers runs the risk of being adversely selected against by its low-balance, high-activity (and hence least proﬁtable) customers. Two ways to model adverse selection are to employ signaling games and screening games. 18. The Swiss referendum “against rip-off salaries” of 2013 was a successful popular initiative in Switzerland to control executive pay of companies listed on the Swiss stock market, and to increase shareholders’ participation in corporate governance. This was one of three questions put to the electorate in the Swiss Referendum 2013.The vote took place on March 3, 2013, and passed with a majority of 67.9%, with a 46% turnout. The initiative mandates the Federal Government to implement the provisions within one year, pending implementation of the ﬁnal law. 19. See Kallianiotis (2010b). 20. See Edward E. Lawler III, “Outrageous Executive Compensation: Corporate Boards, Not the Market, Are to Blame.” http://www.forbes.com/sites/edwardlawler/ 2012/10/09/outrageous-executive-compensation-corporate-boards-not-the-market- are-to-blame/. Also see Jon Talton, “Reasons for Outrageous CEO Pay Packages Well Known.” http://seattletimes.com/html/jontalton/2018495094_biztaltoncol24. html. Further, see Mitch Strohm, “Debunking the ‘Pay ‘em or Lose ‘em’ Excuse for Outrageous CEO Pay.” http://www.interest.com/cd-rates/advice/debunking- the-pay-or-lose-excuse-outrageous-ceo-pay/. 21. See Kallianiotis (2011c). 258 • Notes

22. See IFC World Bank Group, http://www.unglobalcompact.org/docs/issues_doc/ Corporate_Governance/Corporate_Governance_IFC_UNGC.pdf. 23. This is exactly the policy that Troika has imposed the past few years on Euro- zone nations, and the results were destructive and socially unacceptable, but they have an excuse, “they have to save the euro.” When the cost of saving the euro exceeds its benefits; then, there is no need to save it and the latest debt crisis has proved that there was no need to create it. See John N. Kallianio- tis, “If Greece Stays in the Eurozone, It Has No Future,” U.S. News & World Report, May 16, 2012, http://www.usnews.com/debate-club/should-greece-leave- the-eurozone/if-greece-stays-in-the-eurozone-it-has-no-future. 24. In the United States, the data show: (1) Corporate taxes as a percentage of Federal Revenue were in 1955: 27.3% and in 2010: 8.9%. (2) Corporate taxes as a percentage of GDP; in 1955: 4.3% and in 2010: 1.3%. (3) Individual income/payrolls as a percentage of Federal Revenue; in 1955: 58.0% and in 2010: 81.5%. See http://www.ritholtz.com/blog/2011/04/corporate-tax-rates-then-and- now/. The same unfair tax system exists in EU; corporations and wealthy people do not pay taxes. See http://blogs.reuters.com/edward-hadas/2013/05/22/apple- hypocrisy-and-stakeholder-tax/. 25. See http://www.grin.com/en/e-book/135136/nike-in-asia. 26. The Marikana miners’ strike or Lonmin strike was a strike at a mine owned by Lonmin (this MNC was incorporated in the United Kingdom on May 13, 1909, as the London and Rhodesian Mining and Land Company Limited) in the Marikana area, close to Rustenburg, South Africa, in 2012. The event garnered international attention following a series of violent incidents between the South African Police Service, Lonmin security, the leadership of the National Union of Mineworkers (NUM) and strikers themselves, which has resulted in the deaths of approximately 47 people, the majority of whom were striking mineworkers kil- led on August 16, 2012. At least 78 additional workers were also injured. The total number of injuries during the strike remains unknown. See CNN News, http://www.cnn.com/2012/08/17/world/africa/south-africa-mine-violence 27. As of January 2012, some commentators have characterized the unpreceden- ted changes in the global economy as “turbo-capitalism” (Edward Luttwak), “market fundamentalism” (George Soros), “casino capitalism” (Susan Strange), “cancer-stage capitalism” (John McMurtry), and as “McWorld” (Benjamin Bar- ber). Unfortunately, as the time is passing, this fight between the globalists and the antiglobalists is becoming worse and its victims are human beings for whom we have established the MNCs and the international economic system. 28. Capital market segmentation is a financial market imperfection caused by government constraints, institutional practices, and investors’ perceptions. Some important imperfections are: Asymmetric information between domestic and foreign investors, lack of transparency, high securities transaction cost, foreign exchange risk, political risk, corporate governance differences, regulatory barriers, and others. MNCs that gain access to international capital markets can lower their cost of Notes • 259

capital because they increase the market liquidity of their shares and escape from market segmentation that might exist in their home capital market. 29. See Durand (1952), http://www.nber.org/chapters/c4790.pdf. = EBIT (1−T ) = 30. The value of a firm can be measured as: V i where EBIT earnings before interest and taxes, T = corporate tax rate, and i = interest rate (cost of capital). 31. The term “Euro” does not imply that the issuers or investors are located in Europe. Euro-equity is a generic term for international equity issues originating and sold anywhere in the world. 32. In April 1990, the SEC approved Rule 144A. It permits qualified institutional buyers to trade privately placed securities without the previous holding period restrictions and without SEC registration. Simultaneously, the SEC modified its regulation S to permit foreign issuers to tap the US private placement market through an SEC 144A issue, also without SEC registration. A screen-based auto- mated trading system called PORTAL was established by National Association of Security Dealers (NASD) to support the distribution of primary issues and to create a liquid secondary market for those unregistered private placements. Since SEC registration has been identified as the main barrier to foreign firms wishing to raise funds in the United States, SEC rule 144A placements are proved attractive to foreign issuers of both equity and debt securities. 33. Private equity funds differ from traditional venture capital funds. Venture capitalists usually operate mainly in highly developed countries, they typically invest in high-tech startups with the goal of exiting the investment with an Initial Public Offering (IPO) placed in those same highly liquid markets. Very little venture capital is available in emerging markets, partly because it would be difficult to exit with an IPO in an illiquid market. The same exiting problem faces the private equity funds, but they have a longer time horizon, to invest in already mature and profitable business and are content with growing them through better management and mergers with other firms. 34. A decision to cross-list must be balanced against the implied increased commi- tment to full disclosure and to a continuing investor relations program. For firms resident in Anglo-American markets, listing abroad may not appear to be much of a barrier. For example, the SEC’s disclosure rules for listing in the United States are so stringent and costly than any other market’s rules, which are much simpler. However, non-US firms must really think twice before cross-listing in the United States. Not only are the disclosure requirements breathtaking, but also a continuous demand for quarterly information is required by US investors. As a result, the foreign firm must provide a costly continuous investor relations program for its US shareholders, including frequent “road shows” and the time-consuming personal involvement of top management. Of course, these requirements are absolutely necessary, especially today, with this global financial crisis and uncertainty. A US school of thought is that the worldwide trend toward requiring fuller and more standardized financial disclosure if operating results and balance sheet positions 260 • Notes

may have the desirable effect of lowering the cost of equity capital. Another school of thought is that the US level of required disclosure is an onerous, costly burden. It chases away many potential foreign firms, thereby narrowing the choice of securities that are available to US investors at reasonable transaction cost. At the end 1998, only 391 foreign firms were listed on the NYSE, whereas 466 foreign firms were listed in the London Stock Exchange, and 2,784 foreign firms were listed on the German stock exchanges. Studies on internationally traded shares have shown that there is a statistically significant relationship between the level of financial disclosure required and the market, on which the firms chose to list. The higher level of disclosure required, the less likely that a firm would be listed in that market. However, for those firms that are listed despite the disclosure and cost barriers, the payoff could be needed to access additional equity funding for expansion or acquisition in the United States. 35. See Gordon Platt, “Equity: Global IPO Market Shrinks,” Global Finance,February 2013, http://www.gfmag.com/archives/170-february-2013/12305-equity-global- ipo-market-shrinks.html#axzz2PKzNJQGO 36. See ETF Securities Equity ETFs—Structure & Counterparty Risk Explai- ned, February 2013, www.etfsecurities.com and http://personal.fidelity.com/misc/ buffers/ishares_etf.shtml?imm_pid=1&immid= 00593&imm_eid= e12587881 &buf=999999. 37. Sources of external funds for corporations in the United States and the other G-6 countries, in order of importance are: Bank Loans (62%), Bonds and Com- mercial Paper (30%), and Stocks (2%). See http://www.umflint.edu/~mjperry/ Money8a.htm. 38. In June 2012, multiple criminal settlements by Barclays Bank revealed significant fraud and collusion by member banks connected to the rate submissions, leading to the “LIBOR scandal.” The British Bankers’ Association said on September 25, 2012, that it would transfer oversight of LIBOR to UK regulators, as proposed by Financial Services Authority managing director Martin Wheatley’s independent review recommendations. Wheatley’s review recommended that banks submitting rates to LIBOR must base them on actual interbank deposit market transactions and keep records of those transactions, that individual banks’ LIBOR submissions be published after three months, and recommended criminal sanctions specifically for manipulation of benchmark interest rates. 39. The first European Eurobonds were issued in 1963 by Italian motorway network Autostrade. The $15 million six-year loan was arranged by the bankers S. G. War- burg in London. The majority of Eurobonds are now owned in “electronic” rather than physical form. The bonds are held and traded within one of the clearing systems (Euroclear and Clearstream being the most common). Coupons are paid electronically via the clearing systems to the holder of the Eurobond (or their nomi- nee account). These Eurobonds appeared as straight fixed-rate issues,asfloating-rate notes (FRNs),andasequity-related international bonds. 40. On March 16, 2013, the European Commission (EC), European Central Bank (ECB), and International Monetary Fund (IMF) agreed on a C10 billion deal with Cyprus, making it the fifth country (after Greece, Ireland, Portugal, and Spain) to Notes • 261

receive money from the Troika. As part of the deal, was a 37.5% bank deposit levy for deposits higher than C100,000 on all domestic bank accounts and a large amount of these deposits (about C30 billion) were Russian deposits. Savers were due to be compensated with shares in their banks. Measures were put in place to prevent withdrawal or transfer of moneys representing the prescribed levy. Many foreign wealthy people and MNCs were using Cyprus as an offshore bank (Cyprus was an international offshore financial center) and safe tax haven. The objective of Troika was to abolish Cyprus from the list of offshore centers and they succeeded, but at the same time they destroyed the Cypriot economy and its citizens’ social welfare. Cyprus became another victim of the unnecessary common currency in EU, the euro, and the dirty politics of its powerful partners in Eurozone (actually Germany). 41. See Chistofi, Harris, Kallianiotis et al. (2013). 42. See Paul Waldie, “Cash-Strapped Governments Take Aim at Tax Havens,” Globe and Mail, April 12, 2013, http://www.theglobeandmail.com/news/world/cash- strapped-governments-take-aim-at-tax-havens/article11179177/. 43. See G-20 Major Economies, http://en.wikipedia.org/wiki/G-20_major_economies. 44. See Tim Bennett, Tolley’s International Initiatives Affecting Financial Havens, Second Edition, London: LexisNexis Butterworth, 2002, ISBN: 0-406-94264- 9. The author in the Glossary of Terms defines an “offshore financial center” in forthright terms as “a politically correct term for what used to be called a tax haven.” However, he then qualifies this by adding, “The use of this term makes the important point that a jurisdiction may provide specific facilities for offshore financial centers without being in any general sense a tax haven.” See also http://en.wikipedia.org/wiki/Offshore_financial_centre.

4 International Investment, Portfolio Theory, and International Trade Financing 1. Of course, in the financial market the total wealth cannot be lost; it is redistributed from one person to the other. The investor, who is right in his expectations receives the money from the one who is wrong. 2. Portfolio theory was developed in the 1950s through the early 1970s and was considered an important advance in the mathematical modeling of finance. Since then, many theoretical and practical criticisms have been leveled against it. These include the fact that financial returns do not follow a Gaussian distribution or indeed any symmetric distribution, and that correlations between asset classes are not fixed, but can vary depending on external events (especially in crises). Fur- ther, there is growing evidence that investors are not rational and markets are not efficient. Finally, the low volatility anomaly is in conflict with CAPM’s trade-off assumption of higher risk for higher return. It states that a portfolio consisting of low volatility equities (like blue chip stocks) reaps higher risk-adjusted returns than a portfolio with high volatility equities (like illiquid penny stocks). A study conducted by Scholes, Jenson, and Black (1972) suggests that the relationship between return and beta might be flat or even negatively correlated. 262 • Notes

3. According to market data the loss in the US financial market was $18 trillion. The DJIA peaked on October 9, 2007 (DJIA was 14,164.53) and its trough was on March 9, 2009 (DJIA fell to 6,547.05), a decline of –7,617.48 points or –53.78%, with calendar days to bottom 517. See Kallianiotis (2011c). 4. Financial contagion effect refers to a scenario in which small shocks that initially affect only a few financial institutions or a particular region of an economy, spread to the rest of financial sector and other countries whose economies were previously healthy, in a manner similar to the transmission of a medical disease. Financial contagion happens at both the international level and the domestic level. First, at the domestic level, usually the failure of a domestic bank triggers transmission when it defaults on interbank liabilities and sells assets in a fire sale, thereby undermi- ning confidence in similar banks. An example of this phenomenon is the failure of Lehman Brothers and the subsequent turmoil in the US financial markets. Then, international financial contagion, which happens in both advanced and developing economies, is the transmission of financial crisis across integrated financial markets for direct or indirect economies. However, under today’s deregulated financial system, with large volume of cash flows, such as hedge fund and cross-regional operation of large banks, financial contagion usually happens simultaneously both among domestic institutions and across countries, as it happened in 2009. 5. See International Investing, http://www.sec.gov/investor/pubs/ininvest.htm. 6. The Association of Southeast Asian Nations (ASEAN) is a geopolitical and economic organization of ten countries located in Southeast Asia, which was formed on August 8, 1967, by Indonesia, Malaysia, the Philippines, Singapore, and Thailand. Since then, membership has expanded to include Brunei, Burma (Myan- mar), Cambodia, Laos, and Vietnam. Its aims include accelerating economic growth, social progress, and cultural development among its members, protection of regional peace and stability, and opportunities for member countries to discuss differences peacefully. 7. As per section 5 of the Negotiable Instrument Act 1881, a bill of Exchange is an instrument in writing containing an unconditional order, signed by the market, directing a certain person to pay on demand or at a fixed or determinable future time a certain sum of money only to the order of a certain person or the bearer of the instrument. 8. See “Bankers’ Acceptances,” Comptroller of the Currency, Administration of Nati- onal Banks, September 1999, http://www.occ.gov/publications/publications-by- type/comptrollers-handbook/baccept.pdf. 9. On April 11, 2013, the banker’s acceptance rates were: 30 days maturity 0.23%, 60 days 0.28%, 90 days 0.28%, 120 days 0.33%, 150 days 0.38%, and 180 days 0.38%. (Wall Street Journal, April 12, 2013, p. C7). 10. See Trade Acceptance, http://www.eagletraders.com/advice/securities/trade_ acceptance.htm. 11. See The Federation of International Trade Association, http://www.fita.org/aotm/ 0100.html. 12. See Securitization of Receivables, http://www.dilipratha.com/Development%20 Financing.htm#_What_is_securitization? Notes • 263

13. See Export-Import Bank, http://www.exim.gov/about/whoweare/. 14. See International Finance, http://export.gov/ﬁnance/index.asp. 15. For FCIA, see also http://www.referenceforbusiness.com/encyclopedia/For-Gol/ Foreign-Credit-Insurance-Association-FCIA.html#ixzz2QY51kw36. 16. See the Association of Trade & Forfaiters in the Americas, Inc. (ATFA), http://www.tradeandforfaiting.com/.

