More exactly known as the Morgan Stanley Capital International Europe, Australia, Far East Index, the EAFE Index reflects the performance of all major stock markets outside North America. It is a market-weighted index composed on 1,041 companies representing the stock markets of Europe, New Zealand, and the Far East. It is considered the key “rest-of-the-world” index for U.S. investors, much as is the Dow Jones Industrial Average for the American market. It is used as a guide to see how U.S. shares are faring against other markets around the globe. It also serves as a performance benchmark for international mutual funds that hold non-U.S. assets. Morgan Stanley has created its own indexes for 18 major foreign markets. To make the EAFE Index, those country indexes are weighted to reflect the total market capitalization of each country’s markets as a share in the world market. The index’s base of 100 is for January 1, 1970. The index is quoted two ways: one in local currencies and a second in the U.S. dollar. This shows how American investors would fare addressing both share price and currency fluctuations. The EAFE Index can be found in newspapers such as Barron’s. When the EAFE Index is performing better than the U.S. markets, it may be time for investors to shift money overseas. Conversely, when U.S. market indexes are doing better than the EAFE Index, a shift away from foreign assets may be in order. A Word of Caution: Currency fluctuations can play a major part of any overseas investment. A rising EAFE may be more a reflection of a weak U.S. dollar than improving foreign economies or strong opportunities in overseas stocks.


European Association of Securities Dealers Automated Quotation (http://www.easdaq.com), the only pan-European stock market, offers international growth companies and investors seamless cross-border trading, clearing, and settlement within a unified market infrastructure. It is a fully regulated market, independent of any national exchange. Trading takes place through member firms in 15 countries.


The Economic and Finance Council (ECOFIN), made up of the finance ministers of Euro-land’s 11 member-states, has the key legal and political responsibilities for managing the euro. See also EURO.


Also called operating exposure, economic exposure is the extent to which an MNC’s future international cash flows and its market value are affected by an unexpected change in exchange rates. Economic exposure involves the long-run effect of changes in exchange rates on future prices, sales, and costs. It differs from translation exposure and transaction exposure in that it is subjective and thus not easily quantified. The best strategy to control economic exposure is to internationally diversify operations and financing. Exhibit 37 compares economic exposure with translation (accounting) exposure.


Translation Exposure vs Economic Exposure

Translation (Accounting) Exposure Economic (Operating) Exposure
Occurs only when an MNC has foreign subsidiaries Occurs for any type of foreign operations
A backward looking concept, reflecting past decisions A forward looking concept, focusing on future cash
as reported in the subsidiary’s financial statements flows
Deals with accounting values due to translation Deals with cash flows (not just accounting values)
and market value of the MNC
Subject to accounting rules and regulations Subject to economic facts such as outstanding
commitments denominated in foreign currency and
operating exposure
Looks only at items on the financial statements; Incorporates all cash flows and sources of value
ignores off-balance-sheet contracts and future

In order to see the difference between the economic and translation exposure, consider the following example.


A U.S. MNC has a subsidiary in France. On December 31 of each year the parent company consolidates the balance sheet and income statement of the subsidiary with its U.S. operations. If the exchange rate prevailing on December 31 of any year is used to translate the assets and liabilities of the French subsidiary, the total book or accounting value of the subsidiary, measured in dollars, will fluctuate from year to year, even if the total franc-denominated assets and liabilities do not. This fluctuation in the value of the subsidiary is due to the accounting or translation exposure of the subsidiary. Economically, it makes little sense to say that the value of the French plant has changed over the years, while nothing physical has changed. The change appears in the books only—due to an arbitrary accounting rule. What should matter, however, is the way in which the earnings (or cash flow) stream of the French operations changes because of changes in the franc-dollar rate. The measurement of the responsiveness of the future earnings stream of the French subsidiary to changes in the dollar-franc exchange rate is captured in the concept of economic (or operating) exposure. Economic exposure is, conceptually, a sound way of capturing the effects of exchange-rate changes on the value of the firm, although it is difficult to measure this exposure.


1. The long-run effect of changes in exchange rates on future prices, sales, and costs.

2. The likelihood that events, including economic mismanagement, will cause drastic changes in a country’s business environment that adversely affect the profit and other goals of a particular business enterprise.

