International Finance Cheat Sheet

The core ideas of International Finance distilled into a single, scannable reference — perfect for review or quick lookup.

PiqCue — piqcue.com/international-finance/cheatsheet

Quick Reference

Balance of Payments

A comprehensive record of all economic transactions between residents of a country and the rest of the world over a specific period. It consists of the current account (trade in goods and services, income, transfers), the capital account (capital transfers), and the financial account (investment flows).

Exchange Rate Regimes

The framework a country uses to determine the value of its currency relative to other currencies. Regimes range from freely floating (market-determined) to fixed (pegged to another currency or commodity) with various intermediate arrangements such as managed floats and crawling pegs.

Purchasing Power Parity (PPP)

An economic theory stating that in the long run, exchange rates should adjust so that an identical basket of goods costs the same in any two countries when expressed in a common currency. It provides a benchmark for assessing whether currencies are overvalued or undervalued.

Interest Rate Parity

A no-arbitrage condition stating that the difference in interest rates between two countries should equal the difference between the forward and spot exchange rates. It links money markets and foreign exchange markets and comes in covered and uncovered forms.

Foreign Exchange Risk

The potential for financial loss arising from changes in exchange rates. It is typically classified into three types: transaction exposure (impact on specific cash flows), translation exposure (impact on consolidated financial statements), and economic exposure (impact on future competitive position and cash flows).

The Impossible Trinity (Trilemma)

A principle in international economics stating that it is impossible for a country to simultaneously achieve a fixed exchange rate, free capital movement, and an independent monetary policy. A nation must choose two of the three objectives.

Foreign Direct Investment (FDI)

Investment made by a firm or individual in one country into business interests in another country, typically involving establishing operations or acquiring tangible assets, with the investor retaining significant management control (usually defined as 10% or more ownership).

Eurocurrency Market

An international money market in which currencies are deposited and lent outside their country of origin. The prefix 'Euro' is historical and does not refer exclusively to Europe; it encompasses any currency held in banks outside the currency's home country.

Sovereign Debt

Bonds and other debt instruments issued by a national government, denominated in either domestic or foreign currency. Sovereign credit risk depends on factors like fiscal position, economic growth, political stability, and the ability to tax and print money (for domestic currency debt).

Currency Hedging

The use of financial instruments — such as forward contracts, futures, options, and swaps — to reduce or eliminate the risk of adverse exchange rate movements on international transactions, investments, or balance sheet items.

Key Terms at a Glance

Balance of Payments:A systematic record of all monetary transactions between a country and the rest of the world over a given period.

Bretton Woods System:The post-WWII international monetary system (1944-1971) based on fixed exchange rates pegged to the U.S. dollar, which was convertible to gold.

Capital Account:The component of the balance of payments recording capital transfers and the acquisition or disposal of non-produced, non-financial assets.

Capital Controls:Measures taken by a government or central bank to regulate the flow of foreign capital in and out of the domestic economy.

Carry Trade:A strategy of borrowing in a low-interest-rate currency to invest in a higher-yielding currency, profiting from the interest rate differential.

Covered Interest Rate Parity:The condition that the interest rate differential between two countries equals the forward premium or discount on the exchange rate, eliminating arbitrage opportunities.

Currency Board:A monetary authority that issues domestic currency fully backed by foreign currency at a fixed exchange rate, relinquishing independent monetary policy.

Currency Crisis:A sudden and sharp depreciation of a nation's currency, often driven by speculative attacks and loss of confidence.

Current Account:The balance of payments component recording trade in goods and services, primary income, and secondary income (transfers).

Eurocurrency:Any currency deposited in a bank outside its country of origin, such as Eurodollars (USD held outside the U.S.).

Exchange Rate Regime:The system a country adopts for managing its currency's value, ranging from free float to fixed peg.

Financial Account:The balance of payments component that records transactions involving financial assets and liabilities, including FDI, portfolio investment, and reserve assets.

Foreign Direct Investment (FDI):Cross-border investment establishing lasting interest and significant control in a foreign enterprise, typically requiring 10% or more ownership.

Foreign Exchange Market (Forex):The global decentralized market for trading currencies, the largest and most liquid financial market in the world with daily turnover exceeding $7 trillion.

Forward Contract:A customized agreement to exchange currencies at a predetermined rate on a specific future date, used for hedging exchange rate risk.

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