Key Formulas and Concepts in International Finance
Formulas
GDP = GDI
GNI = GDI + Resident’s Net Factor Income from Abroad
%Δ in Foreign Currency Value = [(1/S1) – (1/S0)] / (1/S0)
%Δ in Value of Dollar = (S1-S0)/S0
Bilateral RER = (Foreign Currency / Domestic Currency) / (Pfor / Pdom)
The %Δ in the Real Exchange Rate = %Δ in the Nominal Exchange Rate – the Inflation Differential (from US perspective means US on the bottom or second in the subtraction equation)
Current Account = X-M
Trade Balance (X-M) + Services Balance + Net Factor Income from Abroad
Read MoreRegional Economic Integration and Global Markets
Regional Economic Integration
Regional economic integration refers to agreements between countries in a geographic region to reduce tariff and non-tariff barriers to the free flow of goods, services, and factors of production between each other. These agreements foster interdependence and increased influence. There are five levels of economic integration:
- Free Trade Area: Eliminates all barriers to the trade of goods and services among member countries. Examples include the European Free Trade Association
Bank Financial Analysis: Key Ratios & Metrics
Risk-Adjusted Return on Capital (RAROC)
RAROC is calculated as:
(Expected Income – Financial Costs – Provisions – Operating Expenses) / Risk Capital
- Expected Income: (Loan * Interest Rate)
- Financial Costs: (Loan * Cost of Financing)
- Provisions: (Loan * Loss Given Default * Probability of Default)
- Risk Capital: (Loan * Loss Given Default * Unexpected Default Rate)
A higher RAROC is better, and it should be greater than the bank’s capital cost to create value. Value creation occurs when RAROC exceeds the
Read MoreInternational Purchases: Accounting and Tax Treatment
Accounting and Tax Treatment of International Purchases
The accounting and tax treatment of purchases of goods made abroad differs from domestic purchases primarily due to:
- Administrative, commercial, and tax regulations, including specific procedures.
- Customs duties on imports.
- Value Added Tax (VAT) application and treatment.
- Currency exchange operations for payments and euro recording.
- Specific payment arrangements in international trade.
Two types of operations are considered, based on the goods’ country
Read MoreImpact of Monetary & Fiscal Policies on Economies
Foreign Policy
1) ∇i Exterior
This causes i > i*, leading to capital inflows into the EU (increasing demand for the Euro (€) and appreciating the exchange rate (E)).
- ∆E (€ appreciates, $ depreciates), the i-E curve shifts to the right (without changing our i).
- If € appreciates (∆E), the real exchange rate increases (Real exchange rate = E * p), leading to a decrease in net exports (∇XN) and a decrease in output (∇Y).
The current account balance worsens. If initially, XN is in equilibrium
Read MoreKey Accounting Principles and Financial Statements
Chapter 1: Fundamental Accounting Concepts
Internal Users: Marketing managers, production supervisors, finance directors, and company officers.
External Users: Investors and creditors.
GAAP (Generally Accepted Accounting Principles): A common set of accounting standards and procedures.
Cost Principle: Companies must record assets at their original cost.
Monetary Unit Assumption: Companies record only transactions that can be expressed in monetary terms.
Economic Entity Assumption: Activities of an entity
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