3. The chance of loss or uncertain variations in earnings of a business due to economic conditions, including foreign exchange risk, inflation risk, and interest rate risk.


Economic value added (EVA), a registered trademark of Stern & Steward & Company, is one of the two well-known financial metrics (measures of performance) of an MNC or its affiliates. The other is cash flow return on investment (CFROI). Also called residual income,

EVA is the operating profit which an MNC or its division is able to earn above some minimum rate of return on its assets. EVA is the value created by a company in excess of the cost of capital for the investment base. It attempts to determine whether management has, in fact, added value to the entity over and above what the providers of capital (both credit and equity holders) to the firm require. The formula is:

EVA = Net operating profit after taxes – (weighted average cost of capital x capital employed)

Improving EVA can be achieved in three ways: (1) invest capital in high-performing projects, (2) use less capital, and (3) increase profit without using more capital.


Also referred to as an Edge Act Corporation. An Edge Act and Agreement Corporation is a subsidiary, located in the United States, of a U.S. commercial bank incorporated under federal law to be allowed to engage in various international banking, investment, and financing activities, including equity participations. The Edge Act subsidiary may be located in a state other than that of the parent bank. The Edge subsidiary, operating abroad, is free of restraints of U.S. law and may perform whatever services and functions are legal in the countries where it operates. The Edge Act was proposed by Senator Walter E. Edge of New Jersey and enacted in 1919 by the Congress.


1. The effective annual yield is better known as the annual percentage rate (APR). Different types of investments use different compounding periods. For example, most bonds pay interest semi-annually. Some banks pay interest quarterly. If an investor wishes to compare investments with different compounding periods, he/she needs to put them on a common basis.

2. Real interest rate on a loan. It is the nominal interest rate divided by the actual proceeds of the loan. For example, assume you took out a $10,000, one year, 10% discounted loan. The effective interest rate equals: $1,000/($10,000 – $1,000) = $1,000/$9,000 = 11%. In this discount loan, the actual proceeds are only $9,000, which effectively increases the cost of the loan.

3. Yield to maturity.


An efficient market is one in which all available and relevant information is already reflected in the prices of traded securities. The term is most frequently applied to foreign exchange markets and securities markets. It is very difficult for investors to outperform the market. If competition exists and transaction costs are low, prices tend to respond rapidly to new information, and speculation opportunities quickly dissipate. The efficient market hypotheses have been subjected to numerous empirical tests, but with mixed results. For example, the more recent studies seriously challenge the view of unbiased forward exchange rates.


Efficient portfolio is the central gist of Markowitz’sportfolio theory. Efficient portfolio theory claims that rational investors behave in a way reflecting their aversion to taking increased risk without being compensated by an adequate increase in expected return. Also, for any given expected return, most investors will prefer a lower risk and, for any given level of risk, prefer a higher return to a lower return. In Exhibit 38, an efficient set of portfolios that lie along the ABC line, called “efficient frontier,” is noted. Along this frontier, the investor can receive a maximum return for a given level of risk or a minimum risk for a given level of return. Specifically, comparing three portfolios A, B, and D, portfolios A and B are clearly more efficient than D, because portfolio A could produce the same expected return but at a lower risk level, while portfolio B would have the same degree of risk as portfolio D but would afford a higher return. Investors try to find the optimum portfolio by using the indifference curve, which shows the investor’s trade-off between risk and return. By matching the indifference curve showing the risk-return trade-off with the best investments available in the market as represented by points on the efficient frontier, investors are able to find an optimum portfolio.

Efficient Portfolio

An embedded derivative is not itself a derivative, but a derivative implied by a contract such as a bond that is contingent on an underlying commodity.


Exchange rate at which demand for a currency exactly matches the supply of the currency for sale.


The equity method is an accounting method used in preparing a parent company’s nonconsolidated financial reports that treats income at the foreign subsidiary’s level as being received by the parent company when it is earned by the foreign entity. This method requires that the value of the investment in the parent company’s balance sheet be increased or decreased to recognize the parent’s share of profits or losses since the acquisition. To compute this profit or loss, however, a foreign subsidiary’s financial statements must be translated into U.S currency, with the translation profit or loss specified.