5 Political Risk and Foreign Direct Investment 1. See Kennedy (1988). 2. Since December 2010 the world has watched demonstrations and protests spread across countries in North Africa and the Middle East. These “prodemocracy” movements rose up against the dictatorial regimes and corrupt leaders who had ruled for decades in some cases. Someone called these revolutionary events “Arab Spring” and the phrase became a common slogan for media. The specificity of these Arab revolutions is that they have been popular uprisings, leaderless, and uncom- promising in demanding total change. Why have the events in Tunisia, Egypt, Libya, Yemen, Syria, and other countries followed such different paths? What are the long-term political, social, and economic ramifications of these revolutions? What are their intended and unintended consequences as countries across the region seek political and social reforms? What will be the future of the Arab revo- lution with regard to the crucial issues of freedom, democracy, fidelity to Islam, secularism, and tribal power? There are a lot of questions and there is much to study in the causes and factors that led to these large-scale movements. It seems that some other powers are behind these suspicious movements, who want the destabilization of these nations, and their poor citizens to be worse off, instead of being liberated. Of course, this situation has increased even more the political risk in these nations and foreign firms have to assess the new environment before going there. See http://guides.library.umass.edu/mideast. 3. For example, there are enormous oppositions by the local community against a Canadian MNC, Hellas Gold Ltd., that wants to exploit the gold in North Greece, in Halkidiki peninsula (the most tourist attractive region of Greece). Spiros Psa- roudas, head of the Callisto organization for wild life and nature, said that “there is a danger of the state of the waters in the area. The investor itself recognizes this. It states that the regional waters will be used for the extraction of gold.” See “Environ- mentalists Will Not Allow Gold Mining in Halkidiki,” GRReportr, March 8, 2013, http://www.grreporter.info/en/environmentalists_will_not_allow_gold_mining_ halkidiki/8850. 4. The General Agreement on Tariffs and Trade (GATT) was a multilateral agreement regulating international trade. According to its preamble, its purpose was the “substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis.” It was negotiated during the UN Conference on Trade and Employment and was the outcome of the failure of negotiating governments to create the International Trade Organization 264 • Notes

(ITO). GATT was signed in 1947 and lasted until 1994, when it was replaced by the World Trade Organization in 1995. The original GATT text (GATT 1948) is still in effect under the WTO framework, subject to the modifications of GATT 1994. 5. The World Trade Organization (WTO) is an organization that intends to supe- rvise and liberalize international trade. The organization officially commenced on January 1, 1995, replacing the GATT. The organization deals with regulation of trade between participating countries; it provides a framework for negotiating and formalizing trade agreements, and a dispute resolution process aimed at enforcing participants’ adherence to WTO agreements, which are signed by representatives of member governments and ratified by their parliaments. The conflict between free trade on industrial goods and services, but retention of protectionism on farm subsidies to domestic agricultural sector (requested by developed countries) and the substantiation of the international liberalization of fair trade on agricultural products (requested by developing countries) remain the major obstacles. Coun- tries have to protect all their domestic economic sectors and not “the economies of their allies.” WTO’s current director-general is Pascal Lamy (a French politician), who leads a staff of over 600 people in Geneva, Switzerland. 6. Today, Troika places restrictions on countries in the Eurozone, which do not want foreign firms within their borders, forcing them to privatize their domestic firms (SOEs) and use this revenue to reduce the public debt. See Kallianiotis (2013a). 7. “Japanese Purchase of Chip Maker Canceled after Objections in U.S.,” New York Times, March 17, 1987, http://www.nytimes.com/1987/03/17/business/japanese- purchase-of-chip-maker-canceled-after-objections-in-us.html. 8. Europe faces a very serious problem with the illegal immigrants, who are creepily imposing their cultures and values to Europeans. Europe will lose completely its identity in 25 years. The name of the European continent was “Christendom” until recently and now there are daily conflicts among locals and visitors. See the Voice of Russia , October 14, 2012, http://english.ruvr.ru/2012_10_14/How-to-tackle- the-problem-of-illegal-Muslim-immigrants-in-Europe/. See also the Te l e g ra p h , August 24, 2009, http://blogs.telegraph.co.uk/news/edwest/100007334/muslim- immigration-the-most-radical-change-in-european-history/ and the Center for Immigration Studies, April 2005, http://www.cis.org/EuropeMujahideen- ImmigrationTerrorism. 9. See Kevin Smith, The Law of Compensation for Expropriated Companies and the valuation Methods Used to Achieve that Compensation, Spring 2001, http://users.wfu.edu/palmitar/Law&Valuation/Papers/2001/Smith.htm. 10. See CNN News, http://www.cnn.com/2013/04/15/us/boston-marathon-explosions. 11. Cyberattacks against Western companies is a common universal-risk in our times. This will be the new war of the future, the “electronic war.” A top Chinese general rejected suggestions that the Chinese military is behind cyberspying aimed to American companies. Cybersecurity is a very sensitive issue for the United States and the Obama administration is looking at options to confront Beijing over the issue, including trade sanctions, diplomatic pressure, and indictments of Chinese Notes • 265

nationals in US courts. See the Wall Street Journal, April 23, 2013, pp. A1 and A17. 12. See David E. Sanger, “China’s Military Is Accused by U.S. in Cyberattacks,” New York Times, May 7, 2013, pp. A1 and A7. 13. Eurasia Group is the world’s largest political risk consultancy founded in 1998. It has offices in New York, Washington, London, and Tokyo and employs more than 150 full-time employees. The company also employs a network of 500 experts in 80 countries in Asia, Latin America, Europe, and Eurasia, the Middle East, and Africa. This approach includes the Eurasia Group Global Political Risk Index (GPRI)—the first qualitative comparative political and economic risk index designed specifically to measure stability in emerging markets. It developed over a ten-year period by experts in transitional politics and economics. This methodo- logy provides an “early warning” system, which helps anticipate critical trends and provides a measure for country capacity to withstand political, economic, security, and social shocks. Eurasia Group services include analytic research publications and tailored consulting and advisory services, as well as direct access to Eurasia Group analysts, research on political trends and their impact on business, on financial markets, and assessing the foreign investment climate. Eurasia Group’s 400 clients include major investment banks, institutional investors, government agencies, and MNCs. 14. See the Economist, http://www.economist.com/node/9890890?story_id=9890890. 15. For 2013, for the best countries, the rating was: Norway 89.87, Luxembourg 87.29, Singapore 86.81, United States 74.88, and Greece 33.99. See Euromoney, http://www.euromoney.com/Poll/10683/PollsAndAwards/Country-Risk.html. 16. The Economist Intelligence Unit (EIU) is an independent business within the Economist Group. Through research and analysis, EIU offers forecasting and advisory services to its clients. It provides country, industry, and management analysis worldwide and incorporates the former Business International Corpora- tion, a UK company acquired by the parent organization in 1986. It is particularly well known for its monthly country reports, five-year country economic forecasts, country risk service reports, and industry reports. It also specializes in tailored research for companies that require analysis for particular markets or business sectors. Year 2006 marked the sixtieth anniversary of the EIU’s inception. The EIU also produces regular reports on "liveability" and “cost of living” of the world’s major cities, which receive wide coverage in international news sources. The Economist Intelligence Unit’s Quality-of-Life Index is another important report. 17. The PRS Group, Inc., headquartered near Syracuse, New York, was established in 1979, placing it among the earliest commercial providers of political and country risk forecasts. In 2010, The PRS Group, Inc., was purchased by CEO/Owner Christopher McKee, who maintains operations for the company and also holds the position of ICRG editor-in-chief. Originally the Political Risk Services division of Frost & Sullivan, Inc., and then of UK-based IBC Group (now known as Informa); the company kept its original focus on political risk analysis and became independent in 1999. The PRS Group offers two distinct, independent, publicly 266 • Notes

available methodologies for assessing risk: Political Risk Services (PRS) and the International Country Risk Guide (ICRG). 18. The countries rank and score for 2012 is: Denmark, Finland, and New Zealand 90; United States 73; Greece 36; Afghanistan; North Korea; and Somalia 8. See http://cpi.transparency.org/cpi2012/results/. 19. See http://www.heritage.org/index/visualize. 20. See INSEAD, The Business School for the World, http://knowledge.insead.edu/ economics-politics/identifying-assessing-and-mitigating-political-risk-2013. 21. For estimating of binary models, see EViews 5 User’s Guide, Quantitative Micro Software, Irvine, CA, 2004. 22. See “Bribery and Corruption: The Lessons of the Siemens Scandal,” SAFETRAC, November 7, 2011, http://www.safetrac.com/blog/index.php/bribery-corruption- lessons-siemens-scandal/. 23. See http://www.pwc.com/us/en/risk-compliance/assets/PwC_PoliticalRisk_ 052006.pdf. 24. OPIC operates on a self-sustaining basis at no net cost to American government (taxpayers). It generated net income of $269 million in Fiscal Year 2011, helping to reduce the federal budget deficit for the thirty-fourth consecutive year. To date, OPIC has supported nearly $200 billion of investment in more than 4,000 projects, generated $75 billion in US exports and supported more than 276,000 American jobs. See http://www.opic.gov/press-releases/2009/. 25. See Census of Manufactures, U.S. Census Bureau, http://www.census.gov/econ/ overview/ma0100.html. 26. The Herfindahl index (also known as Herfindahl–Hirschman Index,orHHI) is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them. Named after economists Orris C. Herfindahl and Albert O. Hirschman, it is an economic concept widely applied in competition law, antitrust and also technology management. See James Bryant Bradley, “How to Calculate the Herfindahl Index.” http://www.ehow.com/how_5136910_calculate-herfindahl-index.html. 27. US investments in Ireland, for example, have these characteristics: branch plants are used to serve the integrated EU, but Ireland is chosen as the low-cost location. A second example would be a European firm producing in Mexico to serve the integrated North American market. See Ekholm, Forslid, and Markusen (2003). 28. The cause of these problems is the varied wages. Hourly labor costs for the textile industry, as of 2004, was: France $19.82, Italy $18.63, United States $15.78, Slovakia $3.27, Turkey $3.05, Bulgaria $1.14, Egypt $0.88, and Mainland China $0.49. See the Wall Street Journal, September 27, 2005, pp. A1 and A10. 29. A center of excellence refers to a team, a shared facility, or an entity that provides leadership, best practices, research, support, and training for a focus area. The focus area in this case might be a technology (i.e., Java), a business concept (i.e., Business process management [BPM] has been referred to as a “holistic management” approach to aligning an organization’s business processes with the wants and Notes • 267

needs of clients. It promotes business effectiveness and efficiency while striving for innovation, flexibility, and integration with technology), a skill (i.e., negotiation) or a broad area of study (i.e., women’s health). A center of excellence may also be aimed at revitalizing stalled initiatives. 30. In Asia, many hotels operate under management contract arrangements, as they can more easily obtain economies of scale, a global reservation systems, brand recognition, and so on. It is not unusual for contracts to be signed for 25 years, and having a fee as high as 3.5% of total revenues and 6–10% of gross operating profit. The Marriott International Corporation operates solely on management contracts. Management contracts have been used to a wide extent in the airline industry and also when foreign government action restricts other entry methods. Management contracts are often formed where there is a lack of local skills to run a project. It is an alternative to FDI as it does not involve high risk and can yield higher returns for the company. The first recorded management contract was initiated by Qantas and Duncan Upton in 1978. See http://www.iaccm.com/. 31. See the Top 50 Holding Companies as March 31, 2013. National Informa- tion Center, U. S. Federal Reserve System, http://www.ffiec.gov/nicpubweb/nicweb/ Top50Form.aspx. 32. In accounting, minority interest (or noncontrolling interest)istheportionofa subsidiary corporation’s stock that is not owned by the parent corporation. The magnitude of the minority interest in the subsidiary company is generally less than 50% of outstanding shares; otherwise the corporation would generally cease to be a subsidiary of the parent. It is, however, possible (i.e., through special voting rights) that a controlling interest requiring consolidation be achieved without exceeding 50% ownership depending on the accounting standards being employed. Mino- rity interest belongs to other investors and is reported on the consolidated balance sheet of the owning company to reflect the claim on assets belonging to other, noncontrolling shareholders. Also, minority interest is reported on the consolidated income statement as a share of profit belonging to minority shareholders. 33. See “Mergers and Acquisitions,” the Free Dictionary by FARLEX, http://legal- dictionary.thefreedictionary.com/Mergers+and+Acquisitions. 34. In European law, the term “joint-venture”(or“joint undertaking”) is an elusive legal concept, better defined under the rules of company law. In France, the term “joint venture” is variously translated as “association d’entreprises,” “entreprise conjointe,” “coentreprise,”or“entreprise commune.” But generally, the term societe anonyme loosely covers all foreign collaborations. In Germany, “joint venture”is better represented as a “combination of companies” (Konzern). 35. The following US listing tabulates the early 2010 ranking of major franchises along with the number of sub-franchisees (or partners) from data available for 2004. As can be seen from the names of the franchises, the United States is a leader in franchising, a position it has held since the 1930s, when it used the approach for fast-food restaurants, food inns, and, slightly later, motels at the time of the Great Depres- sion. As of 2005, there were 909,253 established franchised businesses, generating 268 • Notes

$880.9 billion of output and accounting for 8.1% of all private, nonfarm jobs. This amounts to 11 million jobs, and 4.4% of all private sector output. (1) Subway (sandwiches and salads), startup costs $84,300–$258,300 (22,000 partners worldwide in 2004). (2) McDonald’s, startup costs in 2010, $995,900–$1,842,700 (37,300 partners in 2010). (3) 7-Eleven, Inc. (convenience stores), startup costs in 2010 $40,500– $775,300, (28,200 partners in 2004). (4) Hampton Inns & Sui- tes (mid-price hotels), startup costs in 2010 $3,716,000–$15,148,800. (5) Great Clips (hair salons), startup costs in 2010 $109,000–$203,000. (6) H&R Block (tax preparation and now e-filing), startup costs $26,427–$84,094 (11,200 partners in 2004). (7) Dunkin’ Donuts, startup costs in 2010 $537,750–$1,765,300. (8) Jani-King (commercial cleaning), startup costs $11,400–$35,050 (11,000 partners worldwide in 2004). (9) Servpro (insurance and disaster restoration and cleaning), startup costs in 2010 $102,250–$161,150. (10) Mini Markets (convenience store and gas station), startup costs in 2010 $1,835,823–$7,615,065. See "The Eco- nomic Impact of Franchised Businesses In the United States," Price Waterhouse Coopers, 2012. Retrieved February 2, 2012. Many times there are negative reports about these franchises, such as “It seems like there is one on every corner and that customers line up no matter how crazy the prices. No not gas stations: Starbucks.” See the Wall Street Journal, April 25, 2013, p. C1. 36. See Rick Newman, “Why U.S. Companies Aren’t So American Anymore,” US News, Money, June 30, 2011. http://money.usnews.com/money/blogs/flowchart/ 2011/06/30/why-us-companies-arent-so-american-anymore 37. See Angus Deaton, “The Pursuit of Happiness,” Lancet, 376 (9754), November 20, 2010, p. 1729, http://www.thelancet.com/journals/lancet/article/PIIS0140- 6736(10)62120-4/fulltext. 38. Of course, history repeats itself. There were even monetary and economic unions in Ancient Greece, that is, “the Common of Euboeans,” in second century BC, where they issued a common currency, but they did not last for very long time because of the oppression on their member-states by other more powerful states, like Athens. See Kallianiotis (2010a). 39. See Spiegel International, http://www.spiegel.de/international/europe/entering-a- death-spiral-tensions-rise-in-greece-as-austerity-measures-backfire-a-712511.html. 40. The largest costs in Western societies are interest payments on debts and taxes. These two components of households’ costs exceed at least 50% of the monthly income of the average household. 41. At least 119 people died in Bangladesh when a garment-factory building collapsed. Hundreds more remained trapped in the rubble. See the Wall Street Journal,April 25, 2013, pp. A1 and A10. 42. See the Bretton Woods Institutions, http://www.brettonwoodsproject.org/ institution/. 43. See Stiglitz (2002). Notes • 269

44. Neoliberalism is a political philosophy, whose advocates support economic liberalization, free trade and open markets, privatization, deregulation, and decreasing the size of the public sector (government), while increasing the role of the private sector (corporations) in modern society. The term was introduced in the late 1930s by European liberal scholars to promote a new form of liberalism, after interest in classical liberalism had declined and labor movements have increased in Europe. In the decades that followed, neoliberal theory tended to be at variance with the more laissez-faire doctrine of classical liberalism and promoted instead a market economy under the guidance and rules of a strong state, a model that came to be known as the social market. In the 1960s, usage of the term “neoliberal” heavily declined. When the term was reintroduced in the following decades, the meaning had shifted. The term “neoliberal” is now normally associated with laissez-faire economic policies, and is used mainly by those who are critical of the latest market and social reforms. Opponents of neoliberalism commonly argue these following points: (1) Globalization can subvert nations’ ability for self-determination. (2) Accountability to the stakeholders, who depend upon the service provided by the privatized entity, is lost as a consequence of business secrecy, a practice that is normally adopted by private investors. (3) The replacement of a government-owned monopoly with private companies, each supposedly trying to provide the consumer with better value service than all of its private competitors, removes the efficiency that can be gained from the economy of scale and becomes a private-owned monopoly. (4) Even if it could be shown that neoliberal capitalism increases productivity, it erodes the conditions, in which production occurs long term; for example, resources/nature, requiring expansion into new areas. It is, therefore, not sustainable within the world’s limited geographical space. (5) The fact that in neoliberal economies, such as the United States, Australia, South Africa, sovereign communities, including federal, state, and local governments, are legislatively prevented from owning entities, which produce wealth or provide services, even when public opinion is overwhelmingly in favor, shows that the term “free market,” often used to describe the neoliberal economy, is misleading. (6) Exploitation: critics consider neoliberal economics to promote exploitation. (7) Negative economic consequences: Critics argue that neoliberal policies produce inequality. (8) Increase in corporate power: some organizations believe neoliberalism, unlike liberalism, changes economic and government policies to increase the power of corporations, and a shift to benefit the upper classes (wealth holders). (9) There are terrains of struggles for neoliberalism locally and socially. Urban citizens are increasingly deprived of the power to shape the basic conditions of daily life. (10) Trade-led, unregulated economic activity and lax state regulation of pollution lead to environmental impacts or degradation. (11) Deregulation of the labor market produces flexibilization and casualization of labor, greater informal employment, part-time employment without social benefits, employment by illegal immigrants, and a considerable increase in industrial accidents and occupational diseases. (12) Critics sometimes refer to neoliberalism 270 • Notes

as the “American Model” and make the claim that it promotes low wages and high inequality. 45. See Elsadig Elsheikh, “Browman v. Monsanto: The Monopoly over the Global Food System,” Equity, Inclusion, and Diversity, Berkeley University, http://diversity.berkeley.edu/bowman-v-monsanto-monopoly-over-global-food- system.

