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.
9International Financial Markets Copyright © 2014 Pearson Education, Inc Chapter Objectives • Discuss the purposes, development, and financial centers of the international capital market • Describe the international bond, international equity, and Eurocurrency markets • Discuss the four primary functions of the foreign exchange market • Explain how currencies are quoted and the different rates that are given • Identify the main instruments and institutions of the foreign exchange market • Explain why and how governments restrict currency convertibility Copyright © 2014 Pearson Education, Inc 9-2 Nintendo • Exchange rates affect financial performance • Convert foreign earnings into home currency • Rising home currency means lower earnings Copyright © 2014 Pearson Education, Inc 9-3 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 Copyright © 2014 Pearson Education, Inc Stock shares in financial gains or losses 9-4 International Capital Market Network of people, firms, financial institutions, and governments borrowing and investing internationally Borrowers Borrowers Expandsmoney moneysupply supply Expands Reducescost costof ofmoney money Reduces Lenders Lenders Spread//reduce reducerisk risk Spread Offsetgains gains//losses losses Offset Copyright © 2014 Pearson Education, Inc 9-5 International Capital Market Drivers Information technology Deregulation Financial instruments Copyright © 2014 Pearson Education, Inc 9-6 Offshore Financial Centers Operational center Extensive financial activity and currency trading Country or territory whose financial sector features few regulations and few, if any, taxes Booking center Mostly for bookkeeping and tax purposes Copyright © 2014 Pearson Education, Inc 9-7 Discussion Question What key factors are driving growth of the international capital market? Copyright © 2014 Pearson Education, Inc 9-8 Answer to Discussion Question 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 Copyright © 2014 Pearson Education, Inc 9-9 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 Copyright © 2014 Pearson Education, Inc Foreign bond Interest rates Bond sold outside a borrower’s country and denominated in the currency of the country in which it is sold Driving growth are differential interest rates between developed and developing nations - 10 Cross Rate • • Exchange rate calculated using two other exchange rates Use direct or indirect exchange rates against a third currency Copyright © 2014 Pearson Education, Inc - 19 Cross Rate Example Direct quote method 1) 2) 3) 4) Quote on euro = € 0.7883/$ Quote on yen = ¥ 84.3770/$ 0.7883/$ ữ Ơ 84.3770/$ = 0.0093/Ơ Costs 0.0093 euros to buy yen Copyright © 2014 Pearson Education, Inc - 20 Spot Rate Exchange rate requiring delivery of traded currency within two business days Repatriate income from sales abroad Copyright © 2014 Pearson Education, Inc Pay supplier in its own currency Invest in another national market - 21 Forward Rate 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 Copyright © 2014 Pearson Education, Inc - 22 Swaps, Options, and Futures 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 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 Copyright © 2014 Pearson Education, Inc - 23 Discussion Question Why is exchange rate risk important to companies involved in international business? Copyright © 2014 Pearson Education, Inc - 24 Answer to Discussion Question Exchange-rate risk is important because it can jeopardize profits from current and future international transactions Copyright © 2014 Pearson Education, Inc - 25 24Hour Trading Copyright © 2014 Pearson Education, Inc - 26 Key Market Institutions Interbank market Market in which Market in which the world’s largest the world’s largest banks exchange banks exchange currencies at spot currencies at spot and forward rates and forward rates Copyright © 2014 Pearson Education, Inc Securities exchange Exchange that Exchange that specializes in specializes in currency futures currency futures and options and options transactions transactions OvertheCounter (OTC) market Global computer Global computer network of foreign network of foreign exchange traders exchange traders and other market and other market participants participants - 27 Manager’s Briefcase: Managing Foreign Exchange Match Needs to Providers Work with the Major Banks Consolidate Multiple Transactions Get the Best Rate Possible Embrace Information Technology Copyright © 2014 Pearson Education, Inc - 28 Goals of Currency Restriction 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 Copyright © 2014 Pearson Education, Inc - 29 Currency Restriction Policies Central bank approval Import licenses Multiple exchange rate system Import deposit requirements Quantity restrictions What’s a firm to do? Countertrade Copyright © 2014 Pearson Education, Inc - 30 Discussion Question A currency that trades freely in the foreign exchange market is called a currency a Cross b Vehicle c Convertible Copyright © 2014 Pearson Education, Inc - 31 Answer to Discussion Question A currency that trades freely in the foreign exchange market is called a currency a Cross b Vehicle c Convertible Copyright © 2014 Pearson Education, Inc - 32 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher Printed in the United States of America Copyright © 2014 Pearson Education, Inc - 33 .. .Chapter Objectives • Discuss the purposes, development, and financial centers of the international capital market • Describe the international bond, international equity, and Eurocurrency markets. .. Education, Inc Stock shares in financial gains or losses 9-4 International Capital Market Network of people, firms, financial institutions, and governments borrowing and investing internationally Borrowers... Pearson Education, Inc 9-5 International Capital Market Drivers Information technology Deregulation Financial instruments Copyright © 2014 Pearson Education, Inc 9-6 Offshore Financial Centers Operational