Monetary unit of Azores, Cape Verde Islands, Guinea-Bissau, Madeira, Mozambique, Portugal, Portuguese East Africa, and Timor.


The euro is the European currency that made its debut on January 1, 1999 and that unites many European economies. The symbol is €, and the ISO code is EUR. The history behind the creation of the euro is as follows. The European Union Treaty (Maastricht Treaty) of 1993 created the European Currency Unit (ECU), a basket of currencies which includes 15 currencies of the European Union (EU) countries. The ECU took two different forms: the official ECU and the private ECU. The official ECU did not trade in the foreign exchange market and was used between central banks and international financial institutions. The private ECU was freely traded in the foreign exchange market, and its exchange rate resulted from the supply and demand.

Beginning with 1999, as provided in the Maastricht Treaty, the ECU was replaced by the euro. It is based on fixed conversion rates between the currencies of the different countries which constitute the EMU, thus there is no longer trading in currency rates between ECU members that agreed to use the euro.

According to the Maastricht criteria, the following 11 countries qualified for entry and joined EMU in January 1999: Germany, France, Italy, Spain, Portugal, Belgium, Luxembourg, the Netherlands, Finland, Austria, and Ireland. Of the four remaining EU members, Greece is scheduled to join in 2001, and Britain, Sweden, and Denmark have opted out for now. Foreign exchange rates are quoted daily in business dailies as well as major newspapers, on computer services such as America Online, and on financial TV networks and specialty shows. The introduction of the euro in 1999 is only for operations carried out in the money, foreign exchange, and financial markets. For most retail transactions, the changeover to the euro will start only after the date of the physical introduction of euro banknotes and coins denominated in euros, by 2002 at the latest. When the euro conversion is complete, perhaps by 2002, investors will notice these changes in Western European investments:

• Stocks will be priced and settled in euro only.

• Government debt will be quoted in euro only.

• Stock and bond deals, such as mergers, will be stated in euro.

• Financial statements from companies and governments will be in euro.

Exhibit 39 presents a series of events leading to the debut of the euro.


Europe Moves Toward a Single Market

Europe Moves Toward a Single Market


Eurobanks are those banks that accept deposits and make loans in foreign currencies.


A Eurobill of exchange is a bill of exchange drawn and accepted in the ordinary manner but denominated in foreign currency and approved as being payable outside the country in whose currency it is denominated.


The Eurobond market is an international market for long-term debt, whereas the foreign bond market is a domestic market issued by a foreign borrower. A Eurobond market is the market for bonds in any country denominated in any currency other than the local one. A bond originally offered outside the country in whose currency it is denominated, Eurobonds are typically dollar-denominated bonds originally offered for sale to investors outside of the United States.


A Eurobond is a bond that is sold simultaneously in a number of countries by an international syndicate. It is a bond sold in a country other than the one in whose currency the bond is denominated. Examples include a General Motors issue denominated in dollars and sold in Japan and a German firm’s sale of pound-denominated bonds in Switzerland. Eurobonds are underwritten by an international underwriting syndicate of banks and other securities firms. For example, a bond issued by a U.S. corporation, denominated in U.S. dollars, but sold to investors in Europe and Japan (not to investors in the United States), would be a Eurobond. Eurobonds are issued by MNCs, large domestic corporations, governments, governmental agencies, and international institutions. They are offered simultaneously in a number of different national capital markets, but not in the capital market of the country, nor to residents of the country, in whose currency the bond is denominated. Eurobonds appeal to investors for several reasons: (1) They are generally issued in bearer form rather than as registered bonds. So investors who desire anonymity, whether for privacy reasons or for tax avoidance, prefer Eurobonds. (2) Most governments do not withhold taxes on interest payments associated with Eurobonds. While depositors in the short-term Eurocurrency market are primarily corporations, potential buyers of Eurobonds are often private individuals.


A check from a European bank that can be cashed at over 200,000 banks around the world displaying the “European Union” pinnacle. It is similar to an American traveler’s check.


Telecommunications network that notifies all traders regarding outstanding issues of Eurobonds for sale.