6 The US Dollar as an International Currency Reserve and Its Value 1. Because the dollar had started devaluating drastically with respect to the gold, as Graph 6.4 shows. From 1833 to 1918: The gold price was constant ($18.95/oz of gold), which means no devaluation of the US dollar. From 1919 to 1973: The gold from $18.93/oz reached $97.39/0z, a devaluation of the dollar by – 414.47% in 54 years or –7.68% per annum. From 1974 to 2011: The price of gold from $154.00/oz reached $1,571.52/oz. Its highest price in history was on August 24, 2011, which reached $1,910.00/ ounce. A depreciation of the dollar in 37 years was –1,140.26% or –30.82% per annum. On May 14, 2013, its price was $1,424.40 per oz. See Historical Gold Prices-1833 to Present.Seealso http://www.nma.org/pdf/gold/his_gold_prices.pdf. 2. Some economists say that when the United States abandoned the exchange of government bonds with gold ($35/1 oz of Gold), the country technically went bankrupt. 3. USXRI = Trade Weighted Exchange Index: Major Currencies: Index March 1973 = 100. (Source: Economagic.com). ρ = 4. When the Fed cuts the interest rate (iFF ), the dollar is depreciated ( iFF ,USXRI + → = 0.357) and the causality is: iFF USXRI (F-statistic 3.551**). 5. On May 15, 2013, the US national debt (ND) was $16.776 trillion and foreigners were holding $5.758 trillion, which is 34.32% of the total ND. See http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt. 6. US National Debt Clock May 15, 2013 and Grandfather Debt Summary January 1, 2012. 7. Thus, in March 2013, the Social Distress Index (SDI) for the United States was, SDI = u + π + d = 7.6% +3.12% +1,343.1% = 1,353.82%, which show that the country is extremely distressful (risky). See Kallianiotis (2011b, p. 344) for this index. The United States needs more than 13 years to pay off its debt, that too if all the other spending is zero. = EBIT (1−T ) 8. Because, the value of our ﬁrms depends on interest rate: V i where V= market value of the ﬁrm, EBIT = earnings before interest and taxes, T = corporate tax rate, and i = market rate of interest. 9. The liquidity trap, in Keynesian Economics, is a situation where monetary policy is unable to stimulate the economy, either through lowering interest rates or increasing the money supply. Liquidity traps typically occur when expectations of adverse Notes • 271

events (e.g., deflation, insufficient aggregate demand, low confidence, high risk, or civil or international war) make persons with liquid assets unwilling to invest and banks reluctant to lend. 10. The inflation rate in the month of July 2011 was π = 6.22% per annum. (Economagic.com). In January 2013, it was 1.7%. 11. This is one reason that the oil from $28 per barrel in 1985 had reached on February 27, 2012, $109.14; an increase by +289.79%. Its maximum price had been $144 per barrel. 12. The ex-Treasury Secretary, Tim Geithner, had said that “A strong dollar is in the interest of our country, and we’ll never embrace a strategy of trying to weaken the currency to gain economic advantage at the expense of our trading partners.” − ∗ = − = 13. Interest Rate Parity (IRP) holds when it it ft st,whereit US short- ∗ = = term interest rate, it foreign short-term interest rate, ft logarithm of forward exchange rate, st =logarithm of spot rate. 14. See Doug McKelway, “Critics Say Fed Policies Devalue the U.S. Dollar,” Fox- News.com, April 26, 2011. 15. The monetary base (MB) from $846 billion in 2007 reached $2,753 billion in 2012. Lately, the Fed is purchasing monthly $85 billion worth of securities (government and mortgage back securities). See http://www.breitbart.com/Big- Government/2012/12/12/Fed-Bond-Buying-Bonanza-85-Billion-A-Month-Until- Unemployment-Hits-6-5 16. As it was reported, extensively, by the media, in February 2011. See http://money.cnn.com/2011/02/10/markets/dollar/index.htm. See also, http:// theeconomiccollapseblog.com/archives/shocking-new-imf-report-the-u-s-dollar- needs-to-be-replaced-as-the-world-reserve-currency-and-that-sdrs-could-constitute- an-embryo-of-global-currency. 17. The SEC charged a former Goldman Sachs employee with tipping off his father in the first insider-trading case related to the market in ETFs. (A security that tracks an index, a commodity, or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.) See the Wall Street Journal, September 22, 2011, pp. A1, and C1. Kweku Adoboli, the UBS AG (UBSN) trader charged with fraud and false accounting that may have resulted in a $2.3 billion loss, said through his lawyer that he was “sorry beyond words” after facing an additional fraud charge at a court hearing on September 22, 2011. (Bloomberg.com, September 22, 2011). 18. In 2011: Q1, the percentage of dollars in the world market was: 60.7% Euros: 26.6%, and SDR: SDR 238.3 billion. (IMF: Currency Composition of Official Exchange Reserves). 19. Occupy Wall Street (OWS) was the name given to a protest movement that began on September 17, 2011, in Zuccotti Park, located in New York City’s Wall Street financial district. The ensuing series of events helped and lead to media aware- ness that inspired Occupy protests and movements around the world. In awarding Workhouse its Platinum Award, industry publication PRNews noted: “The results, 272 • Notes

obviously, have been spectacular. There’s hardly a newspaper, Internet or broadcast media outlet that hasn’t covered OWS.” The main issues raised by Occupy Wall Street were social and economic inequality, greed, corruption, and the perceived undue influence of corporations on government (particularly from the financial services sector). The OWS slogan, “We are the 99%,” refers to income inequality and wealth distribution in the United States between the wealthiest 1% and the rest of the population. To achieve their goals, protesters acted on consensus-based decisions made in general assemblies, which emphasized direct action over petitio- ning authorities for redress. Finally, protesters were forced out of Zuccotti Park on November 15, 2011. After several unsuccessful attempts to reoccupy the original location, protesters turned their focus on occupying banks, corporate headquarters, board meetings, college and university campuses. On December 29, 2012, Naomi Wolf of the Guardian newspaper provided US Government documents that revealed that the FBI and the Department of Homeland Security (DHS) had monitored Occupy Wall Street through its joint terrorism task force despite labeling it a pea- ceful movement. This was the end of the movement in the United States and the same terminations have all the European protests during the current debt crisis. 20. TV News CNN, October 9, 2011. 21. Capital structure theories in 1950s and 1960s were recommending 100% debt as the optimal amount of debt because the interest on debt is tax deductible (paid by the tax payers and the national debt became unmerciful for the future of the country). Corporations have to start paying taxes because they receive every- thing from the country (its citizens): the economic environment, the financial markets, the legal system, the institutions, the labor used for their production, the purchasing of their products and services, and so on. President Obama offered to reduce corporate tax rate to 28%. See the New York Times,Febru- ary 22, 2012; http://www.nytimes.com/2012/02/22/business/economy/obama- offers-to-cut-corporate-tax-rate-to-28.html?pagewanted= all. Also, President Obama wanted to increase the taxes for people, who have an income above $250,000. But the Republicans disagreed; they wanted all taxes to go up, as it happened in January 2013. See the Washington Post, November 13, 2012; http://www.washingtonpost.com/business/economy/obama-to-open-fiscal- talks-with-plan-to-raise-taxes-on-wealthy/2012/11/13/9984cd78-2dc1-11e2-89d4- 040c9330702a_story.html 22. See Kallianiotis and Harris (2010). 23. This is a “Ponzi-financing” according to Hyman Minsky. See http://wfhummel. cnchost.com/minsky.html. 24. “The United Sates government and its agencies have, by far, the largest pile-up of interest-bearing debts ($15.6 trillion), the largest accumulation of unsecured obligations (over $60 trillion), the largest yearly deficit ($1.6 trillion), and the greatest indebtedness to the rest of the world ($4.8 trillion).” See Martin D. Weiss, www.moneyandmarkets.com. 25. Many hyperinflations around the world, like the German (1923): 3,250,000%, the Greek (1944): 8,500,000,000%, and the Hungarian (1946): Notes • 273

13,000,000,000,000,000%. The United States during the Revolutionary War, when the Continental Congress authorized the printing of paper currency called continental currency. The monthly inflation rate reached a peak of 47% in Novem- ber 1779. These notes depreciated rapidly, giving rise to the expression "not worth a continental." A second close encounter occurred during the US Civil War, between January 1861 and April 1865, the Lerner Commodity Price Index of leading cities in the eastern Confederacy states increased from one hundred to over nine thousand. As the Civil War dragged on, the Confederate dollar had less and less value, until it was almost worthless by the last few months of the war. Similarly, the Union government inflated its greenbacks, with the monthly rate peaking at 40% in March 1864. 26. See http://www.boston.com/business/globe/articles/2004/04/11/most_us_firms_ paid_no_income_taxes_in_90s/. 27. (1) Corporate taxes as a percentage of Federal Revenue were in 1955: 27.3% and in 2010: 8.9%; (2) Corporate taxes as a percentage of GDP; in 1955: 4.3% and in 2010: 1.3%; and (3) Individual income/payrolls as a percentage of Federal Revenue; in 1955: 58.0% and in 2010: 81.5%. See http://www.ritholtz.com/blog/2011/04/corporate-tax-rates-then-and-now/. 28. See Walter Hickey, “Apple Avoids Paying $17 million in Taxes Every Day through a Ballsy but Genius Tax Avoidance Scheme,” Business Insider, Politics, May 21, 2013; http://www.businessinsider.com/how-apple-reduces-what-it-pays- in-taxes-2013-5 and the Wall Street Journal, May 22, 2013, pp. A1 and A8. 29. From 1926 to 2008, the π¯ = 3.1% and σπ =±4.2%. Source: Modified from Stocks, Bills, and Inflation: 2009 Yearbook, annual updates work by Roger G. Ibbotson and Rex A. Sinquefield (Chicago: Morningstar). 30. The Monetary Base (seasonally adjusted) in billions of dollars was: In 2000: $613.869; 2001: $668.020; 2002: $716.722; 2003: $754.871; 2004: $789.177; 2005: $814.831; 2006: $836.193; 2007: $846.212; 2008: $1,690.796; 2009: $1,994.401; 2010: $1,982.737; 2011:M07: $2,725.301; 2011:M09: $2,684.784; 2012:M02: $2,753.00; and on February 6, 2013, it was $2,828.560 billion. Source: Federal Reserve Bank of St. Louis. See http://research.stlouisfed.org/fred2/data/BASE.txt. 31. The price of gold was 2000:$280.10/1 oz, 2001: $272.22, 2002: $311.33, 2003: $364.80, 2004: $410.52, 2005: $446.00, 2006: $647.10, 2007: $842.80, 2008: $841.70, 2009: 1,084.70, 2010: $1,405.60, August 22, 2011: $1,892.60, August 24, 2011: $1,899.00, February 27, 2012: $1,774.40, on February 19, 2013 it was $1,604.10/oz, and on May 17, 2013, fell to $1,356.50/oz. (Bloomberg.com). 32. Trade deficit with China: in 2010, it was $273.1 billion, in 2011, it was $295.5 billion; and in 2012, it was $315.054 billion; in 1985; it was only $6 million. See http://www.census.gov/foreign-trade/balance/c5700.html 33. With March 2011, Chinese were holding $29.583 billion of US L-T securities. See also “U.S. net long-term capital inflows rises to $30.6 billion”: Foreigners increased purchases of long-dated US securities in April for the first time in five months, 274 • Notes

while China raised its holdings of US government debt. The United States attracted a net long-term capital inflow of $30.6 billion in April, an increase from $24 billion the prior month. Including short-dated assets such as Treasury bills, foreigners bought a net of $68.2 billion. That was down from an upwardly revised $127.1 billion inflow in March. Net overseas buying of US Treasury debt fell by $3.4 billion to $23.3 billion, a fifth consecutive monthly decline. But net foreign purchases of US equities rose. China, the largest foreign US creditor, increased its overall Treasury holdings by $7.6 billion to $1.153 trillion. (Reuters, June 15, 2011). See http://www.khaleejtimes.com/biz/inside.asp?xfile= /data/economicindicator/ 2011/June/economicindicator_June18.xml§ion=economicindicator. 34. China currently owns about $29.6 billion in US dollar denominated securities; and a depreciation of the dollar by 30%, it will cost China $8.88 billion in losses of its investment. 35. Some economists say that the United States technically defaulted in 1973, when it officially reneged on its gold obligations under Bretton-Woods, leaving other nations holding US paper dollars that could no longer be converted to gold. 36. A credit default swap (CDS) is a swap contract in which the buyer of the CDS makes a series of payments to the seller and, in exchange, receives a payoff if a credit instrument (typically a bond or loan) undergoes a defined “credit event,” often described as a default (fails to pay). However, the contract typically construes a Credit Event as being not only “Failure to Pay” but also can be triggered by the “Reference Credit” undergoing restructuring, bankruptcy, or even (much less common) by having its credit rating downgraded. CDS contracts have been compared with insurance, because the buyer pays a premium and, in return, receives a sum of money if one of the events specified in the contract occurs. However, there are a number of differences between CDS and insurance, for example: • The buyer of a CDS does not need to own the underlying security or other form of credit exposure; in fact the buyer does not even have to suffer a loss from the default event. In contrast, to purchase insurance, the insured is generally expected to have an insurable interest such as owning a debt obligation; • the seller need not be a regulated entity; • the seller is not required to maintain any reserves to pay off buyers, although major CDS dealers are subject to bank capital requirements; • insurers manage risk primarily by setting loss reserves based on the law of large numbers, while dealers in CDS manage risk primarily by means of offsetting CDS (hedging) with other dealers and transactions in underlying bond markets; • in the United States CDS contracts are generally subject to market accounting, introducing income statement and balance sheet volatility that would not be present in an insurance contract; Notes • 275

• Hedge accounting may not be available under US Generally Accepted Accounting Principles (GAAP) unless the requirements of FAS 133 are met. In practice this rarely happens. However, the most important difference between CDS and Insurance is simply that an insurance contract provides an indemnity against the losses actually suffered by the policy holder, whereas the CDS provides an equal payout to all holders, calculated using an agreed, market-wide method. There are also important differences in the approaches used to pricing. The cost of insurance is based on actuarial analysis. CDSs are derivatives whose cost is determined using financial models and by arbitrage relationships with other credit market instruments such as loans and bonds from the same “Reference Entity” to which the CDS contract refers. Insurance contracts require the disclosure of all risks involved. CDSs have no such requirement, and, as we have seen in the recent past, many of the risks are unknown or unknowable. Most significantly, unlike insurance companies, sellers of CDSs are not required to maintain any capital reserves to guarantee payment of claims. In that respect, a CDS is an insurance that insures nothing. 37. See Kallianiotis (2010b, p. 50). 38. See Kallianiotis and Petsas (2008). 39. See Demitri B. Papadimitriou and L. Randall Wray, “Minsky’s Analysis of Financial Capitalism,” Working Paper No. 275, Jerome Levy Economics Institute, July 1999. See also Eiteman, Stonehill, and Moffett (2010, pp. 106–134). 40. Now, it imposes its will financially and economically without any war or resistance from the other Eurozone nations. 41. In 2011, the economic growth and the growth in stocks is: United States (1.8% and –0.9%) and China (9.0% and –22.2%). (Wall Street Journal, December 5, 2011, p. C5). 42. In China, 1.34 billion people are working like ants and keep the wages to the lowest level compared with the other nations. 43. Trade barriers are government-induced restrictions on international trade. The barriers can take many forms, including the following: Tariffs, Nontariff barriers to trade, Import licenses, Export licenses, Import quotas, Subsidies, Voluntary Export Restraints, Local content requirements, Embargo, Currency devaluation. Most trade barriers work on the same principle: the imposition of some sort of cost on trade that raises the price of the traded products. If two or more nations repeatedly use trade barriers against each other, then a trade war results. But, the ultimate objective of a nation must be the maximization of the social welfare of its citizens. 44. The DM was appreciated much more compared to the Euro with respect to the US dollar. Then, Germany is better-off with the Euro instead of its own currency, the DM. 45. The exchange rate between dollar and Euro was, in October 2000, S=0.8500 $/Cand reached in April 2008, S=1.6001 $/C; an appreciation 88.24%. On February 24, 2012, where the Eurozone is under dissolution, it is 1.3463 $/C and (58.39% appreciation). Then, the markets might know something for the 276 • Notes

US economy that the rating firms, the politicians, the central bankers, and the economists do not know. 46. According to Taylor’s original version of the rule, the nominal interest rate should respond to divergences of actual inflation rates from target inflation rates and of actual Gross Domestic Product (GDP) from potential GDP: = π + ∗ + α π − π∗ + α −¯ it t rt π ( t t ) y(yt yt )

In this equation, it is the target short-term nominal interest rate (e.g., the federal funds rate in the United States or the ECB key interest rate, OND), πt is the rate ∗ of inflation as measured by the GDP deflator, π is the desired rate of inflation, ∗ t rt is the assumed equilibrium real interest rate, yt is the logarithm of real GDP or the unemployment rate(ut), and y¯t is the logarithm of potential output, as N determined by a linear trend or the natural level of unemployment (ut ). In this equation, both aπ and ay should be positive (as a rough rule of thumb, Taylor’s 1993 paper proposed setting aπ = ay = 0.5). That is, the rule “recommends” a relatively high interest rate (a "tight" monetary policy) when inflation is above its target or when output is above its full-employment level, in order to reduce inflationary pressure. It recommends a relatively low interest rate ("easy" monetary policy) in the opposite situation, to stimulate output. Sometimes monetary policy goals may conflict, as in the case of stagflation, when inflation is above its target while output is below full employment. In such a situation, a Taylor rule specifies the relative weights given to reducing inflation versus increasing output. A simple version of the Taylor rule is:

iECB = 1 + 1.5π − 1(u − uN ) ONDt t t t Thus, the target rates (November 2011) must be: (1) Eurozone: 0.2%=1+ 1.5(3%)–1(10.3%–5%), but it is 1% (high) (2) Germany: 1.7%=1+1.5(2.4%)–1(6.9%–4%), but it is 1% (low) (3) Greece: –7.75%=1+1.5(3.1%)–1(18.4%–5%), but it is 1% (very high) (4) Spain: –11.15%=1+1.5(2.9%)-1(21.5%–5%), but it is 1% (very high) (5) United States: 1.65%=1+1.5(3.5%)–1(8.6%–4%), but it is 0.25% (very low). The ECB key interest rate was 1.25% the last two years and on December 8, 2011, was cut to 1%, which beneﬁts only Germany. The US federal funds rate is 0.25% since December 2008 and helps the domestic economy. 47. See Krugman (2012). 48. The Monetary Base (MB) was $875 billion in 2008 and reached $2,725 billion in 2011. On February 6, 2013, it was $2,829 billion. See http://research.stlouisfed. org/fred2/series/BASE. = = 49. Treasury Bills rates were: i3M 0.085% and i6M 0.125% (February 24, 2012). In December 2011, the rate on 3-month T-Bills was 0.000%. (Economagic.com). 50. Just compare how much other members of the richest nations whose currencies are not the reserve currency pay for their gasoline. While the US average price of gas came in at $2.72 per gallon, in Germany it was $6.82 per gallon, in Great Britain Notes • 277

it was $6.60 a gallon, in Italy it was $6.40 every gallon, in France it was $6.04 a gallon, and in Japan it was $5.40 for every gallon (data are from January 2011). In February 2013, the price of gas had reached $4.25 per gallon (a 56.25% increase in two year). 51. Where MB = monetary base, C = currency in circulation outside Federal Reserve Banks and the US Treasury, and R = reserves (deposits) of depository financial institutions at Federal Reserve Banks. 52. See Thomas Herold, “What If the U.S. Dollar Loses Reserve Currency Status?,” http://www.wealthbuildingcourse.com/dollar-loses-reserve-currency-status.html. 53. Economy of Eurozone (2011) GDP = $12,460 billion Growth of GDP = –0.3% Inflation rate = 2.7% Unemployment rate = 10% Gross External Debt = (NA) Public Debt = 86% of the GDP Budget Deficit = 4.1% of the GDP GDP as a % of the United States = 92.83% Economy of United States (2011) GDP = $13,423 billion Growth of GDP = 1.7% Inflation rate = 2.98% Unemployment Rate = 8.5% Gross External Debt = $8,400 billion National Debt = $15,251 billion; 113.62% of the GDP Budget Deficit = $1,300 billion; 9.68% of the GDP GDP as a % of Eurozone = 107.73% Total Debt (Public and Private)= $115.7 trillion+$40.8 trillion=$156.5 trillion; 1,165.91% of the GDP. Then, United States is not doing better than the Eurozone. Why so much noise for the Eurozone? There is no economic explanation!.. 54. See Dornbusch (1976) and Kallianiotis and Bianchi (2009). 55. The regression is:

∗∗∗ ∗∗∗ ∗ ∗∗∗ ∗∗∗ s = 0.218 − 0.024 i − 0.001 i + 1.503 ε − + 0.947 ε − t FFt ondt t 1 t 2 (0.051) (0.009) (0.016) (0.025) (0.023) R2 = 0.882,SSR = 0.424,F = 226.467

56. These results are as following:

∗∗ ∗ ∗∗∗ ∗∗∗ s = 0.357 + 0.005 i + 0.007 FFRP + 0.001 fd t ONDt t $t (0.506) (0.002) (0.002) (0.001) 278 • Notes

∗∗∗ ∗∗∗ ∗∗∗ + 0.990 st−1 + 1.342 εt−1 + 0.356 εt−2 (0.018) (0.090) (0.089) R2 = 0.995, SSR = 0.019, F = 3,647.425 = ∗ = = Note: st ln of spot exchange rate, iOND ECB overnight deposit rate, FFRPt = t ε = freezing funds risk premium, fd$t forward discount of the US dollar, and t the error term. Glossary

absolute advantage: The ability of an individual party or country to produce more of a product or service with the same inputs as another party. It is therefore possible for a country to have no absolute advantage in any international trade activity. See also comparative advantage. absolute form of purchasing power parity: Theory that explains how inflation differentials affect exchange rates. It suggests that prices of two products of different countries should be equal when measured by a common currency. The spot exchange rate is equal to the ratio of price levels between the domestic and the foreign economy. accounts receivable financing: Indirect financing provided by exporter for an importer by exporting goods and allowing for payment to be made at a later date. ad valorem duty: A customs duty levied as a percentage of the assessed value of goods entering a country. ADB: Asian Development Bank ADR: See American depositary receipt advising bank: Corresponding bank in the beneficiary’s country to which the issuing bank sends the letter of credit. AfDB: African Development Bank. affiliate: A foreign enterprise in which the parent company owns a minority interest. Agency for International Development (AID): AunitoftheUSgovern- ment dealing with foreign aid. agency problem: Conflict of goals between a firm’s shareholders and its managers. agency theory: The costs and risks of aligning interests between shareholders of the firm and their agents—management—in the conduct of firm business and strategy. See also agency problem or agency issue. airway bill: Receipt for a shipment by air, which includes freight charges and title to the merchandise. 280 • Glossary all-in-rate: Rate used in charging customers for accepting banker’s acceptances, consisting of the discount interest rate plus the commission. American depositary receipts (ARDs): Certificates representing ownership of foreign stocks issued by a US bank that are traded on stock exchanges in the United States. American selling price (ASP): For customs purposes, the use of the domestic price of competing merchandise in the United States as a tax base for determining import duties. The ASP is generally higher than the actual foreign price, so its use is a protectionist technique. American terms: Foreign exchange quotations for the US dollar, expressed as the number of US dollars per unit of non-US currency. Direct quotation for the United States. anchor currency: See Reserve currency. appreciation: In the context of exchange rate changes, a rise in the foreign exchange value of a currency that is pegged to other currencies or to gold. Also called revaluation. arbitrage: A trading strategy based on the purchase of a commodity or financial assets, including foreign exchange, in one market at one price while simultaneously selling it in another market at a more advantageous price, in order to obtain a risk-free profit on the price differential. arbitrageur: An individual or company that practices arbitrage. arithmetic return: A calculation in which the mean equals the average of the annual percentage changes in capital appreciation plus dividend distributions. arm’s-length price: The price at which a willing buyer and a willing unre- lated seller freely agree to carry out a transaction—in effect, a free market price. Applied by tax authorities in judging the appropriateness of transfer prices between related companies. Asian currency unit: A trading department within a Singaporean bank that deals in foreign (non-Singaporean) currency deposits and loans. Asian dollar market: Market in Asia, in which banks collect deposits and make loans denominated in US dollars. ask: The price at which a dealer is willing to sell foreign exchange (the currency that is denominator), securities, or commodities. Also called offer price. asset backed security (ABS): A derivative security that typically includes second mortgages and home-equity loans based on mortgages, in addition to credit card receivables and auto loans. asset market approach: A strategy that determines whether foreigners are willing to hold claims in monetary form, depending on an extensive set of investment considerations or drivers. Glossary • 281 assignment of proceeds: Arrangement that allows the original beneficiary of a letter of credit to pledge or assign proceeds to an end supplier. backlog exposure: The period of time between contract initiation and fulfillment through delivery of services or shipping of goods. back-to-back loan: A loan in which two companies in separate countries borrow each other’s currency for a specific period of time and repay the other’s currency at an agreed maturity. Sometimes the loans are channeled through an intermediate bank. Back-to-back financing is also called link financing or parallel loan. balance of payments (BoP): A financial statement summarizing the flow of goods, services, and investment funds between residents of a given country and residents of the rest of the world. balance of trade (BoT): An entry in the balance of payments measuring the difference between the monetary value of merchandise exports and merchandise imports—exports of goods minus imports of goods. balance on goods and services: Balance of trade, plus the net amount of payments of interest and dividends to foreign investors and from investment, as well as receipts and payments resulting from international tourism and other service transactions. Bank for International Settlements (BIS): An international organization of central banks that “fosters international monetary and financial cooperation and serves as a bank for central banks.” As an international institution, it is not accountable to any single national government. It is in Basel, Switzerland with representative offices in Hong Kong and Mexico City. banker’s acceptance: An unconditional promise by a bank to make payment on a draft when it matures. This comes in the form of the bank’s endorsement (acceptance) of a draft drawn against that bank in accordance with the terms of a letter of credit issued by the bank. bank rate: The interest rate at which central banks for various countries lend to their own monetary institutions. barter: International trade conducted by the direct exchange of physical goods, rather than by separate purchases and sales at prices and exchange rates set by a free market. basic balance: In a country’s balance of payments, the net of exports and imports of goods and services, unilateral transfers, and long-term capital flows. basis point: One one-hundredth of one percentage point, often used in quotations of spreads between interest rates or to describe changes in yields in securities. bearer bond: Corporate or governmental debt in bond form that is not registered to any owner. Possession of the bond implies ownership, and interest 282 • Glossary is obtained by clipping a coupon attached to the bond. The advantage of the bearer form is easy transfer at the time of a sale, easy use as a collateral for a debt, and what some cynics call “taxpayer anonymity,” meaning that governments find it hard to trace interest payments in order to collect income taxes. Bearer bonds are common in Europe, but are seldom issued anymore in the United States. The alternate form to a bearer bond is a registered bond. beggar-thy-neighbor policy: An economic policy through which one country attempts to remedy its economic problems by means that tend to worsen the economic problems of other countries. The term was originally devised to characterize policies of trying to cure domestic depression and unemployment by shifting effective demand away from imports onto domestically produced goods, either through tariffs and quotas on imports or by competitive devaluation. The policy can be associated with mercantilism and neo-mercantilism. These policies were widely adopted by major economies during the Great Depression of the 1930s or at any time that a country is at a depression, as it was recently with the global financial crisis of 2007-2013. beta: Second letter of the Greek alphabet (β), used as a statistical measure of market risk of a security in the capital asset pricing model. Beta is the covariance between returns on a given asset and returns on the market portfolio, divided by the variance of returns on the market portfolio. bid: The price that a dealer or a bank is willing to pay to purchase foreign exchange (the currency that is denominator) or a security. bid-ask spread: The difference between a bid and an ask quotation. Big Bang: The October 1986 liberalization of the London capital markets. bilateral netting system: Netting method used for transactions between two units. bill of exchange (B/E): A written order requesting one party (such as an importer) to pay a specified amount of money at a specified time to the writer of the bill. Also called a draft.Seesight draft. bill of lading (B/L): Document serving as receipt for shipment and a summary of freight charges and conveying title to the merchandise. black market: An illegal foreign exchange market. blocked funds: Funds in one country’s currency that may not be exchanged freely for foreign currencies because of exchange controls. border tax adjustments: The fiscal practice, under the General Agreement on Tariffs and Trade, by which imported goods are subject to some or all of the tax charged in the importing country and reexported goods are exempt from some or all of the tax charged in the exporting country. branch: A foreign operation not incorporated in the host country, in contrast to a subsidiary. Glossary • 283

Bretton Woods Conference: An international conference in 1944 that established the international monetary system—the Bretton Woods Agree- ment—that was in effect from 1945 to 1971. The conference was held in Bretton Woods, New Hampshire, United States. BRIC: A frequently used acronym for the four largest emerging market countries: Brazil, Russia, India, and China. bridge financing: Short-term financing from a bank, used while a borrower obtains medium- or long-term fixed rate financing from capital markets. bulldogs: British pound-denominated bonds issued within the United Kingdom by a foreign borrower (i.e., foreign bonds). cable: The US dollar per British pound cross rate. CAD: Cash against documents, an international trade term. capital account: A section of the balance of payments accounts. Under the revised format of the International Monetary Fund, the capital account measures capital transfers and the acquisition and disposal of nonproduced, nonfinancial assets. Under traditional definitions, still used by many countries, the capital account measures public and private international lending and investment. Most of the traditional definition of the capital account is now incorporated into IMF statements as the financial account. capital asset pricing model (CAPM): A theoretical model that relates the return on an asset to its risk, where risk is the contribution of the asset to the volatility of a portfolio. Risk and return are presumed to be determined in competitive and efficient financial markets. capital control: Restrictions, requirements, taxes, or prohibitions on the movements of capital across borders as imposed and enforced by governments. capital flight: Movement of funds out of a country because of political risk or to avoid taxes. capital markets: The financial markets of various countries, in which various types of long-term debt and/or ownership securities or claims on those securities are purchased and sold. capital mobility: The degree to which private capital moves freely from country to country in search of the most promising investment opportunities. carry trade: The strategy of borrowing in a low-interest rate currency to fund investing in higher yielding currencies. Also termed currency carry trade, the strategy is speculative in that currency risk is present and not managed or hedged. certificate of deposit (CD): A negotiable receipt issued by a bank for funds deposited for a certain period of time. CDs can be purchased or sold prior to their maturity in a secondary market, making them an interest-earning, marketable security. CFR: Cost and freight charges included 284 • Glossary

CIF: “Cost, insurance, and freight” See Cost, insurance, and freight CKD: “Completely knocked down”—International trade term for components shipped into a country for assembly there. Often used in the automobile industry. clearinghouse: An institution through which financial obligations are clea- red by the process of settling the obligations of various members. Clearinghouse Interbank Payments System (CHIPS): A New York-based computerized clearing system used by banks to settle interbank foreign exchange obligations (mostly US dollars) between members. co-financing agreements: Arrangement in which the World Bank partici- pates along with other agencies or lenders in providing funds to developing countries. collateralized debt obligation (CDO): A portfolio of debt instruments of varying credit qualities created and packaged for resale as an asset- backed security. The collateral in the CDO is the real estate, aircraft, heavy equipment, or other property the loan was used to purchase. commercial invoice: Exporter’s description of merchandise being sold to the buyer. commercial letters of credit: Trade-related letters of credit. commercial risk: In banking, the likelihood that a foreign debtor will be unable to repay its debts because of business events, as distinct from political ones. common market: An association through treaty of two or more countries that agree to remove all trade barriers between themselves. The best known is the European Common Market, now called the European Union (EU). compensation: Arrangement in which the delivery of goods to a party is compensated for by buying back a certain amount of the product from that same party. compensatory financing facility (CFF): Facility that attempts to reduce the impact of export instability on country economies. competitive advantage: The strategic advantage one business entity has over its rival entities within its competitive industry. Achieving competitive advantage strengthens and positions a business better within the business environment. Competitive advantage theory suggests that states and businesses should pursue policies that create high-quality goods to sell at high prices in the market. It emphasizes productivity growth as the focus of national strategies. Competitive advantage rests on the notion that cheap labor is ubiquitous, and natural resources are not necessary for a good economy. concession agreement: An understanding or contract between a foreign corporation and a host government defining the rules under which the corporation may operate in that country. Glossary • 285 consignment: Arrangement in which the exporter ships goods to the importer while still retaining title to the merchandise. consolidated financial statement: A corporate financial statement, in which accounts of a parent company and its subsidiaries are added together to produce a statement, which reports the status of the worldwide enterprise as if it were a single corporation. Internal obligations are eliminated in consolidated statements. consolidation: In the context of accounting for multinational corporations, the process of preparing a single reporting currency financial statement, which combines financial statements of subsidiaries that are in fact measured in different currencies. contagion: The spread of a crisis in one country to its neighboring countries and other countries with similar characteristics, at least in the eyes of cross- border investors. controlled foreign corporation (CFC): A foreign corporation, in which US shareholders own more than 50% of the combined voting power or total value. Under US tax law, US shareholders may be liable for taxes on undistributed earnings of the controlled foreign corporation. convertible currency: A currency that can be exchanged freely for any other currency without government restrictions. corporate governance: The relationship among stakeholders used to determine and control the strategic direction and performance of an organization. corporate wealth maximization: The corporate goal of maximizing the total wealth of the corporation rather than just the shareholders’ wealth. Wealth is defined to include not just financial wealth but also the technical, marketing, and human resources of the corporation. correspondent bank: A bank that holds deposits for and provides services to another bank, located in another geographic area, on a reciprocal basis. cost and freight (CFR): Price, quoted by an exporter, that includes the cost of transportation to the named post of destination. cost, insurance, and freight (CIF): Exporter’s quoted price including the cost of packaging, freight or carriage, insurance premium, and other charges paid in regard to the goods from the time of loading in the country of export to their arrival at the named port of destination or place of trans- shipment. counterparty: The opposite party in a double transaction, which involves an exchange of financial instruments or obligations now and a reversal of that same transaction at an agreed-upon later date. counterparty risk: The potential exposure any individual firm bears that the second party to any financial contract may be unable to fulfill its obligations under the contract’s specifications. 286 • Glossary counterpurchase: Exchange of goods between two parties under two distinct contracts expressed in monetary terms. countertrade: A type of international trade, in which parties exchange goods directly rather than for money; a type of barter. country risk: In banking, the likelihood that unexpected events within a host country will influence a client’s or a government’s ability to repay a loan. Country risk is often divided into sovereign (political) risk and foreign exchange (currency) risk. country-specific-risks: Political risks that affect the MNC at the country level, such as transfer risk (blocked funds) and cultural and institutional risks. covered interest arbitrage (CIA): The process whereby an investor earns a risk-free profit by (1) borrowing funds in one currency, (2) exchanging those funds in the spot market for a foreign currency, (3) investing the foreign currency at interest rates in a foreign country, (4) selling forward, at the time of original investment, the investment proceeds to be received at maturity, (5) using the proceeds of the forward sale to repay the original loan, and (6) sustaining a remaining profit balance. credit default swap (CDS): A derivative contract that derives its value from the credit quality and performance of any specified asset. The CDS was invented by a team at JPMorgan in 1997, and designed to shift the risk of default to a third party. It is a way to bet whether a specific mortgage or security will either fail to pay on time or fail to pay at all. credit risk: The possibility that the lender reclassifies a borrower’s credit worth, at the time of renewing a credit. crisis planning: The process of educating management and other employees about how to react to various scenarios of violence or other disruptive events. cross-border acquisition: A purchase in which one firm acquires another firm located in a different country. cross-border factoring: Factoring by a network of factors across borders. The exporter’s factor can contact correspondent factors in other countries to handle the collections of accounts receivable. cross exchange rate: Exchange rate between currency A and currency B, given the values of currencies A and B with respect to a third currency. cross listing: The listing of shares of common stock on two or more stock exchanges. cross rate: An exchange rate between two currencies derived by dividing or multiplying each currency’s exchange rate with a third currency. Colloqui- ally, it is often used to refer to a specific currency pair such as the euro/yen cross rate, as the yen/dollar and dollar/euro are the more common currency quotations. Glossary • 287 cross-sectional analysis: Analysis of relationships among a cross section of firms, countries, or some other variable at a given point in time. currency basket: The value of a portfolio of specific amounts of individual currencies, used as the basis for setting the market value of another currency. Also called a currency cocktail. currency board: System for maintaining the value of the local currency with respect to some other specified currency. currency diversification: Process of using more than one currency as an investing or financing strategy. Exposure to a diversified currency portfolio typically results in less exchange rate risk than if all of the exposure was in a single foreign currency. currency futures contract: Contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date. currency swap: A transaction in which two counterparties exchange specific amounts of two different currencies at the outset, and then repay over time according to an agreed-upon contract that reflects interest payments and possibly amortization of principal. In a currency swap, the cash flows are similar to those in a spot and forward foreign exchange transaction. See also swap current account: Broad measure of a country’s international trade in goods and services. current account transactions: In the balance of payments, the net flow of goods, services, and unilateral transfers (such as gifts) between a country and all foreign countries. D/A: Documents against acceptance, an international trade term. D/P: Documents against payment, an international trade term. D/S: Days after sight, an international trade term. deductible expense: A business expense that is recognized by tax officials as deductible toward the firm’s income tax liabilities. Delphi technique: Collection of independent opinions without group discussion by the assessors who provide the opinions; used for various types of assessments (such as country risk assessment). dependent variable: Term used in regression analysis to represent the variable that is dependent on one or more other variables. depositary receipt (DR): See American depositary receipt. depreciate: In the context of foreign exchange rates, a drop in the spot foreign exchange value of a floating currency, as in a currency whose value is determined by open market transactions. depreciation: A market-driven change in the value of a currency that results in reduced value or purchasing power. 288 • Glossary devaluation: The action of a government or central bank authority to drop the spot exchange value of a currency that is pegged to another currency or to gold. devalue: To reduce the value of a currency against the value of other currencies. dim sum bond market: The market for Chinese renminbi (yuan) denominated securities as issued in Hong Kong. direct foreign investment (DFI): Investment in real assets such as land, buildings, or even existing plants in foreign countries. direct loan program: Program in which the Ex-Im Bank offers fixed rate loans directly to the foreign buyer to purchase US capital equipment and services. direct public share issue: An issue that is targeted at investors in a single country and underwritten in whole or in part by investment institutions from that country. direct quotations: Exchange rate quotations representing the value measured by number of dollars per unit of foreign currency. direct quote: The price of a unit of foreign exchange expressed in the home country’s currency (e.g., $/C). The term has meaning only when the home country is specified. dirty float: A system of floating (i.e., market-determined) exchange rates, in which the government intervenes from time to time to influence the foreign exchange value of its currency. discount: In the foreign exchange market, the amount by which a currency is cheaper for future delivery than for spot/immediate delivery. The currency is expected to depreciate. The opposite of discount is “premium.” documentary collections: Trade transactions handled on a draft basis. documents against acceptance: Situation in which the buyer’s bank does not release shipping documents to the buyer until the buyer has accepted (signed) the draft. documents against payment: Shipping documents that are released to the buyer once the buyer has paid for the draft. dollarization: The use of the US dollar as the official currency of a country. domestic international sales corporation (DISC): Under the US tax code, a type of subsidiary formed to reduce taxes on exported US-produced goods. It has been ruled illegal by the World Trade Organization. draft: An unconditional written order requesting that one party, such as an importer, pay a specified amount of money at a specified time to the order of the writer of the draft. Personal checks are one type of draft. Also called a bill of exchange. Glossary • 289 dragon bond: A US dollar-denominated bond sold in the so-called “dragon economies” of Asia, such as Hong Kong, Taiwan, and Singapore. dumping: Selling products overseas at unfairly low prices—a practice perceived to result from subsidies provided to the firm by its government—to increase competition. economic value added (EVA): A widely used measure of corporate financial performance. It is calculated as the difference between net operating profits after tax for the business and the cost of capital invested, both debt and equity. EVA is a registered trademark of Stern Stewart & Company. economies of scale: Achievement of lower average cost per unit by means of increased production. effective exchange rate: An index measuring the change in value of a foreign currency determined by calculating a weighted average of bilateral exchange rates. The weighting reflects the importance of each foreign country’s trade with the home country. effective tax rate: Actual taxes paid as a percentage of actual income tax. efficient market: A market in which all relevant information is already reflected in market prices. The term is most frequently applied to foreign exchange markets and securities markets. effective yield: Yield or return to an MNC on a short-term investment after adjustment for the change in exchange rates over the period of concern. efficient frontier: A set of points reflecting risk-return combinations achieved by particular portfolia (so-called “efficient portfolia”) of assets. EOM: End of month, an international trade term. equilibrium exchange rate: Exchange rate at which demand for a currency is equal to the supply of the currency for sale. equity issuance: The issuance to the public market of shares of ownership in a publicly traded company. equity listing: The listing of a company’s shares on a public stock exchange. equity risk premium: The average annual return of the market expected by investors over and above riskless debt. euro: A new currency unit that has so far replaced the individual currencies of 17 European countries, known as the Eurozone, that belong to the European Union. The euro was launched electronically on January 1, 1999 and in notes and coins on January 1, 2002. eurobank: A bank or bank department that bids for time deposits and makes loans in currencies other than that of the country where the bank is located. eurobond: A bond originally offered outside the country in whose currency it is denominated. For example, a dollar-denominated bond originally offered for sale to investors outside the United States. 290 • Glossary

