Introduction to Finance

parts, and vice versa. The world banking systems facilitate fi nancing 
of sales by exporters and purchasers by importers through legal 
documents such as a draft (sight or time) or bill of exchange and an 
order bill of lading. Bank guarantees of payments take the form of a 
banker’s acceptance or a commercial letter of credit. 
LO 6.7 
U.S. imports continue to exceed exports of goods and ser-
vices each year. This is the primary reason for a negative current 
account balance in the balance of payments or international transac-
tions statement. To off set current account defi cits, direct investments 
(business fi xed assets and acquisitions) and portfolio investments 
(corporate stocks and bonds and government debt securities) by for-
eign businesses and governments need to be greater than the compar-
able investments of their U.S. counterparts. The Fed may also adjust 
its holdings of foreign exchange reserves when needed.
Key Terms
arbitrage
balance of payments
balance of trade
banker’s acceptances
Bretton Woods system
capital account 
clean draft
commercial letter of credit
currency appreciation
currency depreciation
currency exchange markets
currency exchange rate
currency exchange rate risk 
current account 
direct quotation method
documentary draft
draft or bill of exchange
economic risk
equilibrium exchange rate 
euro
European Monetary Union 
(EMU)
European Union (EU)
eurozone members
Export-Import Bank
fi nancial account 
fl exible exchange rates
foreign exchange markets
forward contract 
forward rate
gold standard
hedging
indirect quotation method
international Fisher eff ect (IFE)
International Monetary Fund 
(IMF)

---

Exercises
155
International monetary system
merchandise trade balance
multinational corporation 
order bill of lading
political risk
purchasing power parity 
(PPP)
sight draft
special drawing rights 
(SDRs)
spot exchange rate
time draft
traveler’s letter of credit
trust receipt
World Bank
Review Questions