Euro-commercial papers (Euro-CP or ECP) are short-term notes of an MNC or bank, sold on a discount basis in the Eurocurrency market. The proceeds of the issuance of Euro-commercial papers at a discount by borrows is computed as follows:


where Y = yield per annum and N = days remaining until maturity.


The proceeds from the sale of a $10,000 face value, 90-day issue Euro-CP priced to yield 8% per annum (reflecting current market yields on similar debt securities for comparable credit ratings) would be:



Eurocredit loans are loans of one year or longer made by Eurobanks.


Eurocredit market is the group of banks that accept deposits and extend loans in large denominations and a variety of currencies. Eurobanks are major players in this and the Eurocurrency market. The Eurocredit loans are longer than so-called Eurocurrency loans.


Eurocurrency is a dollar or other freely convertible currency outside the country of the currency in which funds are denominated. A U.S. dollar in dollar-denominated loans, deposits, and bonds in Europe is called a Eurodollar. There are Eurosterling (British pounds deposited in banks outside the U.K.), Euromarks (Deutsche marks deposited outside Germany), and Euroyen (Japanese yen deposited outside Japan).


Eurocurrency banking is not subject to domestic banking regulations, such as reserve requirements and interest-rate restrictions. This enables Eurobanks to operate more efficiently, cheaply, and competitively than their domestic counterparts and to attract intermediation business out of the domestic and into the external market. Eurocurrency banking is a wholesale rather than a retail business. The customers are corporations and governments—not individuals. They do not want checking accounts; they want to earn interest on their deposits. Therefore, they lend on a short-term time deposits or they buy somewhat larger longer-term certificates of deposits. They borrow anything from overnight call money to 8-year term loans. Interest rates in the Eurocurrency market may be fixed or floating. Floating rates are usually tied to the rate at which the banks lend to one another.


Also called a Eurodollar market or a Euromarket, a Eurocurrency market is a market for a currency deposited in a bank outside the country of its origin, say, the United States, which is based primarily in Europe and engaged in the lending and borrowing of U. S. dollars and other major currencies outside their countries of origin to finance international trade and investment. The Eurocurrency market then consists of those banks (Eurobanks) that accept deposits and make loans in foreign currencies. The term Eurocurrency markets is misleading for two reasons: (1) they are not currency markets where foreign exchange is traded, rather they are money markets for short-term deposits and loans; and (2) the prefix euro- is no longer accurate since there are important offshore markets in the Middle East and the Far East.


A eurodeposit or Eurodollar deposit, is a dollar-denominated deposit held in banks outside of the U.S.


A Swedish investor may deposit U.S. dollars with a bank outside the U.S., perhaps in Stockholm or in London. This deposit is then considered a eurodeposit.


A Eurodollar is not some strange banknote. It is simply a U.S. dollar deposited in a bank outside the United States. Eurodollars are so called because they originated in Europe, but Eurodollars are really any dollars deposited in any part of the world outside the United States. They represent claims held by foreigners for U.S. dollars. Typically, these are time deposits ranging from a few days up to one year. These deposit accounts are extensively used abroad for financial transactions such as short-term loans, the purchase of dollar certificates of deposit, or the purchase of dollar bonds (called Eurobonds) often issued by U.S. firms for the benefit of their overseas operations. In effect, Eurodollars are an international currency. .


Also called eurodeposits, Euromarket deposits are dollars deposited outside of the United States. Other important Eurocurrency deposits include the Euroyen, the Euromark, the Eurofranc, and the Eurosterling.


Also called Eurocurrency markets, Euromarkets are offshore money and capital markets in which the currency of denomination is not the official currency of the country where the transaction takes place. They are the international markets that are engaged in the lending and borrowing of U.S. dollars and other major currencies outside their countries of origin to finance international trade and investment. The main financial instrument used in the Eurocurrency market for long-term investment purposes is the Eurobond. Despite its name, the market is not restricted to European currencies or financial centers. It began as the Eurodollar market in the late 1950s.


