Glossary

CAA

Clean Air Act (USA)

Call Option

The right to buy the underlying currency or security at a specified price and on a specified date from the option writer/seller.

Calvo Doctrine

A foreign policy doctrine that states that the country in which an investment is located has jurisdiction over that investment.

Cap

In banking and finance, when the interest on borrowed funds is tied to the market rate, an upper limit or a cap can be negotiated and agreed upon, so that even when the market rate is higher than the stated level, no premium will be paid.

Capital Account

A measure of change in cross-border ownership of long-term financial assets, including financial securities and real estate.

Capital Asset Pricing Model (CAPM)

An asset pricing model that relates the required return on an asset to its systematic risk.

Capital Budgeting

Planning and managing expenditures for long-lived assets.

Capital Formation

The process of increasing the amount of capital goods - also called capital stock - in a country.

Capital Gain

The positive change in the value of an asset, a negative capital gain is a capital loss.

Capital Goods

Manufactured goods that are used for production, such as machine tools.

Capital Market Line

The line between the risk-free asset and the market portfolio that represents the mean-variance efficient set of investment opportunities in the CAPM.

Capital Markets

Markets for financial assets and liabilities with maturity greater than one year, i.e. long-term loanable funds, including long-term government and corporate bonds, preferred stock, and common stock.

Capital Rationing

The case where funds are limited to a fixed dollar amount and must be allocated among the competing projects.

Capital Structure

The mix of the various debt and equity capital maintained by a firm. Also called financial structure. The composition of a corporation's securities used to finance its investment activities; the relative proportions of short-term debt, long-term debt, and owners' equity.

Capital Structure

The proportion of debt and equity and the particular forms of debt and equity chosen to finance the assets of the firm. Also known as financial structure.

Capitalism

An economic system that is based on private ownership; economic development is proportionate to and dependent upon the accumulation and reinvestment of profits.

Caribbean Community and Common Market (CARICOM)

CARICOM consists of Antigua & Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, St. Kitts & Nevis, St. Lucia, St. Vincent & The Grenadines, Suriname, and Trinidad & Tobago. Its purpose is to provide a continued economic linkage after the dissolution of the West Indies Federation for English-speaking countries in the Caribbean.

Carrier

An individual or entity that transports persons or goods for compensation under the contract of carriage.

Cartage

The delivery of goods with short distance.

Cartel

An agreement among, or an organization of, suppliers of a product to limit production in order to minimize competition and maximize market power.

Cash Against Documents (CAD)

Payment for goods where a commission house or other intermediary transfers title documents to the buyer upon payment in cash.

Cash Cover

In a letter of credit transaction, money deposited by the applicant with the issuing bank.

Cash Flow

Cash generated by the firm and paid to creditors and shareholders. It can be classified as (1) cash flow from operations, (2) cash flow from changes in fixed assets, and (3) cash flow from changes in net working capital.

Cash in Advance (CIA)

Payment for goods in which the price is paid in full before the shipment is made. This type of payment is usually only made for very small shipments or when goods are made to order.

Cash With Order (CWO)

Payment for goods in which the price is paid at the time the order is placed.

Central America Free Trade Agreement (CAFTA-DR)

CAFTA-DR is an extensive trade agreement between Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, and the United States.

Central Bank

The sole institution of a nation that has the authority to issue banknotes and set monetary and credit policies. It manages the rate of exchange of the nation's currency and determines the internal and external monetary stability of the currency.

Centrally Planned Economy

An economy in which the government, rather than free-market activity, controls the allocation of resources.

Certificate of Acceptance

Term used in leasing. A document whereby the lessee acknowledges that the equipment to be leased has been delivered, is acceptable, and has been manufactured or constructed according to specifications.

Certificate of Analysis/Certificate of Inspection

Documents that may be asked for by the importer and/or the authorities of the importing country, as evidence of quality or conformity to specifications.

Certificate of Manufacture

A statement that is usually notarized in which the producer of goods certifies that the goods have been produced and are now available to the buyer.

Certificate of Origin

Documents that may be asked for by the authorities of the importing country, as evidence of the country of manufacture of the goods.

Certificate of Product Origin

A document required by certain foreign countries for tariff purpose, certifying the country of origin of specified goods.

