International business 5th griffin chapter 08

foreign exchange and international financial markets international business, 5th edition chapter Chapter Objectives • Describe how demand and supply determine the price of foreign exchange • Discuss the role of international banks in the foreign-exchange market • Assess the different ways firms can use the spot and forward markets to settle international transactions 8-2 Chapter Objectives • Summarize the role of arbitrage in the foreign-exchange market • Discuss the important aspects of the international capital market 8-3 Foreign Exchange Foreign exchange is a commodity that consists of currencies issued by countries other than one’s own 8-4 Figure 8.1 Demand for Yen Demand for Japanese Yen is Derived from Foreigner’s Demand for Japanese Products 8-5 Figure 8.2 Supply of Yen Supply for Japanese Yen is Derived from Japanese Demand for Foreign Products 8-6 Figure 8.3 The Market for Yen 8-7 Foreign-Exchange Rates • Direct exchange rate – Direct quote – Price of the foreign currency in terms of home currency • Indirect exchange rate – Indirect quote – Price of the home country in terms of the foreign currency 8-8 Figure 8.4 Direct and Indirect Exchange Rates 8-9 Map 8.1 A Day of Foreign-Exchange Trading 8-10 The Role of Banks • Buy or sell major traded currencies • Markets – Wholesale market – Retail market 8-13 Bank Foreign Exchange Clients Commercial customers Speculators Arbitrageurs 8-14 Spot and Forward Markets Currency 8-15 U.S $ Equivalent per U.S $ Wed Tues Wed Tues Britain (Pound) 1.8765 1.8762 5329 5330 30-Day Forward 1.8778 1.8775 5325 5326 90-Day Forward 1.8802 1.8798 5319 5320 180-Day Forward 1.8832 1.8829 5310 5311 Mechanisms for Future Foreign Exchanges • Currency future • Currency option – Call option – Put option 8-16 Arbitrage Arbitrage is the riskless purchase of a product in one market for immediate resale in a second market in order to profit from a price discrepancy There are two types of arbitrage activities that affect the foreign-exchange market: arbitrage of goods and arbitrage of money 8-17 Arbitrage Arbitrage of Goods 8-18 Arbitrage of Money Arbitrage of Money Two-point Three-point 8-19 Covered-interest Figure 8.6 Three-Point Arbitrage 8-20 Table 8.1 The World’s Largest Banks • Citigroup • UBS • Fortis • Bank of America • Credit Agricole • J.P Morgan & Chase Co • HSBC Holdings • BNP paribas • Deutsche Bank • HBOS 8-21 Establishment of Overseas Banking Operations Subsidiary bank Branch bank 8-22 Affiliated bank The Eurocurrency Market • Originated in the early 1950s • Eurodollars – U.S dollars deposited in European bank accounts – Euroyen – Europounds • Eurocurrency – currency on deposit outside in banks worldwide • Euroloans quoted on basis of LIBOR 8-23 The International Bond Market • Major source of debt financing for – World’s governments – International organizations – Larger firms • Two types of bonds – Foreign bonds – Eurobonds 8-24 Figure 8.7 International Bond Issues 2005, by Currency (in billions of U.S dollars) 8-25 Global Equity Markets • Start-up companies are no longer restricted to raising new equity only from domestic sources • Development of country funds – Mutual fund specializing in a given country’s funds 8-26 Offshore Financial Centers • Focus on offering banking and other financial services to nonresident customers • Locations – Bahamas, Bahrain, the Cayman Islands, Bermuda, the Netherlands Antilles, Singapore, Luxembourg, Switzerland 8-27 ... markets to settle international transactions 8-2 Chapter Objectives • Summarize the role of arbitrage in the foreign-exchange market • Discuss the important aspects of the international capital.. .Chapter Objectives • Describe how demand and supply determine the price of foreign exchange • Discuss the role of international banks in the foreign-exchange... worldwide • Euroloans quoted on basis of LIBOR 8-23 The International Bond Market • Major source of debt financing for – World’s governments – International organizations – Larger firms • Two types