The EURO.NM all share index (http://www.euronm.com) is a pan-European grouping of regulated stock markets dedicated to high growth companies. EURO.NM member markets are Le Nouveau Marche (Paris Stock Exchange), Neuer Market (Deutsche Borse), EURO.NM Amsterdam (Amsterdam Exchanges), EURO.NM Belgium (Brussels Exchange), and Nuovo Mercata (Italian Exchange).


Short- to medium-term unsecured debt security issued by MNCs outside the country of the currency it is denominated in.


The European Central Bank (http://www.ecb.int/) is a new, fully independent institution, located in Frankfurt, Germany, created by the European Economic and Monetary Union that is charged with ensuring economic stability related to the euro. It is directed by a governing council made up of six members of the bank’s executive board and governors from the central banks of the 11 countries participating in the euro. See also EURO.


The European Commission (EC) (http://europa.euint/euro/) has exclusive responsibility for all legal and regulatory proposals governing the European Economic and Monetary Union. It also is in charge of monitoring economic developments in the European Union and of making policy recommendations to the Economic and Finance Council when necessary.


Also called European Economic Community (EEC) or common market, European Community (EC) is the association of Western European countries formed in 1958 that has reduced costly political and economic rivalries, eliminated most tariffs among member nations, harmonized some fiscal and monetary policies, and broadly attempted to increase economic integration among them.


The European Currency Unit (ECU) was a basket of the currencies of the 15 members of the European Economic Community (EEC). It is weighted by the economic importance of each member country. Created by the European Monetary System, it serves a reserve currency numeraire. The weighting is based on the foreign currency in the ECU on a percentage relationship to the equivalent U.S. dollar. The objective is to keep a stable relationship in European currencies among members. It may be used as the numeraire for denomination of a number of financial instruments. International contracts, bank accounts, Eurobonds, and even traveler’s checks are being denominated in ECUs. The ECU was replaced by the euro, which is being used by only the 11 nations that joined the European Economic and Monetary Union; the rate is 1 ECU to 1 euro.


The European Economic and Monetary Union (EMU or Euroland), is the group of 11 countries that fixed their currencies to the euro (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain).


European Monetary System (EMS) is a mini-IMF system, formed in 1979 by 12 European countries, under which they agreed to maintain their exchange rates within an established range about fixed central rates in relation to one another. These central exchange rates are denominated in currency units per European Currency Unit (ECU). The EMS observes exchange rate fluctuations between member-nation currencies, controls inflation, and makes loans to member governments, primarily to serve the goal of balance of payments stability.


The European Parliament is the body that supervises the European Union. The citizens of all 15 member-states elect parliament members.


Foreign exchange quotations for the U.S. dollar, expressed as foreign currency price of one U.S. dollar. For example, 1.50 DM/$. This may also be called “German terms.”


The European Union (EU) is a group of 15 member countries (Austria, Belgium, Britain, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, and Sweden), 11 of which are in the European Economic and Monetary Union. The EU has its own flag and anthem and celebrates Europe Day on May 9.


Government regulations that limit outflows of funds from a country. These restrictions relate to access to foreign currency at the central bank and multiple exchange rates for different users.


Exchange risk adaptation is the strategy of structuring the MNC’s activities to lessen the potential impact of unexpected changes in foreign exchange rate. This strategy includes all methods of hedging against exchange rate changes. In the extreme, exchange risk calls for protecting all liabilities denominated in foreign currency with equal-value, equal-maturity assets denominated in that foreign currency.


Exchange risk avoidance is an MNC’s strategy of attempting to escape foreign currency transactions. It includes: (1) eliminating dealings or activities that involve high currency risk and (2) charging higher prices when exchange risk seems to be greater.


Exchange risk transfer is the strategy of transferring exchange risk to others. This strategy involves the use of an insurance policy or guarantee.


A term used in delivery. The seller is responsible for all costs required to deliver the goods at the port of destination. Title to the goods passes to the buyer at the dock of the port of importation.


Also called strike price, the price at which an option may be used to buy/sell foreign exchange.


A term used in delivery of goods. The goods are transferred to the buyer at the point of origin, the seller’s factory. The seller is responsible for all costs of making the goods available at the factory. The buyer assumes all further expenses.