Euroclear: Telecommunications network that informs all traders about outstanding issues of eurobonds for sale. eurocommercial paper (ECP): Short-term notes (30, 60, 90, 120, 180, 270, and 360 days) sold in international money markets. eurocredit: Bank loans to MNCs, sovereign governments, international institutions, and banks denominated in euro currencies and extended by banks in countries other than the country in which the currency the loan is denominated. eurocredit loans: Loans of one year or longer extended by euro banks. eurocredit market: Collection of banks that accepts deposits and provides loans in large denominations and in a variety of currencies. The banks that comprise this market are the same banks that comprise the Eurocurrency market; the difference is that eurocredit loans are longer term than so-called Eurocurrency loans. Eurocurrency: A currency deposited (time deposits) in a bank located in a country other than the country issuing the currency. Eurocurrency market: See eurocredit market. Eurodollar: A US dollar deposited in a time deposits account in banks outside the United States. A eurodollar is a type of Eurocurrency. Euroequity public issue: A new security (initial public offer) issued by a domestic firm, but it is underwritten and distributed in multiple foreign equity markets, sometimes simultaneously with distribution markets. euro note: Short- to medium-term debt instruments sold in the Eurocurre- ncy market. European Central Bank (ECB): Conducts monetary policy of the European Economic and Monetary Union (EMU). Its goal is to safeguard the stability of the euro and minimize inflation. European currency unit (ECU): Unit of account represented by a weighted average of exchange rates of member countries within the European Monetary System. European Economic Community (EEC): The European common market composed of Austria, Belgium, Denmark, Finland, France, Germany, Gre- ece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, and the United Kingdom. Officially renamed the European Union (EU) on January 1, 1994. European monetary system (EMS): A monetary alliance of the same fifteen European countries in the European Union, created in 1979. European terms: Foreign exchange quotations for the US dollar, expressed as the number of non-US currency units per US dollar (e.g., C/$). European Union (EU): The official name of the former European Economic Community (EEC) as of January 1, 1994. The Maastricht Treaty established Glossary • 291 the European Union under its current name in 1993. The latest amendment to the constitutional basis of the EU, the Treaty of Lisbon, came into force in 2009. Eurozone: The countries that officially use the euro as their currency. exchange rate: The price of a unit of one country’s currency expressed in terms of the currency of some other country. exchange rate mechanism (ERM): The means by which members of the EMS formerly maintained their currency exchange rates within an agreed- upon range of ±2.25% with respect to the other member currencies. exchange rate pass-through: Thedegreetowhichthepricesofimported and exported goods change as a result of exchange rate changes. ex dock: Followed by the name of a port of import. An international trade term, in which the seller agrees to pay for the costs—shipping, insurance, customs duties, etc.—of placing goods on the dock at the named port. export credit insurance: Provides assurance to the exporter or the exporter’s bank. In a case where the foreign customer defaults on payment, the insurance company will pay for a major portion of the loss. For example, the Foreign Credit Insurance Association (FCIA). Export-Import bank (Ex-Im bank): A US government agency created to finance and otherwise facilitate imports and exports. expropriation: Official government seizure of private property, recognized by international law as the right of any sovereign nation, provided expropriated owners are given prompt compensation and fair market value in convertible currencies. factor: Firm specializing in collection on accounts receivable; exporters sometimes sell their accounts receivable to a factor at a discount. factor income: Income (i.e., interest and dividend payments) received by investors on foreign investments in financial assets (i.e., securities). factoring: Specialized firms, known as factors, purchase receivables at a discount on either a nonrecourse or recourse basis. fly away free (FAF): an international trade term. free at quay (FAQ): an international trade term. free alongside ship (FAS): the seller’s quoted price for goods alongside a vessel at the port of embarkation, an international trade term. free in: an international trade term meaning that all expenses for loading into the hold of a vessel apply to the account of the consignee. fiat money: Any currency (e.g., bank notes, check, or note of debt) is without intrinsic use value as a physical commodity. It derives its value by being declared by a government to be legal tender; that is, it must be accepted as a form of payment within the boundaries of the country, for “all debts, public and private.” Such laws in practice cause fiat money to acquire the value of 292 • Glossary any of the goods and services that it may be traded for within the nation that issues it. financial account: A section of the balance of payments accounts. Under the revised format of the International Monetary Fund, the financial account measures long-term financial flows including direct foreign investment, portfolio investments, and other long-term movements. Under the traditional definition, which is still used by many countries, items in the financial account are included in the capital account. financial engineering: Those basic building blocks, such as spot positions, forwards, and options, used to construct positions that provide the user with desired risk and return characteristics. financial institution buyer credit policy: Policy that provides insurance coverage for loans by banks to foreign buyers of exports. financing cash flow: Cash flows originating from financing activities of the firm, including interest payments and dividend distributions. firm specific risks: Political risks that affect the MNC at the project or corporate level. Governance risk due to goal conflict between an MNC and its host government is the main political firm-specific risk. Fisher effect: A theory that nominal interest rates in two or more countries should be equal to the required real rate of return to investors plus compensation for the expected amount of inflation in each country. The nominal interest differential in two countries is equal to the expected inflation differential in those two economies. fixed exchange rate system: Monetary system in which exchange rates are either held constant, like the gold standard and the gold exchange standard,or allowed to fluctuate only within narrow boundaries. fixed exchange rates: Foreign exchange rates tied to the currency of a major country, such as the United States, to gold or to a basket of currencies such as special drawing rights (SDRs). flexible exchange rates: The opposite of fixed exchange rates. The foreign exchange rate is adjusted periodically by the country’s monetary authorities in accordance with their judgment and/or an external set of economic indicators. floating exchange rates: Foreign exchange rates determined by demand and supply in an open market that is presumably free of government interference. floating-rate note (FRN): Medium-term securities with interest rates pegged to LIBOR and adjusted quarterly or semiannually. Free on board (FoB): An international trade term, in which an exporter’s quoted price includes the cost of loading goods into transport vessels at a named point. Glossary • 293 forced delistings: The requirement by a stock exchange for a publicly traded share on that exchange to be delisted from active trading, typically because of failure to maintain a minimum level of market capitalization. foreign affiliate: A foreign business unit that is less than 50% owned by the parent company. foreign bond: A bond issued by a foreign corporation or government for sale in the domestic capital market of another country and denominated in the currency of the country where the bond is issued. Foreign Corrupt Practices Act of 1977: A US law that punishes companies and their executives if they pay bribes or make other improper payments to foreigners. Foreign Credit Insurance Association (FCIA): An unincorporated association of private commercial insurance companies, in cooperation with the Export-Import Bank of the United States, that provides export credit insurance to US firms. foreign currency intervention: Any activity or policy initiative by a government or central bank with the intent of changing a currency value on the open market. They may include direct intervention, in which the central bank may buy or sell its own currency, or indirect intervention, in which it may change interest rates in order to change the attractiveness of domestic currency obligations in the eyes of foreign investors. foreign currency translation: The process of restating foreign currency accounts of subsidiaries into the reporting currency of the parent company in order to prepare a consolidated financial statement. foreign direct investment (FDI): Purchase of physical assets, such as a plant and equipment, in a foreign country, to be managed by the parent corporation. FDI is distinguished from foreign portfolio investment. foreign exchange broker: An individual or firm that arranges foreign exchange transactions between two parties, but is not itself a principal in the trade. Foreign exchange brokers earn a commission for their efforts. foreign exchange dealer or trader: An individual or firm that buys foreign exchange from one party at a bid price, and then sells it at an ask price to another party. The dealer is a principal in two transactions and profits via the spread between the bid and ask prices. foreign exchange market: Market composed primarily of banks, serving firms and consumers who wish to buy or sell various currencies. foreign exchange rate: The price of one country’s currency in terms of another currency or in terms of commodities such as gold or silver. See also exchange rate. foreign exchange risk: The likelihood that an unexpected change in exchange rates will alter the home currency value of foreign cash payments 294 • Glossary expected from a foreign source. Also, the likelihood that an unexpected change in exchange rates will alter the amount of home currency needed to repay a debt denominated in a foreign currency. foreign investment risk matrix (FIRM): Graph that displays financial and political risk by intervals so that each country can be positioned according to its risk ratings. foreign sales corporation (FSC): Under US tax code, a type of foreign corporation that provides tax-exempt or tax-deferred income for US persons or corporations having export-oriented activities. foreign tax credit: The amount by which a domestic firm may reduce (i.e., credit) domestic income taxes for income tax payments to a foreign government. forfaiting or forfeiting: A technique for arranging nonrecourse medium- term export financing, used most frequently to finance imports into Eastern Europe. A third party, usually a specialized financial institution, guarantees the financing. forward contract: An agreement to exchange currencies of different countries at a specified future date and at a specified forward rate. forward differential: The difference between spot and forward rates, expressed as an annual percentage. See forward discount or premium. forward discount or premium: The same as forward differential. The expected depreciation or appreciation of a currency as a percentage per annum. forward exchange rate: An exchange rate quoted for settlement at some future date. The rate used in a forward transaction. forward market: Market that facilitates the trading of forward contracts; commercial banks serve as intermediaries in the market by matching up participants who wish to buy a currency forward with other participants who wish to sell the currency forward. forward premium: See forward differential. forward transaction: An agreed-upon foreign exchange transaction to be settled at a specified future date, often one, two, or three months after the transaction date. forward rate: Rate at which a bank is willing to exchange one currency for another at some specified date in the future. forward rate agreement (FRA): An interbank-traded contract to buy or sell interest rate payments on a notional principal. franchising: Agreement by which a firm provides a specialized sales or service strategy, support assistance, and possibly an initial investment in the franchise in exchange for periodic fees. free cash flow: Operating cash flow less capital expenditures (capex). Glossary • 295 freely floating exchange rates: Exchange rates determined in a free market without government interference, in contrast to dirty floating. free trade zone: An area within a country into which foreign goods may be brought duty-free, often for purposes of additional manufacture, inventory storage, or packaging. Such goods are subject to duty only when they leave the duty-free zone to enter other parts of the country. fronting loan: A parent-to-subsidiary loan that is channeled through a financial intermediary such as a large international bank in order to reduce political risk. Presumably government authorities are less likely to prevent a foreign subsidiary repaying an established bank than repaying the subsidiary’s corporate parent. full compensation: An arrangement in which the delivery of goods to one party is fully compensated for by buying back more than 100% of the value that was originally sold. functional currency: In the context of translating financial statements, the currency of the primary economic environment in which a foreign subsidiary operates and in which it generates cash flows. fundamental forecasting: Forecasting based on fundamental relationships between economic variables and exchange rate. futures or futures contracts: Exchange-traded agreements calling for future delivery of a standard amount of any good (i.e., foreign exchange) at a fixed time, place, and price. future rate: The exchange rate at which one can purchase or sell a specified currency on the settlement date in accordance with the futures contract. gap risk: A type of interest rate risk in which the timing of maturities is mismatched. General Agreement on Tariffs and Trade (GATT): A framework of rules for nations to manage their trade policies, negotiate lower international tariff barriers, and settle trade disputes. This agreement allows trade restrictions only in retaliation against illegal trade actions of other countries. global depositary receipt (GDR): Similar to American depositary receipts (ADRs), it is a bank certificate issued in multiple countries for shares in a foreign company. A foreign branch of an international bank holds actual company shares. The shares are traded as domestic shares, but are offered for sale globally by sponsoring banks. global registered shares: Similar to ordinary shares, global registered shares have the added benefit of being tradable on equity exchanges around the globe in a variety of currencies. global-specific risks: Political risks that originate at the global level, such as terrorism, globalization, environment concerns, poverty, and cyber-attacks. 296 • Glossary gold-exchange standard: A fixed exchange rate system adopted in the Bret- ton Woods agreement. It required the US to peg the dollar to gold ($35/1 oz. of gold) and the other countries to peg their currencies to the US dollar. gold standard: A monetary system in which currencies are defined in terms of their gold content (i.e., mint parity), and payment imbalances between countries are settled in gold. greenfield investment: An initial investment in a new foreign subsidiary with no predecessor operation in that location. This is in contrast to a new subsidiary created by the purchase of an already existing operation. An investment that starts, conceptually if not literally, with an undeveloped “green field.” haircut: The percentage of the market value of a financial asset recognized as the collateral value or redeemed value of the asset. hard currency: A freely convertible currency that is not expected to depreciate in value in the foreseeable future. historical exchange rate: In accounting, the exchange rate in effect when an asset or liability was acquired. hostile takeovers: Acquisitions not desired by the target firms. hot money: Money that moves internationally from one currency and/or country to another in response to interest rate differences, and moves away immediately when the interest advantage disappears. hyperinflation countries: Countries with a very high rate of inflation. Under United States FASB 52, these are defined as countries where the cumulative three-year inflation amounts to 100% or more. International Monetary Market (IMM): a division of the Chicago Mercan- tile Exchange. imperfect market: The condition where, due to the costs to transfer labor and other resources used for production, firms may attempt to use foreign factors of production when they are less costly than local factors. import/export letters of credit: Trade-related letters of credit. impossible trinity: An ideal currency would have exchange rate stability, full financial integration, and monetary independence. in-house bank: An internal bank established within an MNC if its needs are either too large or too sophisticated for local banks. The in-house bank is not a separate corporation, but performs a set of functions by the existing treasury department. Acting as an independent entity, the in-house bank transacts with various internal business units of the firm on an arm’s length basis. initial public offering (IPO): Thefirstsaleofsharesofownershipofa private firm to the public market. Glossary • 297 independent variable: Term used in regression analysis to represent the variable that is expected to influence another “dependent” variable. indirect quote: The price of a unit of a home country’s currency expressed in terms of a foreign country’s currency (i.e., C/$). integrated foreign entity: An entity that operates as an extension of the parent company, with cash flows and general business lines that are highly interrelated with those of the parent. intellectual property rights: Legislation that grants the exclusive use of patented technology and copyrighted creative materials. A worldwide treaty to protect intellectual property rights has been ratified by most major countries, including, most recently, by China. interbank market: Market that facilitates the exchange of currencies between banks. interest equalization tax (IET): Tax imposed by the US government in 1963 to discourage US investors from investing in foreign securities. interest rate parity (IRP): A theory that the differences in national interest rates for securities of similar risk and maturity should be equal to but opposite in sign (i.e., positive or negative) to the forward exchange rate discount or premium for the foreign currency. interest rate parity (IRP) line: Diagonal line depicting all points on a four- quadrant graph that represents a state of interest rate parity. interest rate parity theory: Theory suggesting that the forward rate differs from the spot rate by an amount that reflects the interest differential between two currencies. interest rate risk: The risk to the organization arising from interest-bearing debt obligations, either fixed or floating rate obligations. It is typically used to refer to the changing interest rates that a company may incur by borrowing at floating rates of interest. interest rate swap: A transaction in which two counterparties exchange interest payment streams of different character—such as floating vs. fixed—based on an underlying notional principal amount. internal bank: The use of an internal unit of the corporation to act as a bank for exchanges of capital, currencies, or obligations between various units of the company. internalization: A theory that the key ingredient for maintaining a firm- specific competitive advantage in international competition is the possession of proprietary information and control of human capital that can generate new information through expertise in research, management, marketing, or technology. 298 • Glossary internal rate of return (IRR): A capital budgeting approach, in which a discount rate is found that matches the present value of expected future cash inflows with the present value of outflows. International Bank for Reconstruction and Development (IBRD or World Bank): International development bank owned by member nations that makes development loans to member countries, established in 1944. International banking facility (IBF): A department within a US bank that may accept foreign deposits (in Eurocurrencies) and make loans to foreign borrowers as if it were a foreign subsidiary. IBFs are free of US reserve requirements, deposit insurance, and interest rate regulations. international CAPM (ICAPM): A strategy in which the primary distinction in the estimation of the cost of equity for an individual firm using an interna- tionalized version of the domestic capital asset pricing model is the definition of the “market” and a recalculation of the firm’s beta for the market. International Development Association (IDA): Association established to stimulate country development; it is especially suited for less prosperous nations, since it provides loans at low interest rates. International Financial Corporation (IFC): Firm established to promote private enterprise within countries; it can provide loans to corporations and purchase their stock. international Fisher effect: A theory that the spot exchange rate should change by an amount equal to the difference in interest rates between two countries. international Fisher effect (IFE) line: Diagonal line on a graph that reflects points at which the interest rate differential between two countries is equal to the expected percentage change in the exchange rate between their two respective currencies. International Monetary Fund (IMF): An international organization created in 1944 to promote exchange rate stability and provide temporary financing for countries experiencing balance of payments difficulties or national debt problems. International Monetary Market (IMM): A branch of the Chicago Mercan- tile Exchange that is specialized in trading currency and financial futures contracts. international money market securities: Debt securities issued by MNCs and government agencies with a short-term maturity (one year or less) within the international money market. international monetary system: The structure within which foreign exchange rates are determined, international trade and capital flows are accom- modated, and balance of payments adjustments are made. Glossary • 299 international mutual funds (IMFs): Mutual funds containing securities of foreign firms. intracompany trade: International trade between subsidiaries that are under the same ownership. investment agreement: An agreement that spells out specific rights and responsibilities of both the investing foreign firm and the host government. investment grade: A credit rating of BBB- or higher. irrevocable letter of credit: Letterofcreditissuedbyabankthatcannotbe canceled or amended without the beneficiary’s approval. issuing bank: Bank that issues a letter of credit. J-curve effect: The adjustment path of a country’s trade balance following a devaluation or significant depreciation of the country’s currency. The path first worsens as a result of existing contracts before improving as a result of more competitive pricing conditions. joint venture (JV): A business venture that is owned by two or more entities, often from different countries. jumbo loans: Loans of $1 billion or more. kangaroo bonds: Australian dollar-denominated bonds issued within Australia by a foreign borrower (i.e., foreign bonds). lag: In the context of leads and lags, lags are a payment of a financial obligation later than is expected or required. law of one price: The concept that if an identical product or service can be sold in two different markets, and no restrictions exist on the sale or transportation costs of moving the product between markets, the product’s price should be the same in both markets. lead: In the context of leads and lags, leads are the payment of a financial obligation earlier than is expected or required. lender-of-last-resort: The body or institution within an economy that is ultimately capable of preserving the financial survival or variability of individual institutions. Typically, the country’s central bank. letter of credit (L/C): An instrument issued by a bank, in which the bank promises to pay a beneficiary upon presentation of documents specified in the letter. licensing: Arrangement in which a local firm in the host country produces goods in accordance with another, licensing firm’s specifications; as the goods are sold, the local firm can retain part of earnings. link financing: See back-to-back loan or fronting loan. liquid: The ability to exchange an asset for cash at or near its fair market value. 300 • Glossary location-specific advantage: Market imperfections or genuine comparative advantages that attract foreign direct investment to particular locations. locational arbitrage: Action to capitalize on a discrepancy in quoted exchange rates between banks. lockbox: Post office box number to which customers are instructed to send payment. London Interbank Offered Rate (LIBOR): The loans rate applicable to interbank loans in London. LIBOR is used as the reference rate for many international interest rate transactions. long position: A position in which foreign currency assets exceed foreign currency liabilities. The opposite of a long position is a short position. long-term forward contracts: Contracts that state any exchange rate at which a specified amount of a specified currency can be exchanged at a future date: more than one year from today. Also called long forwards. Maastricht Treaty: A treaty among the 12 European Union countries that specified a plan and timetable for the introduction of a single European currency, called the euro. The Maastricht Treaty, formally, the Treaty on European Union or TEU, was signed on February 7, 1992 by the members of the European Community in Maastricht, Netherlands. On December 9 and 10, 1991, the same city hosted the European Council, which drafted the treaty. Upon its entry into force on November 1, 1993 during the Delors Com- mission, it created the European Union and led to the creation of the single European currency, the euro. The Maastricht Treaty has been amended by the treaties of Amsterdam, Nice, and Lisbon. macro-assessment: Overall risk assessment of a country without considering the MNC’s business. macro risk: Country-specific risk. managed float: A country allows its currency to trade within a given band of exchange rates. margin: A deposit made as security for a financial transaction otherwise financed on credit. margin requirement: Deposit placed on a contract, such as a currency futures contract, to cover the fluctuations in the value of that contract; this minimizes the risk of the contract to the counterparty. market liquidity: The degree to which a firm can issue a new security without depressing the existing market price, as well as the degree to which a change in the price of its securities elicits a substantial order flow. market segmentation: The divergence within a national market of required rates of return. If all capital markets are fully integrated, securities of compa- rable expected return and risk should have the same required rate of return Glossary • 301 in each national market after adjusting for foreign exchange risk and political risk. matching currency cash flows: The strategy of offsetting anticipated continuous long exposure to a particular currency by acquiring debt denominated in that currency. Medium-Term Guarantee Program: Program conducted by the Ex-Im Bank, in which commercial lenders are encouraged to finance the sale of US capital equipment and services to approved foreign buyers; the Ex-Im Bank guarantees the loan’s principal and interest on these loans. merchant bank: A bank that specializes in helping corporations and governments finance by any variety of market and/or traditional techniques. European merchant banks are sometimes differentiated from clearing banks, which tend to focus on bank deposits and clearing balances for the majority of the population. micro-assessment: The risk assessment of a country as related to the MNC’s type of business. micro risk: Firm-specific risk. monetary assets or liabilities: Assets in the form of cash or claims to cash, such as accounts receivable, or liabilities payable in cash. Monetary assets minus monetary liabilities are called net monetary assets. money: Any object or record that is generally accepted as payment for goods and services and repayment of debts in a given socio-economic context or country. The main functions of money are distinguished as a medium of exchange, a unit of account, a store of value, and occasionally in the past, a standard of deferred payment. Any kind of object or secure verifiable record that fulfills these functions can be considered money. money markets: The financial markets in various countries, in which various types of short-term debt instruments, including money and bank loans, are purchased and sold. moral hazard: When an individual or organization takes on more risk than it would normally as a result of the existence or support of a secondary insuring or protecting authority or organization. most-favored-nation (MFN) treatment: The application by a country of import duties on the same or most-favored basis to all countries accorded such treatment. Any tariff reduction granted in a bilateral negotiation will be extended to all other nations granted most-favored-nation status. multibuyer policy: Policy administered by the Ex-Im Bank that provides credit risk insurance on export sales to many different buyers. Multilateral Investment Guarantee Agency (MIGA): Agency established by the World Bank that offers various forms of political risk insurance to corporations. 302 • Glossary multilateral netting: The process of netting intracompany payments in order to reduce the size and frequency of cash and currency exchanges. multinational corporations (MNCs): Firms that engage in some form of international business. multinational enterprise (MNE): A firm that has operating subsidiaries, branches, or affiliates located in foreign countries. multinational restructuring: Restructuring of the composition of an MNC’s assets or liabilities. natural hedge: The use or existence of an offsetting or matching cash flow from firm-operating activities to hedge a currency exposure. negotiable bill of lading: Contract that grants title of merchandise to the holder, which allows banks to use the merchandise as collateral. negotiable instrument: A written draft or promissory note, signed by the maker or drawer, that contains an unconditional promise or order to pay a definite sum of money on demand or at a determinable future date, and is payable to order or to bearer. A holder of a negotiable instrument is enti- tled to payment despite any personal disagreements between the drawee and maker. nepotism: The practice of showing favor to relatives over other qualified persons in conferring such benefits as the awarding of contracts, granting of special prices, hiring, promotions to various ranks, etc. net present value: A capital budgeting approach in which the present value of expected future cash inflows is subtracted from the present value of outflows. net-transaction exposure: Consideration of inflows and outflows in a given currency to determine the exposure after offsetting inflows against outflows. netting: The mutual offsetting of sums due between two or more business entities. net working capital (NWC): Accounts receivable plus inventories less accounts payable. nominal exchange rate: The actual foreign exchange quotation, in contrast to real exchange rate, which is adjusted for changes in purchasing power (i.e., theratioofthetwopriceindexes). nondeliverable forward contract (NDF): Like a forward contract, represents an agreement regarding a position in a specified currency, a specified exchange rate, and a specified future settlement date, but does not result in delivery of currencies. Instead, one party makes a payment in the agreement to the other party based on the exchange rate at that future date. nonsterilized intervention: Intervention in the foreign exchange market without adjusting for the change in money supply. Glossary • 303 nontariff barrier: Trade restrictive practices other than custom tariffs, such as import quotas, voluntary restrictions, variable levies, and special health regulations. North American Free Trade Agreement (NAFTA): A treaty allowing free trade and investment between Canada, the United States, and Mexico. note issuance facility (NIF): An agreement by which a syndicate of banks indicates a willingness to accept short-term notes from borrowers and resell these notes in the Eurocurrency markets. The discount is often tied to LIBOR. NPV: See net present value. NSF: Nonsufficient funds. Term used by a bank when a draft or check is drawn on an account not having a sufficient credit balance. numismatics: The scientific study of moneys and their history in all their varied forms and functions. Open account (O/A): Arrangement in which the importer or other buyer pays for the goods only after the goods are received and inspected. The importer is billed directly after shipment, and payment is not tied to any promissory notes or similar documents. ocean bill of landing: Receipt for a shipment by boat, which includes freight charges and title to the merchandise. offer: The price at which a trader is willing to sell foreign exchange currencies, securities, or commodities. Also called ask. official reserve account: Total reserves held by official monetary authorities within the country, such as gold, SDRs, and major currencies. offshore finance subsidiary: A foreign financial subsidiary owned by a corporation in another country. Offshore finance subsidiaries are usually located in tax-free or low-tax jurisdictions to enable the parent multinational firm to finance international operations without being subject to home country taxes or regulations. OLI paradigm: An attempt to create an overall framework to explain why MNCs choose foreign direct investment rather than serve foreign markets through alternative modes such as licensing, joint ventures, strategic alliances, management contracts, and exporting. on the run: International banks of the highest credit quality that are willing to exchange obligations on a no-name basis. operating cash flows: The primary cash flows generated by a business from the conduct of trade, typically composed of earnings, depreciation, and amortization, and changes in net working capital. open account transaction: Sale in which the exporter ships the merchandise and expects the buyer to remit payment according to agreed-upon terms. 304 • Glossary order bill of lading: A shipping document through which possession and title to the shipment reside with the owner of the bill. Organization of Petroleum Exporting Countries (OPEC): An alliance of most major crude oil producing countries, formed for the purpose of alloca- ting and controlling production quotas so as to influence the price of crude oil in world markets. outright quotation: The full price, in one currency, of a unit of another currency. See its difference as points quotation. outsourcing: Represents the process of subcontracting to a third party. See supply chain management. overdraft: Occurs when money is withdrawn from a bank account, and the available balance goes below zero. In this situation, the account is said to be “overdrawn.” If there is a prior agreement with the account provider for an overdraft, and the amount overdrawn is within the authorized overdraft limit, then interest is normally charged at the agreed rate. If the negative balance exceeds the agreed terms, then additional fees may be charged, and higher interest rates may apply. over-the-counter market: A market for share of stock, options (including foreign currency options), or other financial contracts conducted via electronic connections between dealers. The over-the-counter market has no physical location or address, and is thus differentiated from organized exchanges that have a physical location where trading takes place. Overseas Private Investment Corporation (OPIC): A US government- owned insurance company that insures US corporations against various political risks. overvalued currency: A currency with a current foreign exchange value (i.e., current price in the foreign exchange market) greater than the worth of that currency. Because “worth” is a subjective concept, overvaluation is a matter of opinion. If the euro has a current market value of $1.20 (i.e., the current exchange rate is $1.20/C) at a time when its “true” value as derived from purchasing power parity or some other method is deemed to be $1.10, the euro is overvalued. The opposite of overvalued is undervalued. owner-specific advantage: A firm must have competitive advantages in its home market. These must be firm-specific, not easily copied, and in a form that allows them to be transferred to foreign subsidiaries. panda bond: The issuance of a yuan-denominated bond in the Chinese market by a foreign borrower (i.e., foreign bond). parallel bonds: Bonds placed in different countries and denominated in the respective currencies of the countries where they are placed. parallel loan: Another name for a back-to-back loan, in which two companies in separate countries borrow each other’s currency for a specific period of Glossary • 305 time, and repay the other’s currency at an agreed maturity to avoid exchange rate risk. parallel market: An unofficial foreign exchange market tolerated by a government, but not officially sanctioned. The exact boundary between a parallel market and a black market is not very clear, but official tolerance of what would otherwise be a black market leads to use of the term “parallel market.” parity conditions: In the context of international finance, a set of basic economic relationships that provide for equilibrium between spot and forward foreign exchange rates, interest rates, and inflation rates. partial compensation: An arrangement in which the delivery of goods to one party is partially compensated for by buying back a certain amount of product from the same party. pass-through: The time it takes for an exchange rate change to be reflected in market prices of products or services. pegged exchange rate: Exchange rate whose value is pegged to another currency’s value or to a unit of account. petrodollars: Deposits of dollars by countries that receive dollar revenues due to the sale of petroleum to other countries; the term commonly refers to OPEC deposits of dollars in the Eurocurrency market. Plaza Accord: Agreement among country representatives in 1985 to implement a coordinated program to weaken the dollar. points: The smallest units of price change quoted, given a conventional number of digits, in which a quotation is stated. points quotation: A forward quotation expressed only as the number of decimal points (usually four) by which it differs from the spot quotation. political risk: The possibility that political events in a particular country will influence the economic well-being of firms in that country. See also sovereign risk and country risk. portfolio investment: Purchase of foreign stocks and bonds, in contrast to foreign direct investment. possessions corporation: A US corporation which is the subsidiary of another US corporation located in a US possession such as Puerto Rico, that for tax purposes is treated as if it were a foreign corporation. preauthorized payment: Method of accelerating cash inflows by receiving authorization to charge a customer’s bank account. premium: In a foreign exchange market, the amount by which a currency is more expensive for future delivery than for spot/immediate delivery. The opposite of premium is “discount.” prepayment: Method that exporter uses to receive payment before shipping goods. 306 • Glossary price-specie-flow mechanism: A logical argument by David Hume against the Mercantilist (1700–1776) idea that a nation should strive for a positive balance of trade or net exports. The argument considers the effects of international transactions in a gold standard, a system in which gold is the official means of international payments, and each nation’s currency is in the form of gold itself or of paper currency fully convertible into gold. When a country with a gold standard had a positive balance of trade, gold would flow into the country in the amount that the value of exports exceeds the value of imports. Conversely, when such a country had a negative balance of trade, gold would flow out of the country in the amount that the value of imports exceeds the value of exports. Consequently, in the absence of any offsetting actions by the central bank on the quantity of money in circulation (known as “sterilization”), the money supply would rise in a country with a positive balance of trade and fall in a country with a negative balance of trade. Using the quantity theory of money, Hume argued that in countries where the quantity of money increases, inflation would set in, and the prices of goods and services would tend to rise, while in countries where the money supply decreases, deflation would occur as the prices of goods and services fell. private equity: Assets that are composed of equity shares in companies that are not publicly traded. private placement: The sale of a security issue to a small set of qualified institutional buyers. privatization: Conversion of government-owned businesses (SOEs) to ownership by shareholders or individuals (POEs). product cycle theory: Theory suggesting that a firm initially establishes itself locally and expands into foreign markets in response to foreign demand for its product; over time, the MNC will grow in foreign markets. After a point, its foreign business may decline unless it can differentiate its product from competitors’ and do a defensive FDI abroad. profit warning: The public announcement by a publicly traded company that current period earnings will fall significantly, either from a previously reported period or investor expectations. Project Finance Loan Program: Program that allows banks, the Ex-Im Bank, or a combination of both to extend long-term financing for capital equipment and related services for major projects. project financing: Arrangement of financing for long-term capital projects, large in scale, long in life, and generally high in risk. protectionism: A political attitude or policy intended to inhibit the imports of foreign goods and services and to promote the exports of domestic products to increase domestic income and employment. The opposite of free trade policies. Glossary • 307 psychic distance: Firms tend to invest first in countries with a similar cultural, legal, and institutional environment. public debt: The debt obligation of a governmental body or sovereign authority. purchasing power parity (PPP): A theory that the price of internationally traded commodities should be the same in every country, and hence the exchange rate between the two currencies should be the ratio of prices in the two countries. purchase power parity (PPP) line: Diagonal line on a graph that reflects points at which the expected inflation differential between two countries is equal to the percentage change in the exchange rate between the two respective currencies. put option on real assets: Project that contains an option of divesting part or all of the project. qualified institutional buyer (QIB): An entity (except a bank or a savings and loan) that owns and invests a minimum of $100 million in securities of nonaffiliates on a discretionary basis. quota: A limit, mandatory or voluntary, set on the import of a product. quotation: In foreign exchange trading, the pair of prices (bid and ask) at which a dealer is willing to buy or sell foreign exchange (i.e., currency). real interest rate: Nominal or quoted interest rate minus the inflation rate. real exchange rate: An index of foreign exchange adjusted for relative price-level changes from a base point in time, typically a month or a year. Sometimes referred to as real effective exchange rate, it is used to measure purchasing-power-adjusted changes in exchange rates. real options: Implicit options on real assets. reference rate: The rate of interest used in a standardized quotation, loan agreement or financial derivative valuation. registered bond: Corporate or governmental debt in a bond form, in which the owner’s name appears on the bond and in the issuer’s records, and interest payments are made to the owner. regression analysis: Statistical technique used to measure the relationship between variables and the sensitivity of a variable to one or more variables. regression coefficient: Term measured by regression analysis to estimate the sensitivity/elasticity of the dependent variable to a particular independent variable. reinvoicing center: A central financial subsidiary used by a multinational firm to reduce transaction exposure by having all home country exports billed in the home currency and then reinvoiced to each operating subsidiary in that subsidiary’s local currency. 308 • Glossary relative purchasing power parity: A theory that if the spot exchange rate between two countries starts in equilibrium, any change in the differential rate of inflation between them tends to be offset in the spot exchange rate. renminbi (RNMB): The alternative official name for the yuan or CNY, the currency of the People’s Republic of China. repositioning of funds: The movement of funds from one currency or country to another. The MNC faces a variety of political, tax, foreign exchange, and liquidity constraints that limit its ability to move funds easily and without cost. representative office: A representative office established by a bank in a foreign country to help clients doing business in that country. It also functions as a geographically convenient location from which to visit correspondent banks in its region rather than sending bankers from the parent bank at greater financial and physical cost. repricing risk: The risk of changes in interest rates charged or earned at the time a financial contract’s rate is reset. reserve currency: A currency used by a government or central banking authority as a resource asset or currency to be used in market interventions to alter the market value of the domestic currency. restricted stock: Stock shares given to management that are not tradable or transferable before a specified future date, such as when they vest, or under other specified conditions. revaluation: A rise in the foreign exchange value of a currency that is pegged to other currencies or to gold. Also called appreciation. revalue: To increase the value of a currency against the value of other currencies. revocable letter of credit: Letterofcreditissuedbyabankthatcanbe canceled at any time without prior notification to the beneficiary. risk: The likelihood that an actual outcome will differ from an expected outcome. The actual outcome could be better or worse than expected (known as a “two-sided risk”), although in common practice risk is more often used only in the context of an adverse outcome (a “one-sided risk”). Risk can exist for any number of uncertain future situations, including future spot rates or the results of political events. risk-sharing: A contractual arrangement in which the buyer and seller agree to share or split the impacts of currency movement on payments between them. rules of the game: The basis of exchange rate determination under the international gold standard during most of the nineteenth and early twentieth centuries. All countries agreed informally to follow the rule of buying and Glossary • 309 selling their currency at a fixed and predetermined price against gold, the mint parity. samurai bonds: Yen-denominated bonds issued within Japan by a foreign borrower (i.e., foreign bonds). Sarbanes-Oxley Act: An act passed in 2002 to regulate corporate governance in the United States. SEC Rule 144A: Permits qualified institutional buyers to trade privately placed securities without requiring SEC registration. Section 482: The set of US Treasury regulations governing transfer prices. seignorage: The net revenues or proceeds garnered by a government from the printing of its money. self-sustaining foreign entity: One that operates in the local economic environment independent of the parent company. selling short or shorting: The sale of an asset that the seller does not yet own. The premise is that the seller believes he or she will be able to purchase the asset for contract fulfillment at a lower price before sale contract expiration. shared services: A charge to compensate the parent for costs incurred in the general management of international operations and for other corporate services provided to foreign subsidiaries that must be recovered by the parent firm. shareholder wealth maximization (SWM): The corporate goal of maximizing the total value of the shareholders’ investment in the company. Sharpe measure (SHP): Calculates the average return over and above the risk-free rate of return per unit of portfolio risk. It uses the standard deviation of a portfolio’s total return as the measure of risk. shogun bonds: Foreign currency-denominated bonds issued within Japan by Japanese corporations (i.e., Euro-bonds). short position: See long position. SIBOR: Singapore interbank offered rate. sight draft: A bill of exchange (B/E) that is due on demand (i.e., when presented to the bank). See also bill of exchange. SIMEX: Singapore International Monetary Exchange. Single European Act: Act intended to remove numerous barriers imposed on trade and capital flows between European countries. single-buyer policy: Policy administered by the Ex-Im Bank that allows the exporter to selectively insure certain transactions. small business policy: Policy providing enhanced coverage to new exporters and small businesses. Society of Worldwide Interbank Financial Telecommunications (SWIFT): A dedicated computer network that provides funds transfer messages between member banks around the world. 310 • Glossary soft currency: A currency expected to drop in value relative to other currencies. Monetary authorities of the issuing country often restrict free trading in a currency deemed soft. sovereign debt: The debt obligation of a sovereign or governmental authority or body. sovereign risk: The risk that a host government may unilaterally repudiate its foreign obligations or may prevent local firms from honoring their foreign obligations. Sovereign risk is often regarded as a subset of political risk. sovereign spread: The credit spread paid by a sovereign borrower on a major foreign currency denominated debt obligation. For example, the credit spread paid by the Venezuelan government to borrow US dollars over and above a similar maturity issuance by the US Treasury. special drawing right (SDR): An international reserve asset, defined by the International Monetary Fund as the value of a weighted basket of four currencies: $, C, £, and ¥. special purpose vehicle (SPV) or special purpose entity (SPE): An off-balance sheet legal entity, typically a partnership, set up for a very special business purpose that will isolate or limit the partner’s financial risks associated with the SPV’s activities or assets. Similar in function to an SIV. speculation: An attempt to make a profit by trading on expectations about future prices. speculative grade: A credit quality that is below BBB, below investment grade. The designation implies a possibility of borrower default in the event of unfavorable economic or business conditions. spot market: Market in which exchange transactions occur for immediate exchange. spot rate: The price at which foreign exchange can be purchased (its bid) or sold (its ask) in a spot transaction. See spot transaction. spot transaction: A foreign exchange transaction to be settled/paid for on the following business day. spread: The difference between the bid/buying quote and the ask/selling quote. stakeholder capitalism model (SCM): Another name for corporate wealth maximization. standby letter of credit: Document used to guarantee invoice payments to a supplier; it promises to pay the beneficiary if the buyer fails to pay. state-owned enterprise (SOE): Any organization or business that is owned in-whole or in-part and controlled by government, typically created to conduct commercial business activities. statutory tax rate: The legally imposed tax rate. Glossary • 311 sterilized intervention: Intervention by the Federal Reserve in the foreign exchange market, with simultaneous intervention in the Treasury securities markets to offset any effects on the dollar money supply; thus, the intervention in the foreign exchange market is achieved without affecting the existing dollar money supply. strategic alliance: A formal relationship, short of a merger or acquisition, between two companies, formed for the purpose of gaining synergies because in some aspect the two companies complement each other. stripped bonds: Bonds issued by investment bankers against coupons or the maturity (known as “corpus”) portion of original bearer bonds, where the original bonds are held in trust by the investment banker. Whereas the original bonds will have coupons promising interest at each interest date, say June and December for each of the next twenty years, a given stripped bond will represent a claim against all interest payments from the entire original issue due on a particular interest date. A stripped bond is in effect a zero coupon bond manufactured by the investment banker. structural adjustment loan (SAL): Established in 1980 by the World Bank to enhance a country’s long-term economic growth through financing projects. subpart F: A type of foreign income, as defined in the US tax code, which under certain conditions is taxed immediately in the United States, even though it has not been repatriated to the United States. It is income of a type that is otherwise easily shifted offshore to avoid current taxation. subsidiary: A foreign operation incorporated in the host country and owned 50% or more by a parent corporation. Foreign operations that are not incorporated are called “branches.” supply chain management: A strategy that focuses on cost reduction through imports from less costly foreign locations with lower wages. sushi bonds: Eurodollar or other non-yen-denominated bonds issued by a Japanese corporation for sale to Japanese investors (i.e., Euro-bonds). swap: This term is used in many contexts. In general it is the simultaneous purchase and sale of foreign exchange or securities, with the purchase execu- ted at once, and the sale back to the same party carried out at an agreed-upon price to be completed at a specified future date. Swaps include interest rate swaps, currency swaps, and credit swaps. swap rate: A forward foreign exchange quotation expressed in terms of the number of points by which the forward rate differs from the spot rate. SWIFT: See Society for Worldwide Interbank Financial Telecommunications. syndicate: Group of banks that participate in loans. syndicated eurocredit loans: Loans provided by a group (or syndicate) of banks in the eurocredit market. 312 • Glossary syndicated loan: A large loan made by a group of banks to a large multinational firm or government. Syndicated loans allow the participating banks to maintain diversification by not lending too much to a single borrower. synthetic risk: In portfolio theory, the risk of the market itself (i.e., risk that cannot be diversified away). systematic risk: Also called aggregate risk, market risk,orundiversifiable risk, it is the vulnerability to events that affect aggregate outcomes such as broad market returns, total economy-wide resource holdings, or aggregate income. systemic risk: The risk of collapse of an entire financial system or entire market, as opposed to risk associated with any individual entity, group, or component of a system. Financial system instability, potentially catastro- phic, caused or exacerbated by idiosyncratic events or conditions in financial intermediaries. It refers to the risks imposed by interlinkages and interdepen- dencies in a system or market, where the failure of a single entity or cluster of entities can cause a cascading failure that could potentially bankrupt or bring down the entire system or market. trade acceptance (T/A): An international trade term. target zones: Implicit boundaries established by central banks on exchange rates. tariff: A duty or tax on imports that can be levied as a percentage of cost or as a specific amount per unit of import. tax deferral: Foreign subsidiaries of MNEs pay the host country corporate income taxes, but many parent countries, including the United States, defer claiming additional taxes on that foreign source income until it is remitted to the parent firm. tax exposure: The potential for tax liability on a given income stream or on the value of an asset. Usually used in the context of a multinational firm being able to minimize its tax liabilities by locating some portion of operations in a country where the tax liability is minimized. tax haven: A country with either no or very low tax rates that uses its tax structure to attract foreign investment or international financial dealings. tax morality: The consideration of conduct by an MNC to decide whether to follow a practice of full disclosure to local tax authorities or adopt the philosophy of “When in Rome, do as the Romans do.” tax neutrality: In domestic tax, the requirement that the burden of taxation on earnings in home country operations by an MNC be equal to the burden of taxation on each currency equivalent of profit earned by the same firm in its foreign operations. Foreign tax neutrality requires that the tax burden on each foreign subsidiary of the firm be equal to the tax burden on its competitors in the same country. Glossary • 313 tax on undistributed profits: A different income tax applied to retained earnings from that applied to distributed earnings (i.e., dividends). tax treaties: A network of bilateral treaties that provide a means of reducing double taxation. technical analysis: The focus on price and volume data to determine past trends that are expected to continue into the future. Analysts believe that future exchange rates are based on the current exchange rate. technical forecasting: Development of forecasts using historical prices or trends. TED spread: Treasury Eurodollar spread. The difference, in basis points, between the 3-month interest rate swap index or the 3-month LIBOR interest rate, and the 90-day US Treasury bill rate. It is sometimes used as an indicator of credit crisis or fear over bank credit quality. tenor: Time period of drafts. tequila effect: Term used to describe how the Mexican peso crisis of Decem- ber 1994 quickly spread to other Latin American currency and equity markets through the contagion effect. terms of trade: The weighted average exchange ratio between a nation’s import prices and its export prices, used to measure gains from trade. “Gains from trade” refers to increases in total consumption resulting from produ- = ∗ ction specialization and international trade. (TOT PM /PX = SP /P). territorial taxation or territorial approach: Taxation of income earned by firms within the legal jurisdiction of the host country, not on the country of the firm’s incorporation. time-series analysis: Analysis of relationships between two or more variables over periods of time (i.e., AR(p), MA(q), ARM(p,q), etc.). time-series models: Models that examine series of historical data; sometimes used as a means of technical forecasting by examining moving averages, autoregressive processes, and other combinations. time draft: A draft that allows a delay in payment. It is presented to the drawee, who accepts it by writing a notice of acceptance on its face. Once accepted, the time draft becomes a promise to pay by the accepting part. See also banker’s acceptance. total shareholder return (TSR): A measure of corporate performance based on the sum of share price appreciation and current dividends. trade acceptance: Draft that allows the buyer to obtain merchandise prior to paying for it. tranche: An allocation of shares, typically to underwriters that are expected to sell to investors in their designated geographic markets. transfer pricing: Policy for pricing goods sent by either the parent or a subsidiary to a subsidiary of an MNC. 314 • Glossary transferable letter of credit: Document that allows the first beneficiary on a standby letter of credit to transfer all or part of the original letter of credit to athirdparty. transparency: The degree to which an investor can discern the true activities and value drivers of a company from the disclosures and financial results reported. Treynor measure (TRN): A calculation of the average return over and above the risk-free rate of return per unit of portfolio risk. It uses the portfolio’s beta as the measure of risk. Triffin paradox (also Triffin dilemma): The potential conflict in objectives that may arise between domestic monetary policy and current policy when a country’s currency is used as a reserve currency. trilemma of international finance: The difficult but required choice that a government must make among three conflicting international financial system goals: a fixed exchange rate, independent monetary policy, and free mobility of capital. turnover tax: A tax based on turnover or sales, similar in structure to a VAT, in which taxes may be assessed on intermediate stages of a good’s production. umbrella policy: Policy issued to a bank or trading company to insure exports of an exporter and handle all administrative requirements. unaffiliated: An independent third-party. unbiased predictor: A theory that spot prices at some future date will be equal to today’s forward rates. unbundling: Dividing cash flows from a subsidiary to a parent into their many separate components, such as royalties, lease payments, dividends etc., so as to increase the likelihood that some fund flows will be allowed during economically difficult times. uncovered interest arbitrage (UIA): The process by which investors borrow in countries and currencies exhibiting relatively low interest rates and convert the proceeds into currencies that offer much higher interest rates. The transaction is “uncovered” because the investor does not sell the higher yielding currency proceeds forward. undervalued currency: The status of currency with a current foreign exchange value (i.e., current price in the foreign exchange market) below the worth of that currency. Because “worth” is a subjective concept, underva- luation is a matter of opinion. If the euro has a current market value of $1.20 (i.e., the current exchange rate is $1.20/C) at a time when its “true” value as derived from purchasing power parity or some other method is deemed to be $1.30, the euro is undervalued. The opposite of undervalued is “overvalued.” unilateral transfers: Balance of payments accounting for government and private gifts and grants. Glossary • 315 unsystematic risk: In a portfolio, the amount of risk that can be eliminated by diversification. value-added tax: A type of national sales tax collected at each stage of production or sale of consumption goods and levied in proportion to the value added during that stage. value date: The date when value is given (i.e., funds are deposited) for foreign exchange transactions between banks. value today: A spot foreign exchange transaction, in which delivery and payment are made on the same day as the contract. Normal delivery is two business days after the contract. value tomorrow: A spot foreign exchange transaction, in which delivery and payment are made on the next business day after the contract. Normal delivery is two business days after the contract. volatility: In connection with options, the standard deviation of daily spot price movement. weighted average cost of capital (WACC): The sum of the proportionally weighted costs of different sources of capital, used as the minimum acceptable target return on new investments. wire transfer: Electronic transfer of funds. Working Capital Guarantee Program: Program conducted by the Ex-Im Bank that encourages commercial banks to extend short-term export financing to eligible exporters; the Ex-Im Bank provides a guarantee of the loan’s principal and interest. World Bank: Bank established in 1944 to enhance economic development by providing loans to countries. World Trade Organization (WTO): Organization established to provide a forum for multilateral trade negotiations and to settle trade disputes related to the GATT accord. Yankee bonds: Dollar-denominated bonds issued within the United States by a foreign borrower (i.e., foreign bonds). Yankee stock offerings: Offerings of stock by non-US firms in US markets. yield to maturity: The rate of interest (i.e., discount) that equates future cash flows of a bond (PV), both interest and principal, with the present market price (P0). Yield to maturity is thus the time-adjusted rate of return earned by a bond investor. yuan (CNY): The official currency of the People’s Republic of China, also termed the renminbi. zero coupon bond: A bond that pays no periodic interest, but returns a given amount of principal at a stated maturity date. Zero coupon bonds are sold at a discount from the maturity amount to provide the holder a compound rate of return for the holding period. Bibliography

