NEAR MONEY

Liquid assets easily convertible into money as needed such as marketable securities, money-market funds, and time deposits.

NEGOTIABLE INSTRUMENT

Any financial instrument that can readily be converted into cash. It is a written draft or promissory note, which is signed by the maker or drawer, has an unconditional promise, and is an order to make payment of a certain sum of money on demand by the bearer or to the order of a named party at a determinable future date. A “holder in due course” of a negotiable instrument is entitled to payment despite any personal disagreements between drawee and drawer.

NEGOTIABLE LETTER OF CREDIT

A letter of credit issued in such form that it allows any bank to negotiate the documents. Negotiable credits incorporate the opening bank’s engagement, stating that the drafts will be duly honored on presentation, provided they comply with all terms of the credit.

NET PRESENT VALUE

Net present value (NPV) is the excess of the present value (PV) of cash inflows generated by the project over the amount of the initial investment (I). The present value of future cash flows is computed using the so-called cost of capital (or minimum required rate of return) as the discount rate.

where -I = the initial investment or cash outlay, CFt = estimated cash flows in t (t = 1,…T), and k = the discount rate on those cash flows. When cash inflows are uniform, the present value would be PV = CF • T4 (k, t) where CF is the amount of the annuity.

Decision rule: If NPV is positive, accept the project. Otherwise reject it.

EXAMPLE 82

Consider the following foreign investment project:
Initial investment (I)	$12,950,000
Estimated life	10 years
Annual cash inflows (CF)	$3,000,000
Cost of capital	12%

PV = CF X T4(k, t)
= $3,000,000 X T4(12%,10 years)
= $3,000,000 (5.650)	$16,950,000
minus Initial investment (I)	-12,950,000
Net present value (NPV = -I + PV)	$4,000,000

Since the NPV of the investment is positive, the investment should be accepted. The advantages of the NPV method are that it obviously recognizes the time value of money, and it is easy to compute whether the cash flows form an annuity or vary from period to period. Spreadsheet programs can be used in making NPV calculations. For example, the Excel formula for NPV is NPV(discount rate, cash inflow values) + I, where I is given as a negative number.

Since the NPV of the investment is positive, the investment should be accepted. The advantages of the NPV method are that it obviously recognizes the time value of money, and it is easy to compute whether the cash flows form an annuity or vary from period to period. Spreadsheet programs can be used in making NPV calculations. For example, the Excel formula for NPV is NPV(discount rate, cash inflow values) + I, where I is given as a negative number.

Year    0             1       2               3             4              5             6               7                    8          9            10 2,950,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 NPV = $4,000.67

NETTING

Netting involves the consolidation of payables and receivables for one currency so that only the difference between them must be bought and sold. Centralization of cash management allows the MNC to offset subsidiary payments and receivables in a netting process.

NET TRANSACTION EXPOSURE

Net transaction exposure takes into account cash inflows and outflows in a given currency to determine the exposure after offsetting inflows against outflows.

NOMINAL EXCHANGE RATE

Actual spot rate of foreign exchange, in contrast to real exchange rate, which is adjusted for changes in purchasing power.

NONDELIVERABLE FORWARD CONTRACTS

Nondeliverable forward contracts (NDFs) are forward contracts that do not result in actual delivery of currencies. Instead, the agreement specifies that a payment is made by one party to the other party based on the exchange rate at the future date.

NONDIVERSIFIABLE RISK

Also called unsystematic risk or uncontrollable risk, nondiversifiable risk is that part of a security’s risk that cannot be diversified away. It includes market risk that comes from factors systematically affecting most firms (such as inflation, recessions, political events, and high interest rates).

NONDOCUMENTARY LETTER OF CREDIT

Also called a clean letter of credit, this letter of credit for which no documents need to be attached to the draft is normally used in transactions other than commercial ones.

NONSTERILIZED INTERVENTION

Unlike sterilized intervention in the foreign exchange market, nonsterilized intervention does not adjust for the change in money supply.

NOSTRO ACCOUNT

A nostro account is working balances maintained with the correspondent to facilitate delivery and receipts of currencies.

NOTE ISSUANCE FACILITY

Note issuance facility (NIF) is a facility provided by a syndicate of banks that allows borrowers to issue short-term notes (typically of three- or six-months’ maturity) in their own names. A group of underwriting banks guarantees the availability of funds to the borrower by purchasing any unsold notes or by providing standby credit. Borrowers usually have the right to sell their notes to the bank syndicate at a price that yields a prearranged spread over LIBOR.