The expectations theory of exchange rates states that the percentage difference between the forward rate and today’s spot rate is equal to the expected change in the spot rate.


1. The last day that an option may be exercised into the underlying futures contract upon the exercise of the option.

2. The last day of trading for a futures contract.


Also called as EX-IM bank or Eximbank, the Export-Import Bank (http://www.exim.gov) is a U.S. government agency that finances and facilitates for U.S. exports through credit risk protection and funding programs. The EX-IM bank was established in 1934 with the original intention to facilitate Soviet-American trade. It operates as an independent agency of the U.S. government and, as such, carries the full faith and credit of the United States. The EX-IM bank provides fixed-rate financing for U.S. export sales facing competition from foreign export financing agencies. Other programs provided make international factoring more feasible because they offer credit assurance alternatives that promise funding sources the security they need to agree to a deal. When the EX-IM bank is involved, the payor must be a foreign company buying from a U.S. company. Just as the EX-IM bank makes international commerce a realistic alternative for wary U.S. companies, it helps make international factoring as feasible as domestic factoring.

The EX-IM bank has nothing to do with imports, in spite of the name, but it plays a key role in determining the competitiveness of the U.S. among its trading partners because of the buyer credit programs, which is often a major component of an overseas customer’s ability to finance and, therefore, to buy American products. EX-IM bank’s willingness and ability to insure foreign private or sovereign buyers in any corner of the world often determines whether a U.S. supplier can offer competitive or acceptable terms to the foreign buyer. EX-IM bank states that its responsibilities are: (1) to assume most of the risks inherent in financing the production and sale of exports when the private sector is unwilling to assume such risks, (2) to provide funding to foreign buyers of U.S. goods and services when such funding is not available from the private sector, and (3) to help U.S. exporters meet officially supported and/or subsidized foreign credit competition. These roles fit into four functional categories: foreign loan guarantees, supplier credit working capital guarantees, direct loans to foreign buyers, and export credit insurance.

A. Guarantee Programs

The two most widely used guarantee programs are the following:

• The Working Capital Guarantee Program. This program encourages commercial banks to extend short-term export financing to eligible exporters. By providing a comprehensive guarantee that covers 90 to 100% of the loan’s principal and interest, EX-IM bank’s guarantee protects the lender against the risk of default by the exporter. It does not protect the exporter against the risk of nonpayment by the foreign buyer. The loans are fully collateralized by export receivables and export inventory and require the payment of guarantee fees to EX-IM bank. The export receivables are usually supported with export credit insurance or a letter of credit.

• The Guarantee Program. This program encourages commercial lenders to finance the sale of U.S. capital equipment and services to approved foreign buyers. The EX-IM bank guarantees 100% of the loan’s principal and interest. The financed amount cannot exceed 85% of the contract price. This program is designed to finance products sold on a medium-term basis, with repayment terms generally between one and five years. The guarantee fees paid to EX-IM bank are determined by the repayment terms and the buyer’s risk. EX-IM bank now offers a leasing program to finance capital equipment and related services.

B. Loan Programs

Two of the most popular loan programs are the following:

• The Direct Loan Program. Under the program, EX-IM bank offers fixed-rate loans directly to the foreign buyer to purchase U.S. capital equipment and services on a medium- or long-term basis. The total financed amount cannot exceed 85% of the contract price. Repayment terms depend upon the amount but are typically one to five years for medium-term transactions and seven to ten years for long-term transactions. EX-IM bank’s lending rates are generally below market rates.

• The Project Finance Loan Program. The program allows banks, EX-IM bank, or a combination of each to extend long-term financing for capital equipment and related services for major projects. These are typically large infrastructure projects, such as power generation, whose repayment depends on project cash flows. Major U.S. corporations are often involved in these types of projects. The program typically requires a 15% cash payment by the foreign buyer and allows for guarantees of up to 85% of the contract amount. The fees and interest rates will vary depending on project risk.

C. Bank Insurance Programs

EX-IM bank offers several insurance policies to banks.

• The Bank Letter of Credit Policy. This policy enables banks to confirm letters of credit issued by foreign banks supporting a purchase of U.S. exports. Without this insurance, some banks would not be willing to assume the underlying commercial and political risk associated with confirming a letter of credit. The banks are insured up to 100% for sovereign (government) banks and 95% for all other banks. The premium is based on the type of buyer, repayment term, and country.