Change in Net Working Capital

Difference between net working capital from one period to another.

Characteristic Line

The line relating the expected return on a security to different returns on the market.

Chattel

An item of movable personal property

Chill a Sale

The collusion of buyers or bidders in a sale to check competition in order to obtain goods or properties below fair value.

Civil Law

A body of law created by the legislation of a state or nation, and based upon written statutes, for its own regulation.

Civil Society Organizations (CSOs)

Non-governmental and non-profit groups that work to improve society and the human condition.

Clean Bill of Lading

A receipt for goods issued by a carrier that indicates that the goods were received in apparently good order and without damage.

Clean Collection

Collection in which only the financial document is sent through the banks.

Clearance

The completion of customs entry requirements that results in the release of goods to the importer.

Clearing

The settlement of a transaction, often involving exchange of payments and/or documentation.

Clearing House Interbank Payments System (CHIPS )

Financial network through which banks in the United States conduct their financial transactions.

Closed-end Fund

A mutual fund in which the amount of funds under management is fixed and ownership in the funds is bought and sold in the market like a depository receipt.

Closed-end Transaction

A credit transaction in which the time for repayment and amount are fixed.

Codex

Codex Alimentarius Commission (a world food standards body)

Collar

An agreement that fixes the interest rate between a lower and upper boundary, regardless of the market rate.

Collecting Bank

The bank that acts as the agent of the seller to collect payment(s) from the buyer and then transfer the payment(s) to the remitting bank (seller's bank).

Collection Order

In a collection, the document in which the seller instructs the banks as to how the collection is to be conducted.

Collective Mark

A trademark or service mark for a cooperative, association or a collective group to indicate membership in this collective group.

Collectivist Society

A society in which people feel more comfortable thinking and acting in groups.

Collusion

An agreement (usually secret ) among mostly oligopolistic competing firms in an industry to control the market, raise the market price, and otherwise act like a monopoly.

Command Economy

An economy based on government ownership and/or control of society's resources; during the 20th century, the dominant form of command economy was communism.

Commercial Bank

A bank whose primary function is to accept demand deposits (which can be withdrawn upon depositories' demand), and grant short-term and long-term loans.

Commercial Credit

A letter of credit that assures the seller that buyer will pay for the goods being sold. Such letter is usually issued by a bank upon client's request.

Commercial Document

General term for documents describing various aspects of a transaction, e.g. commercial invoice, transport document, insurance document, certificate of origin, certificate of inspection, etc.

Commingling

Method of packing a shipment in which various goods subject to differing duties are grouped together. Because of this, the value of each type of item is difficult to determine.

Commodity Price Risk

The risk of unexpected changes in a commodity price, such as the price of oil.

Commodity Swap

A swap in which the (often notional) principal amount on at least one side of the swap is a commodity such as oil or gold.

Common Carrier

An organization that transports persons or goods for a fee.

Common Law

The body of law based on customs, usages, and court decisions rather than statutory laws.

Common Market

A common market is a group of countries that have common external tariffs against non-member nations. It may also allow labor mobility as well as common economic policies. For example, the European Union (EU).

Common Market for Eastern and Southern Africa (COMESA)

An organization of states that intends to promote the development of the resources of its members, COMESA forms a major trading block of 20 nations: Angola, Burundi, Comoros, D.R. Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Madagascar, Malawi, Mauritius, Namibia, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia and Zimbabwe.

Common Market of the South

See MERCOSUR.

Commonwealth

An association of independent states that promotes cooperation, consultation, and mutual assistance among members. However, such association has no treaty or constitution. For example, the British Commonwealth.

Comparative Advantage

A comparative advantage exists when a nation or economic region is able to produce a product at a lower opportunity cost compared to another nation or region. The rule of economics that states that each country should specialize in producing those goods that it is able to produce relatively most efficiently.

Compensatory Trade

The sale of goods or services that is paid for by bartering other goods or services.

Complementary Imports

The imports of goods or services that the importing country does not possess or produce.

Compliant Documents

Documents presented under a letter of credit that comply with all its terms and conditions. The banks are only obliged to pay the beneficiary if documents are totally compliant.