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Dr. Ioannis (John) N. Kallianiotis is a professor of Finance at the Econo- mics/Finance Department, The Arthur J. Kania School of Management, University of Scranton, Scranton, PA, United States. He has a BA in Business Economics from the Aristotelian University of Thessaloniki, Greece (1978), an MA in Business Economics from Queens College, CUNY, New York (1982), an MPhil in Financial Economics from Graduate Center, CUNY, New York (1984), and a PhD in Finance (International Finance and Mone- tary Theory and Financial Institutions) from Graduate Center and Baruch College, CUNY, New York (1985). He has taught at nine different colleges and universities over the last 28 years and has worked at a few other jobs (as an accountant, banker, and resea- rcher) in the private sector for six years. He was an officer in the Greek Army, where he served at a NATO base for three years. He has been married for 39 years and has one son. He is president, a member of the board of directors, or on the council of many editorial boards in academic, professional, community, charitable, and spiritual societies and associations across America, Europe, and in the international arena. His research is focused on international finance, financial markets, the European Union, and business in general; he has published over 230 articles in different journals, including Quarterly Economic Review, Greek Econo- mic Review, Economicos Tachydromos, International Journal of Commerce and Management, American Business Review, Pennsylvania Economic Review, Journal of Business and Society, North Central Business Journal, Economic Modelling, Journal of Business and Economic Studies, Global Business and Eco- nomic Review, Spoudai, Indian Journal of Economics and Business, The Journal of American Academy of Business, The Business Review, The Journal of European Research Studies, The International Research Journal of Finance and Econo- mics, The International Journal of Applied Business and Economic Research, The American Journal of Economics and Business Administration, Journal of Business and Economics, International Journal of Business and Commerce, Cor- porate Finance Review, British Journal of Economics, Management and Trade, 324 • About the Author

