Lecture International business - Chapter 9: International financial markets

In this chapter, you will explore international financial markets. You will also: Learn about the international bond, international equity, and eurocurrency markets; understand the primary functions of the foreign exchange market; and examine the main instruments and institutions of the foreign exchange market.

Markets

9

• Exchange rates affect financial performance

• Convert foreign earnings into home currency

• Rising home currency means lower earnings

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

Network of people, firms, financial institutions, and governments borrowing and investing internationally

Borrowers

 Expands money supply

 Reduces cost of money

Borrowers

 Expands money supply

 Reduces cost of money

Lenders

 Spread / reduce risk

 Offset gains / losses

Lenders

 Spread / reduce risk

 Offset gains / losses

Country or territory

whose financial sector

features few regulations

and few, if any, taxes

Country or territory

whose financial sector

features few regulations

and few, if any, taxes

What key factors

are driving growth

of the international

capital market?

Information technology is

reducing the costs of global

communication Deregulation

increases competition, lowers

the cost of financial transactions,

and opens national markets to

global investing and borrowing

Innovative financial instruments

expand the options available to

lenders and borrowers.

Driving growth are

differential interest rates between

developed and developing

nations

Market of bonds sold by issuing companies,

governments, and others outside their own countries

Market of stocks bought and sold outside

the issuer’s home country

Privatization

Investment banks

Emerging markets

Electronic markets

currencies banked outside

their countries of origin

 Conversion: To facilitate transactions, invest

directly abroad, or repatriate profits

 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

Market in which currencies are bought and

sold and their prices are determined

$0.24 trillion Source: */Kyodo/Newscom

Using the foreign exchange

market to insure against

potential losses from

Using the foreign exchange

market to insure against

potential losses from

%change = [(.25-.20)/.20] x 100 = 25%

Norwegian krone rose 25%

• Exchange rate calculated using two other exchange rates

• Use direct or indirect exchange rates against a third currency

Exchange rate requiring delivery

of traded currency within two business days

Repatriate income

from sales abroad

Invest in another national market Pay supplier in

its own currency

Rate at which two parties will exchange

currencies on a specified future date

 Forward Contracts

 Reduce exchange-rate risk

 30, 90, 180 days or custom lengths

Currency swap

Simultaneous purchase and sale of foreign exchange

for two different dates

Currency swap

Simultaneous purchase and sale of foreign exchange

for two different dates

Currency option

Option to exchange a specified amount of currency on a

specified date at a specified rate

Currency option

Option to exchange a specified amount of currency on a

specified date at a specified rate

Currency futures contract

Contract requiring the exchange of a specified amount of a currency

on a specified date at a specified exchange rate, with all

conditions fixed and not adjustable

Currency futures contract

Contract requiring the exchange of a specified amount of a currency

on a specified date at a specified exchange rate, with all

conditions fixed and not adjustable

Swaps, Options, and Futures

24­Hour Trading

  Exchange that  specializes in  currency futures  and options

  transactions

Global computer network of foreignexchange tradersand other marketparticipants

Global computer network of foreignexchange tradersand other marketparticipants

Over­the­Counter (OTC) market

Managing Foreign Exchange

1 Match Needs to Providers

2 Work with the Major Banks

3 Consolidate Multiple Transactions

4 Get the Best Rate Possible

5 Embrace Information Technology

Protect a currency

from speculators

Constrain individuals and companies from investing abroad

A currency that trades

freely in the foreign

A currency that trades

freely in the foreign

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