Compound Interest

Interest that is earned both on the initial principal and on interest earned on the initial principal in previous periods. The interest earned in one period becomes in effect part of the principal in a following period.

Compound Rate

A rate that has both a specific rate as well as an ad valorem rate.

Compound Value

Value of a sum after investing it over more than one period. Also called future value.

Compounding

Process of reinvesting each interest payment to earn more interest. Compounding is based on the idea that interest itself becomes principal and therefore also earns interest in subsequent periods.

Confirming Bank

Bank that adds its payment undertaking to a letter of credit.

Consignee

Party to whom goods are to be delivered.

Consignment

Delivery of merchandise from an exporter (the consignor) to an agent (the consignee) under agreement that the consignee sells the merchandise of the account of the consignor, while the consignor retains title to the goods until the consignee sells them. The consignee sells merchandise for commissions and remits the net proceeds to the consignor.

Consignor

A consignor is an individual entity, partnership or a company that ships its goods to another party to be taken care of. A consignor is usually an exporter.

Consolidated Income

The sum of income across all of the multinational corporation’s domestic and foreign subsidiaries.

Consolidation

A form of corporate reorganization in which two firms pool their assets and liabilities to form a new company. The term can also be used for shipping, in which a freight consolidator combines shipments of cargo that are less than truckload (LTL) in order to reduce shipping rates.

Consular Statement

A document required by some foreign countries, describing a shipment of goods and showing information such as the consignor, consignee, and value of shipment. Certified by a consular official of the foreign country, it is used by the country's officials to verify the value, quantity, and nature of the shipment.

Consulate

The diplomatic building located in a foreign country that represents the commercial interests of the home country.

Consumer Goods

Goods produced for individuals rather than for manufacturing purposes.

Contango

The amount the buyer pays the seller to delay the transaction of a security, especially when the future price of the security is above the expected future spot price. The opposite is called backwardation.

Contingency Insurance

Contingency insurance protects the exporter in any situation in which exporter responsibility relied on the buyer to insure, but sustained a loss because of inadequate coverage from that source. It will cover situations in which the FOB endorsement would have otherwise served had that been in force.

Contingent claim

Claim whose value is directly dependent on, or is contingent on, the value of its underlying assets. For example, the debt and equity securities issued by a firm derive their value from the total value of the firm.

Continuous Compounding

Interest compounded continuously, every instant, rather than at fixed intervals.

Continuous Quotation System

A trading system in which buy and sell orders are matched with market makers as the orders arrive, ensuring liquidity in individual shares.

Contract Manufacturing

A firm allowing another firm to manufacture a pre-specified product.

Contribution Margin

Amount that each additional product, such as a jet engine, contributes to after-tax profit of the whole project: (Sales price - Variable cost) X (1 - T), where T is the corporate tax rate.

Controlled Foreign Corporation (CFC)

In the U.S. tax code, a foreign corporation owned more than 50 percent either in terms of market value or voting power.

Convention on the International Trade in Endangered Species (CITES)

CITES (the Convention on International Trade in Endangered Species of Wild Fauna and Flora) is an international agreement between governments. Its aim is to ensure that international trade in specimens of wild animals and plants does not threaten their survival.

Convertible Bonds

Bonds sold with a conversion feature that allows the holder to convert the bond into common stock on or prior to a conversion date and at a prespecified conversion price.

Convertible Currency

A currency that can be traded for other currencies at will.

Convex Tax Schedule

A tax schedule in which the effective tax rate is greater at high levels of taxable income than at low levels of taxable income. Such a schedule results in progressive taxation.

Cooperation Council for the Arab States of the Gulf (GCC)

The Cooperation Council for the Arab States of the Gulf (GCC) was established on May 25, 1981. It joined the 6 states of the United Arab Emirates, State of Bahrain, Kingdom of Saudi Arabia, Sultanate of Oman, State of Qatar and State of Kuwait. The framework's focus is on acheiving a state of unity in all fields among its member states. It also stresses a furthering of relations and cooperation among member states and provides a platform to address security and economic development chanllenges.

Copenhagen Criteria

The rules and regulations that all applicant countries to the European Union must meet, and to which all EU member nations must maintain.

Corporate Culture

The set of values, beliefs, relationships between individuals and functions that guide the decisions of a company to achieve its objectives.