• The Financial Institution Buyer Credit Policy. Issued in the name of the bank, this policy provides insurance coverage for loans by banks to foreign buyers on a short-term basis. A variety of short-term and medium-term insurance policies are available to exporters, banks, and other eligible applicants. Basically, all the policies provide insurance protection against the risk of nonpayment by foreign buyers. If the foreign buyer fails to pay the exporter because of commercial reasons such as cash flow problems or insolvency, EX-IM bank will reimburse the exporter between 90 and 100% of the insured amount, depending upon the type of policy and buyer. If the loss is due to political factors, such as foreign exchange controls or war, EX-IM bank will reimburse the exporter for 100% of the insured amount. The insurance policies can be used by exporters as a marketing tool by enabling them to offer more competitive terms while protecting them against the risk of nonpayment. The exporter can also use the insurance policy as a financing tool by assigning the proceeds of the policy to a bank as collateral. Certain restrictions may apply to particular countries, depending upon EX-IM bank’s experience, as well as the existing economic and political conditions.

• The Small Business Policy. This policy provides enhanced coverage to new exporters and small businesses. Firms with very few export credit sales are eligible for this policy. The policy will insure short-term credit sales (under 180 days) to approved foreign buyers. In addition to providing 95% coverage against commercial risk defaults and 100% against political risk, the policy offers lower premiums and no annual commercial risk loss deductible. The exporter can assign the policy to a bank as collateral.

• The Umbrella Policy. Issued to an “administrator,” such as a bank, trading company, insurance broker, or government agency, the policy is administerd for multiple exporters and relieves the exporters of the administrative responsibilities associated with the policy. The short-term insurance protection is similar to the Small Business Policy and does not have a commercial risk deductible. The proceeds of the policy may be assigned to a bank for financing purposes.

• The Multi-Buyer Policy. Used primarily by the experienced exporter, the policy provides insurance coverage on short-term export sales to many different buyers. Premiums are based on an exporter’s sales profile, credit history, terms of repayment, country, and other factors. Based upon the exporter’s experience and the buyer’s creditworthiness, EX-IM bank may grant the exporter authority to preapprove specific buyers up to a certain limit.

• The Single-Buyer Policy. This policy allows an exporter to selectively insure certain short-term transactions to preapproved buyers. Premiums are based on repayment term and transaction risk. There is also a medium-term policy to cover sales to a single buyer for terms between one and five years.

EX-IM bank, in addition to other federal support programs for export finance and promotion, can be viewed as a competitive weapon provided by the U.S. to help match export marketing advantages with those extended by foreign governments on behalf of their exporters and U.S. firms’ foreign competition. Another advantage is that the EX-IM bank has a wealth of information on foreign buyers as a result of its insurance, guarantee, and lending activities. Information that has been given in confidence to the EX-IM bank will not be divulged; however, general information about the repayment habits of buyers insured or funded by EX-IM bank is available. You can call or fax Credit Services at EX-IM bank for further information. EX-IM bank’s Washington headquarters are at 811 Vermont Avenue NW, Washington, D.C. 20571, and its toll-free number for general information is 1-800-565-3946, fax (202) 565-3380. There are five regional offices in New York, Miami, Chicago, Houston, and Los Angeles.


Exposure netting is the acceptance of open positions in two or more currencies that are considered to balance one another and therefore require no further internal or external hedging. Thus, exposures in one currency are offset with exposures in the same or another currency.

An open position exists when the firm has greater assets than liabilities (or greater liabilities than assets) in one currency. A closed, or covered, position exists when assets and liabilities in a currency are identical.


Expropriation is the forced seizure or takeover of the host government of property rights or assets owned by a foreigner or foreign corporation without compensation (or with inadequate compensation). Such an action is not in violation of international law if it is followed by prompt, adequate, and effective compensation. If not, it is called confiscation.


A form of foreign direct investment (FDI) adopted by the MNC for the sole purpose of securing raw materials such as oil, copper, or other materials.

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