Interdisciplinary Journal of Research in Business, International Research Journal of Applied Finance, and others. ManyofhisarticleshaveappearedinbookssuchasInternational Research in the Business Disciplines, Emerging Markets in Asia, Quantity and Quality in Economics Research, Business and Economics for the 21st Century,International Public Policy and Regionalism at the Turn of the Century, Applied Economic Research, Contemporary Issues of Economic and Financial Integration: A Colle- ction of Empirical Work, Financial Crises, Impact and Response: The View from the Emerging World, Social Welfare,etc. He was a co-editor of a book titled, Balance of Payments Adjustment (Gree- nwood Press, 2000), author of a book titled, Exchange Rates and International Financial Economics: History, Theories, and Practices (Palgrave/Macmillan 2013), and has also reviewed many books. He has many articles and intervi- ews published in magazines and newspapers (Politico.com, The Washington Times, US News & World Report, Reuters, The Wall Street Journal, Times Lea- der, Scranton Times, Northeast Business Journal, etc.). His work has also been published in numerous conference proceedings. In addition, he has published extensively in other areas, including history, philosophy, culture, education, Greek language, and others. His other work has been published in Orthodoxos Typos, Salpigx Orthodoxias, Ekklisiastiki Paradosis, Dimosiographiki, Agios Kyprianos, Orthodox Tradition, Ellinoch- ristianiki Agogi, Agios Agathagelos, Voanerges, Hellas on the Web, Antibaro, Christian Vivliograﬁa, Serbia Martira, Macedonia Hellenic Land, Hellenes Online, and elsewhere. He has also published different pamphlets, books, chapters, etc. on similar topics. Finally, his unpublished manuscripts about all of the business and social issues above are numerous.