Corporate Governance

The way in which major stakeholders exert control over the modern corporation.

Corporate Social Responsibility (CSR)

The responsibilities that corporations (including MNCs) have to workers and their families, to consumers, to investors, and to the natural environment.

Corporation

Form of business organization that is created as a distinct "legal person" composed of one or more actual individuals or legal entities. Primary advantages of a corporation include limited liability, ease of ownership, transfer, and perpetual succession.

Correlation

A measure of the covariability of two assets that is scaled for the standard deviations of the assets (rAB = sAB / sAsB such that -1 < rAB < +1).

Correspondent Bank

A bank that, in its own country, handles the business of a foreign bank.

Cost and Freight

A pricing term that indicates that the cost of the goods and freight charges are included in the quoted price.

Cost of Equity Capital

The required return on the company's common stock in capital markets. It is also called the equity holders' required rate of return because it is what equity holders can expect to obtain in the capital market. It is a cost from the firm's perspective.

Cottage Industry

An industry comprised of a labor force that produces goods for sale at home, often with their own equipment.

Counter Credit

Another name for back-to-back letter of credit.

Countertrade

The sale of goods or services that are paid for in whole or part by the transfer of goods or services from a foreign country.

Countervailing Duties

Duties levied on an imported good that has been unfairly subsidized by a foreign government. Imposing duties on the good is meant to raise the product's price to a "fair market value".

Country Risk

The political and financial risks of conducting business in a particular foreign country.

Coupon

The stated interest on a debt instrument.

Coupon Swap

A fixed-for-floating interest rate swap.

Courtage

A European term for brokerage fee.

Covariance

A measure of the covariability of two assets (sAB = sAsB rAB).

Cover Note

Insurance document evidencing that insurance cover for a consignment has been taken out, but not giving full details.

CPI

Corruption Perceptions Index (CPI):
A ranking of countries by level of corruption that is researched and published by Transparency International (TI), the world's leading non-governmental organization dedicated to fighting corruption.

Consumer Price Indexes (CPI):
A program that produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services. It is 1 indication of inflation.

Credit Risk Insurance

Insurance that covers the risk of nonpayment for delivered goods.

Creeping Nationalization

The succession of small but important changes in a firm's condition or standing that bring it slowly under national control.

Cross-hedge

A futures hedge using a currency that is different from, but closely related to, the currency of the underlying exposure.

Culture

Collective mental paradigms that a society imparts to individuals in the form of behavior patterns, shared values, norms and institutions.

Cumulative Translation Adjustment (CTA)

An equity account under FAS #52 that accumulates gains or losses caused by translation accounting adjustments.

Currency Coupon Swap

A fixed-for-floating rate nonamortizing currency swap traded primarily through international commercial banks.

Currency Cross-hedge

A hedge of currency risk using a currency that is correlated with the currency in which the underlying exposure is denominated.

Currency of Reference

The currency that is being bought or sold. It is most convenient to place the currency of reference in the denominator of a foreign exchange quote.

Currency Option

A contract giving the option holder the right to buy or sell an underlying currency at a specified price and on a specified date. The option writer (seller) holds the obligation to fulfill the other side of the contract.

Currency Risk

The risk of unexpected changes in foreign currency exchange rates. Also known as foreign exchange risk.

Currency Swap

A contractual agreement to exchange a principal amount of two different currencies and, after a prearranged length of time, to give back the original principal. Interest payments in each currency are also typically swapped during the life of the agreement.

Current Account

A measure of a country’s international trade in goods and services.

Current Account Balance

A broad measure of import-export activity that includes services, travel and tourism, transportation, investment income and interest, gifts, and grants along with the trade balance on goods.

Current Rate Method

A translation accounting method, such as FAS #52 in the United States, that translates monetary and real assets and monetary liabilities at current exchange rates. FSA #52 places any imbalance into an equity account called the “cumulative translation adjustment.”

Customhouse Broker

A person or firm obtains the license from the treasury department of its Country when required, and help clients (importers) to enter and declare goods through customs.

Customs

The authorities designated to collect duties levied by a country on imports and exports.

Customs Union

A form of regional economic integration group that eliminates tariffs among member nations and establishes common external tariffs.