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International Financial Markets

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Title: International Financial Markets


1
International Financial Markets
2
Chapter Preview
  • Discuss the international capital market
  • Describe the international bond, international
    equity and Eurocurrency markets
  • Identify the foreign exchange markets functions
  • Explain currency quotes and the rates given
  • Identify the instruments of foreign exchange
  • Discuss government restrictions on currencies

3
Capital Market
  • System that allocates financial resources
    according to their most efficient uses
  • Debt Repay principal plus interest
  • Bond has timed principal interest payments
  • Equity Part ownership of a company
  • Stock shares in financial gains or losses

4
International Capital Market
  • Network of people, firms, financial institutions
    and governments borrowing and investing
    internationally
  • Borrowers
  • Expands money supply
  • Reduces cost of money
  • Lenders
  • Spread / reduce risk
  • Offset gains / losses

5
International CapitalMarket Drivers
  • Information technology
  • Deregulation
  • Financial instruments

6
Offshore Financial Centers
  • Country or territory whose financial sector
    features few regulations and few, if any, taxes
  • Operational center
  • Extensive financial activity and currency trading
  • Booking center
  • Mostly for bookkeeping and tax purposes

7
International Bond Market
  • Market of bonds sold by issuing companies,
    governments and others outside their own
    countries
  • Eurobond
  • Bond that is issued outside the country in whose
    currency the bond is denominated
  • Foreign bond
  • Bond sold outside a borrowers country and
    denominated in the currency of the country in
    which it is sold
  • Interest rates
  • Driving growth are differential interest rates
    between developed and developing nations

8
International Equity Market
  • Market of stocks bought and sold outside the
    issuers home country
  • Privatization
  • Developing nations
  • Investment banks
  • Electronic markets

9
Eurocurrency Market
  • Unregulated market of currencies banked outside
    their countries of origin
  • Governments
  • Commercial banks
  • International companies
  • Wealthy individuals

10
Foreign Exchange Market
  • Market in which currencies are bought and sold
    and their prices are determined
  • Conversion To facilitate sale or purchase, or
    invest directly abroad
  • Hedging Insure against potential losses from
    adverse exchange-rate changes
  • Arbitrage Instantaneous purchase and sale of a
    currency in different markets for profit
  • Speculation Sequential purchase and sale (or
    vice-versa) of a currency for profit

11
Quoting Currencies
  • Quoted currency numerator
  • Base currency denominator
  • (/) Japanese yen needed to buy one U.S.
    dollar
  • Yen is quoted currency, dollar is base currency

12
Currency Values
  • Change in US dollar against Polish zloty
  • February 1 PLZ 5/
  • March 1 PLZ 4/
  • change (4-5)/5 x 100 -20
  • US dollar fell 20
  • Change in Polish zloty against US dollar
  • Make zloty base currency (1 PLZ/)
  • February 1 .20/PLZ
  • March 1 .25/PLZ
  • change (.25-.20)/.20 x 100 25
  • Polish zloty rose 25

13
Cross Rate
  • Exchange rate calculated using two other
    exchange rates
  • Use direct or indirect exchange rates against a
    third currency

14
Cross Rate Example
  • Direct quote method
  • Quote on euro 0.8461/
  • Quote on yen 114.50/
  • 0.8461/ 114.50/ 0.0074/
  • Costs 0.0074 euros to buy 1 yen
  • Indirect quote method
  • Quote on euro 1.1819/
  • Quote on yen 0.008734/
  • 1.1819/ 0.008734/ 135.32/
  • Final step 1 135.32/ 0.0074/
  • Costs 0.0074 euros to buy 1 yen

15
Spot Rate
  • Exchange rate requiring delivery of traded
    currency within two business days
  • Repatriate income from sales abroad
  • Pay supplier in its own currency
  • Invest in another national market

16
Forward Rate
  • Rate at which two parties will exchange
    currencies on a specified future date
  • Forward Contract
  • Derivative
  • Premium vs. Discount

17
Swaps, Options and Futures
  • Currency swap
  • Simultaneous purchase and sale of foreign
    exchange for two different dates
  • Currency option
  • Option to exchange a specific amount of a
    currency on a specific date at a specific rate
  • Currency futures contract
  • Contract requiring the exchange of a specific
    amount of a currency on a specific date at a
    specific rate, with all conditions fixed and not
    adjustable

18
Key Market Institutions
  • Interbank market
  • Market in which the worlds largest banks
    exchange currencies at spot and forward rates
  • Securities exchange
  • Exchange that specializes in currency futures and
    options transactions
  • Over-the-Counter (OTC) market
  • Global computer network of foreign exchange
    traders and other market participants

19
Goals of Currency Restriction
  • Preserve hard currency to repay debts owed to
    other nations
  • Preserve hard currency to pay for imports and
    finance trade deficits
  • Protect a currency from speculators
  • Constrain individuals and companies from
    investing abroad

20
Currency Restriction Policies
  • Multiple exchange rate system
  • Import deposit requirements
  • Quantity restrictions
  • Whats a firm to do? Countertrade
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