E-mail: [email protected] Web: http://academic.scranton.edu/faculty/jnk353/ http://matrix.scranton.edu/academics/ksom/eco-ﬁn/faculty/ John-Kallianiotis.shtml Index

Absolute advantage, 279 Balance of Payments (Bof P), 1–2, 4, Absorption, 10 11, 20, 281 Account receivable, 279 Capital account, 3–4, 7, 13 Adverse selection, 257 Crisis, 11, 24 Afﬁliates, 293 Current account, 3–4, 7, 10, 12, Aggregate demand, 224 35–9, 281 Aggregate spending, 224 Exchange rates, 26, 29 American Depositary Receipts Exports, 4, 9–10, 14 (ADRs), 280 Gross Domestic Product (GDP), American terms, 280 17 “Anglo-American model,” 247, 259, Imports, 4, 9–10, 14 269–70 Interest rates, 13 Anomalies in market efﬁciency, 252 Merchandise trade, 4 Appreciation of currency, 280 Net errors and omissions, 4, 7 Arbitrage, 280 Statistical discrepancy, 4, 7 CIA, 286 Trade balance, 4, 9, 27, 281 UIA, 314 Balassa-Samuelson effect, 42, 249 Ask rates, 280 Bandwagon effect, 252 Assessing political risk, 188–91 Bank for International Settlements Checklist approach, 189 (BIS), 249, 281 Combination of techniques, 191 Bank loans, 166, 260 Beggar-thy-neighbor, 21, 282 Delphi technique, 189 β Inspection visits, 191 Beta ( ), 116, 134–5, 282 Bid rates, 282 Quantitative analysis, 189–91 Big Mac Index, 249 Asset market approach, 280 Bill of exchange, 262, 282 Association of Southeast Asian Bretton Woods, 22, 283 Nations (ASEAN), 150, 262 Breusch-Godfrey test, 30, 33, 234 ATFA, 263 Augmented Dickey-Fuller test, 231 Cadbury report, 256 Capital account, 3–4, 12–13, 217, Back-to-back loans, 281 224, 230, 273–4, 283 Backward integration, 99 Capital controls, 283 326 • Index

Capital market line, 141–2 Country-specific political risk, 186, Capital mobility, 283 286 Capital structure, 121–3, 272 Covered interest arbitrage (CIA), 286 Net income approach, 121 Credit default swap (CDS), 223, Net operating income approach, 274–5, 286 121 Cross rates, 286 Optimal, 121 Currencies, 215–16, 243, 270 Traditional approach, 121 Futures in foreign, 287 CAPM, 115–16, 134, 146, 261, 283 Swaps, 287 Causality, 217 Current account, 4, 10, 12, 29–39, Center of excellence, 253 217, 230, 287 Price of Oil, 29–35 Central banks, 270, 276 Risk, 29–35 Cheap inputs, 99 Clearing House Interbank Payments Debt crisis, 218, 220, 235, 246, 262, System (CHIPS), 284 268, 270–1 Cointegration, 34, 230–1 Depositary receipts, 126–7, Commercial documents, 151 287 Certificate of origin, 152 American, 280 Export declaration, 153 Global, 295 Invoice, 151–2, 284 Depreciation of currency, 216, 219, Packing list, 153 222, 287 Quality or inspection certificates, Devaluation of currency, 216–17, 229, 153 288 Weight notes or certificates, 152 Direct investment, 288 Competitive Advantage, 284 Direct quotes, 288 Conflict of laws, 253 Disclosure, 105 Corporate governance, 103–9, 256, Discriminant analysis, 190 285 Distributive policies, 111 Corporate regulation, 109–11, 221 Diversification, 172, 199, 287 Correlation, 134, 242, 250 Domestic portfolio theory, 139 Coefficients, 134, 146, 226, 242 Expected return, 139 Cost of capital, 113, 120, 123, 133 Risk, 139–40 “Dot com” crisis, 256 Debt, 114 Drafts, 288 External equity, 117 Bill of Exchange, 288 MCC, 118–19 “New” stock, 117 EBIT, 270 “Old” stock, 115 Economic and Monetary Union Preferred stock, 114 (EMU), 240 Retained earnings, 115 Economic efficiency, 251 Weighted average (WACC), Economic motives, 99 117–18, 136 Economic rent, 255 Cost of financial distress, 122 Effective return, 148, 289 Country risk, 144, 182, 286 Euro, 237, 275, 289 Index • 327

Euro- Financial and financing documents, Euro-banks, 289 156 Euro-bond, 129, 260, 289 Bank credit line, 163–4 Euro-commercial paper, 290 Banker’s Acceptance (BA), 158–60, Euro-currencies, 290 262, 281 Euro-dollars, 290 Commercial paper, 163 Euro Medium-term notes, 128, 290 Draft or Bill of Exchange (B/E), Euro-note market, 172–5 157–8, 262, 282 Euro-stock market, 175–9, 290 Factoring, 161–3 European Central Bank (ECB), 237, Letter of Credit (L/C), 156–7 241, 260, 290 Promissory Notes, 160 European debt crisis, 237, 260–1, Securitization, 163 264 Trade Acceptances, 161 Dummy (EDCD). 224 Trust Receipts, 161 European Union (EU), 211–2, 290 Financial strength, 99 Eurosia Group, 265 Financing for your international Euro-zone, 237, 277, 291 buyers, 165 Exchange rate expectations, 75–83 Firm-specific political risk, 292 Adaptive, 77–8, 92 Fisher effect, 52–4, 292 Extrapolative, 77, 91 Fisher equation, 52 General specifications, 81, 94 Fixed exchange rate, 292 Rational, 78–9, 92 Flexible exchange rate, 292 Regressive, 80, 93–4 Floating exchange rate, 292 Static, 76 Flotation cost, 117 Exchange rates, 12, 14, 41 Forecasting exchange rates, 295 Effective, 48–9, 289 Foreign affiliate, 293 Fixed, 292 Foreign assets, 18–19 Flexible, 292 Foreign bond, 128–9, 293 Floating, 292, 300 Foreign Credit Insurance Association Nominal, 48 (FCIA), 166, 263, 291, Nominal effective, 48 293 Pass-through, 51, 291, 305 Foreign currency Real, 48 Exchange rates, 293 Real effective, 49 Forward discount, 288 Executive pay, 108–9 Futures, 287, 295 Expansion, 103 Foreign Direct Investment, 149, Export-Import Bank, 164–7, 263, 291 195–210, 212, 253, 293 Exports, 14, 27, 29, 164, 217 Export-platform FDI, 198 Horizontal FDI, 198 Facilities development financing, 165 Motives, 198–201, 266 Factoring, 291 Vertical FDI, 198 FDI, 149, 253 Foreign exchange Federal Reserve, 9, 241 Brokers, 293 Financial contagion effect, 262 Cross rates, 286 328 • Index

Foreign exchange—Continued Globalization, 210, 212–14 Currency, 270 Gold exchange standard, 22, 296 Determination, 224, 228 Gold standard, 21, 234 Forecasting, 295 Government spending, 17, 29 Forward transactions, 294 Granger causality test, 227, 244 Market, 293 Gross Domestic Product (GDP), 17, Rate quotations, 304 196, 277 Risk, 143, 293 Gross National Product (GNP), 17, Trading, 293 196 Foreign exchange market efficiency, 70–5, 91, 289 Herfindahl-Hirscham Index, 266 Allocation efficiency, 70 Human resources, 99 Anomalies in market efficiency, 74 Imperfect markets, 296 Efficiency in pricing, 70 Imports, 14, 27, 29, 217 Operational efficiency, 70 Income elasticity, 14, 241 Semi-strong market efficiency, 72, Index of Economic Freedom, 188 90–1 Inflation, 221 Strong market efficiency, 74 Differential, 46, 53 Weak market efficiency, 71, 90 Hyperinflation, 221, 272–3 Foreign exchange rate quotation Rate, 271, 273 American terms, 280 Innovation, 102 Bid and ask rates, 303 Insurance documents, 154–5 European terms, 290 Interbank market, 297 Forward quotations, 294 LIBOR, 127–8, 260 Foreign subsidiary, 129 Interest rate, 51, 88, 120, 250, 307 Forfaiting, 168–70, 294 Interest rate parity (IRP), 57–61, 297 Forward discount, 13, 58, 66, 69, 90, Covered interest arbitrage (CIA), 294 61–2, 64–6 Forward premium, 58, 66, 294 Covered interest differential (CID), Forward quotations, 294 60, 250 Forward rate, 294 Covered IRP, 59, 251 Forward rate as an unbiased predictor Real IRP, 56–7, 89 of the future spot rate, 67–9 Uncovered IRP, 61–3 Forward transactions, 294 Internalization, 113, 297 Franchising, 206, 208–10, 267–8, International bond market 294 Euro-bonds, 129, 260, 289 Free trade zone (FTZ), 295 Foreign bonds, 128–9, 293 Futures International CAPM, 119, 136, 298 Contracts, 287, 295 International Centre for Settlement of Investment Disputes (ICSID), GATT, 263, 295 150 Global Political Risk Index, 188 International Fisher effect, 54–5, 89, Global uncertainty, 210–11, 235–6 250 Global-specific political risk, 187, 295 International Investment, 147–50 Index • 329

International Investment Agreement Unbiased forward rate hypothesis, (IIA), 149 67–9 International Market performance, International portfolio diversification, 145–7 142–3, 179 International Monetary Fund (IMF), International Product Life-Cycle 16, 22, 219, 298 Hypothesis, 200–1 Bretton Woods, 22, 247 International trade, 151–64 Debt crises, 23, 25, 247 Documents, 151–64, 262, 299, International Monetary Market 302, 309 (IMM), 296, 298 Export-Import Bank, 164–67, 263, International monetary system, 298 291 Bretton Woods, 22, 283 Factoring, 291 Currency regime, 21–2, 234, Finance, 151–64 296 Forfaiting, 168–70, 294 Investments, 17 ECB, 237, 241, 260, 290 Foreign direct (FDI), 253, 293 Euro, 237, 275, 289 Initial public offering (IPO), 296 Fixed exchange rate, 292 Investment project financing, 166 Flexible exchange rate, 292 Gold standard, 21, 234 J-Curve, 19–20, 299 International offshore financial Joint venture, 205–6, 208, 267, 299 centers, 130–2, 261 International operations, 99 Keynesianism, 247, 270 International parity conditions, 41–2 Knowledge seekers, 99 CIA, 61–2, 64–6, 286 Commodity price parity (CPP), Laissez-faire, 220 43 Laissez-passer, 220 Exchange rate pass-through, 51 Law of one price, 42, 299 Fisher effect, 52–4 PPP, 43 Fisher’s open hypothesis, 54–5 LIBOR, 127–8, 260, 300 Forward rate as an unbiased Licensing, 299 predictor of future spot rate, Logit regression, 190 67–9, 89 Long position, 300 Interest rate and exchange rate, 51, 88 Maastricht Treaty, 300 International Fisher effect, 54–5, ECB, 237, 241, 260, 290 89, 298 Euro, 237, 275, 289 International parity identity, 41–2 Management contracts, 202, 267 IRP, 57–61, 250, 271, 297 Managing political risk, 191–3 Law of one price, 43 Maquiladoras, 210 PPP (absolute and relative), 45–7 Market capitalization, 251 Real and nominal exchange rate, Market development, 98 89 Market dominance, 102 UIA, 56–7 Market seekers, 98 330 • Index

Marshall-Lerner condition, 14–15, Official Reserves Account, 303 28–9 Official settlements, 3–4, 7 Mercantilism, 21, 246 Offshore financial centers, 130–2, 261 Merchandise trade, 5 Operating subsidiary, 203 Mergers & Acquisitions (M&As), Optimal capital structure, 121–3 203–5, 265 Optimal portfolio, 141 Conglomerate mergers, 204–5 Orthogonality tests, 82–3, 94–6 Horizontal mergers, 204 Overall balance Vertical mergers, 204 BofP, 4 Minority interest, 267 Overseas Private Investment MNC (Multinational Corporation), Corporation (OPIC), 166–8, 97–104, 112, 258 194–5, 266, 304 Modern capitalism, 258, 259–60 Modern Portfolio Theory (MPT), Parent company, 203 137–43 Pass-through exchange rates, 51, 291, Monetary base, 5, 18–19, 239, 271, 305 273, 276–7 Phillips-Perron test, 231 Monetary expansion, 271 PIIGSC, 223, 237, 257 Monetary policy, 15, 185, 241, Political risk, 181–93, 263, 265–6, 277–8, 302 305 Money, 301 Macro-, 182, 184, 186, 300 Supply, 5, 18, 239 Micro-, 182–3, 301 Moral hazard, 256, 301 Universal-, 184, 187, 264 MRR, 119 Political safety seekers, 99 Multinational corporations (MNCs), Portfolio diversification theory, 97–104, 112, 253–4, 258, 263, 137–43, 261, 289, 305 302 PPP, 43 NAFTA, 149–50, 303 Absolute, 45, 47 Neoliberalism, 269–70 Empirical tests, 47, 84–8 Net errors and omissions Exchange rate determination, Balance of payments, 4 45–6 Net FDI inflow, 197 Relative, 45–7, 308 Nominal exchange rate, 302 Preferential Trade and Investment Non-operating subsidiary, 203 Agreements (PTIAs), 149 Non-stationary series, 229, 231 Premiums, 305 NPV, 302 Price elasticity, 14, 28, 241, 250 Numismatics, 303 Price-specie-flow mechanism, 306 Principal-agent problem, 257 Official documents, 153–4, 308 Product cycle theory, 306 Black-listed certificate, 153 Production efficiency seekers, 99 Certificate of analysis, 153 Profit, 101–2, 198 Consular invoice, 153 Protectionism, 14, 306 Health certificate, 153–4 Purchasing power parity (PPP), 43–7, Legalized invoice, 153 307 Index • 331

Q-statistics, 30–2, 233 Strategic alliances, 125, 206–10, 311 Quasi-rent, 255 Subsidiaries, 203, 311 Quotations Swap transactions, 287, 311 Foreign exchange rates, 304–5, SWIFT, 309, 311 307 Swiss Referendum 2013, 257 Syndicated credits, 311 Raw material seekers, 98 Systematic risk, 144, 312 Real exchange rate, 48–9, 307 Systemic risk, 144–5, 312 Regression analysis, 134–5, 232, 307 Regulatory policies, 111 Tariffs, 249, 275 Relative PPP, 45–7, 308 Tax noncompliance, 221, 254 Reserves, 308 Taxes, 221, 245, 258, 268, 273 Retained earnings break point, 118–19 Taylor’s rule, 276 Revaluation of currency, 308 Technical analysis, 313 Reward to variability ratio, 141–2, Forecasting of exchange rates, 313 146, 223 Technological strength, 99 Risks, 29, 308 TED spread, 30, 313 Currency risk, 143 Terms of trade (TOT), 14, 29, 229, Interest rate risk, 297 250, 313 Political risk, 144, 181–93 The Big Mac Index, 44, 85, 87 Systematic risk, 144 Time drafts, 313 Systemic risk, 144 Trade, 224 Royalty, 206, 208–10 BofP, 9, 27, 273 Rule 144A, 259, 309 Trade ﬁnance, 137 Sarbanes-Oxley Act, 256, 309 Trade Weighted Exchange Index, 216, SDR (Special Drawing Rights), 271 270 Seignorage, 309 Transport documents, 155–6 Serial correlation LM test, 33 Air Consignment note, 155 Service account, 5 Airway Bill, 155 BofP, 4 Bill of Lading (B/L), 155 Sharpe measure (SHP), 142, 147, 309 Mate’s receipt, 155 Short positions, 309 Treynor measure (TRN), 147, 314 Social Distress Index (SDI), 270 Troika, 16, 258, 264 Society for Worldwide Interbank True rent, 255 Financial Telecommunications (SWIFT), 309 UIA (uncovered interest arbitrage), Sovereign wealth fund, 245 61–3 Special Drawing Rights, 271, 310 Unbiased predictor of the future spot Speculation, 310 rate, 67–9, 251, 314 Spot rates, 310 Uncovered interest arbitrage (UIA), Spot transactions, 310 314 Standard deviation, 146 Unilateral transfers, 6, 314 Stationary series, 229, 231 Unit root, 229, 231 Sterilization policy, 311 Unsystematic risk, 315 332 • Index

Valuation against the dollar, 223 Wire transfer, 315 Variance-Covariance matrix, 140 World Bank, 22, 298, 315 WTO, 150, 220, 264, 315 War dummy (WD), 224 Weighted average cost of capital (WACC), 117–18, 315 Yuan, 222, 236, 308, 315