Glossary

1. CREDIT RATINGS EXPLAINED

Credit ratings give a view (usually by an established rating agency) of a corporate or sovereign entity’s ability to meet their financial obligations – the most basic of which is the repayment of principal and interest on debt. Corporate credit ratings serve as an indicator to potential investors of the vulnerability of debt instruments e.g bonds. Meanwhile, the credit rating of a sovereign entity (a country), takes into account country fundamentals including economic and political factors to give an indication of the risk level of a country’s investment environment.

Which agencies provide credit ratings for Jamaica?

Currently credit ratings are done chiefly by:

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Why do we need credit ratings?

Essentially, credit ratings shed light on critical information needed by investors and financial market participants that otherwise would be difficult to obtain. Rating agencies provide these information seeking to (among other things) minimize informational asymmetries (imbalances), enhance market stability and facilitate both short and long term planning. Investors therefore can and do use credit ratings as an indication of the safety or likelihood of losing monies invested. This is often referred to as the risk of default on the terms of investment.

How are ratings applied?

Credit ratings indicate risk through rating classifications, which is done in rank order. Each ranking has an interpretation as to the likelihood of the risk of default (credit risk). Generally, the ratings wiith higher ranks imply lower credit risk, while those with lower ranks are associated with higher credit risk. For example the rating scale of Standard and Poor’s ranges from low risk to high risk as: AAA, AA, A, BBB, BB, B, CCC, CC, C, D; where the rating with lowest credit risk relates to AAA and the highest credit risk relates to a rating of D.

NB: The web links to select credit agencies above may be used for more detailed information on rating classifications.

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2. FOREIGN EXCHANGE EXPLAINED

Foreign exchange (FX) is the conversion/exchange of one country’s currency for another country’s currency. Each country’s currency refers to money (paper or coins) used as a medium of exchange. The currency in use may be dollars, pounds, euros, pesos (among others) used respectively in Jamaica, the United Kingdom, countries of the European Union (EU), Argentina, and other countries.

When the local currency must be exchanged for foreign currency, the conversion is done using the exchange rate that exists between the two countries. The exchange rate is the rate (or price) used to convert one country’s currency into another country’s currency. For example, the exchange rate between Jamaica and the United States is the price or amount of Jamaican dollars needed to buy one United States dollar. In other words, it is the amount of local dollars per foreign dollar and the exchange rate between all countries is generally assessed in the same way. For instance, the exchange rate between Barbados and the United States is the amount of Barbadian dollars needed to buy one United States dollar.

The exchange rate between Jamaica and the United States may be expressed as JAD: USD, so that if it takes 86 Jamaican dollars to buy 1 United States dollar, the exchange rate is 86:1. This means that if you have 1 United States dollar which is taken to a certified Foreign Exchange Dealer for exchange to Jamaican dollars, the Dealer will issue $86 Jamaican dollars. If you take 2 United States dollar, you will be issued $172 Jamaican dollars, and so on.

Dealers (including banks, investment companies, and cambios) usually post the daily exchange rates for various currencies close to an exchange window for public notice. The rates indicate the prices at which foreign currencies are exchanged, at that institution, on that day and provides a guide for the value of any exchanges/ conversions made.

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