INTERNATIONAL FINANCIAL MARKETS

International Financial Markets Copyright © 2010 Pearson Education, Inc publishing as Prentice Hall Chapter Preview • Discuss the international capital market • Describe the international bond, international equity, and Eurocurrency markets • Identify the foreign exchange market’s functions • Explain currency quotes and the rates given • Identify the instruments of foreign exchange • Discuss government restrictions on currencies Copyright © 2010 Pearson Education, Inc publishing as Prentice Hall International Business 5e Chapter - 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 Copyright © 2010 Pearson Education, Inc publishing as Prentice Hall International Business 5e Chapter - 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 © 2010 Pearson Education, Inc publishing as Prentice Hall International Business 5e Chapter - International Capital Market Drivers Information technology Deregulation Financial instruments Copyright © 2010 Pearson Education, Inc publishing as Prentice Hall International Business 5e Chapter - 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 © 2010 Pearson Education, Inc publishing as Prentice Hall International Business 5e Chapter - International Bond Market Market of bonds sold by issuing companies, governments, and others outside their own countries Eurobond Foreign bond Interest rates Bond that is issued outside the country in whose currency the bond is denominated 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 Copyright © 2010 Pearson Education, Inc publishing as Prentice Hall International Business 5e Chapter - International Equity Market Market Marketof ofstocks stocksbought boughtand andsold sold outside outsidethe theissuer’s issuer’shome homecountry country Privatization Privatization Developing Developingnations nations Investment Investmentbanks banks Electronic Electronicmarkets markets Copyright © 2010 Pearson Education, Inc publishing as Prentice Hall International Business 5e Chapter - Eurocurrency Market Unregulated market of currencies banked outside their countries of origin     Governments Commercial banks International companies Wealthy individuals Copyright © 2010 Pearson Education, Inc publishing as Prentice Hall International Business 5e Chapter - 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 Copyright © 2010 Pearson Education, Inc publishing as Prentice Hall International Business 5e Chapter - 10 Quoting Currencies Quoted currency = numerator Base currency = denominator (¥/$) = Japanese yen needed to buy one U.S dollar Yen is quoted currency, dollar is base currency Copyright © 2010 Pearson Education, Inc publishing as Prentice Hall International Business 5e Chapter - 11 Currency Values Change in U.S dollar against Norwegian krone February 1: NOK 5/$ March 1: NOK 4/$ %change = [(4-5)/5] x 100 = -20% U.S dollar fell 20% Copyright © 2010 Pearson Education, Inc publishing as Prentice Hall Change Changein inNorwegian Norwegiankrone krone against U.S dollar against U.S dollar Make Makekrone kronebase basecurrency currency(1÷ (1÷NOK/$) NOK/$) February February1:1: $.20/NOK $.20/NOK March 1: $.25/NOK March 1: $.25/NOK %change %change==[(.25-.20)/.20] [(.25-.20)/.20]xx100 100==25% 25% Norwegian Norwegiankrone kronerose rose25% 25% International Business 5e Chapter - 12 Cross Rate • • Exchange rate calculated using two other exchange rates Use direct or indirect exchange rates against a third currency Copyright © 2010 Pearson Education, Inc publishing as Prentice Hall International Business 5e Chapter - 13 Cross Rate Example Direct quote method 1) 2) 3) 4) Quote on euro = € 0.6354/$ Quote on yen = Ơ 106.81/$ 0.6354/$ ữ Ơ 106.81/$ = 0.0059/¥ Costs 0.0059 euros to buy yen Indirect quote method 1) 2) 3) 4) 5) Copyright © 2010 Pearson Education, Inc publishing as Prentice Hall Quote on euro = $ 1.5737/€ Quote on yen = $ 0.009362/¥ $ 1.5737/€ ÷ $ 0.009362/¥ = € 168.09/¥ Final step: ÷ € 168.09/¥ = € 0.0059/¥ Costs 0.0059 euros to buy yen International Business 5e Chapter - 14 Spot Rate Exchange rate requiring delivery of traded currency within two business days Repatriate income from sales abroad Copyright © 2010 Pearson Education, Inc publishing as Prentice Hall Pay supplier in its own currency International Business 5e Invest in another national market Chapter - 15 Forward Rate Rate at which two parties will exchange currencies on a specified future date  Forward Contract  Derivative  Premium vs Discount Copyright © 2010 Pearson Education, Inc publishing as Prentice Hall International Business 5e Chapter - 16 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 Copyright © 2010 Pearson Education, Inc publishing as Prentice Hall International Business 5e Chapter - 17 24-Hour Trading Copyright © 2010 Pearson Education, Inc publishing as Prentice Hall International Business 5e Chapter - 18 Key Market Institutions Interbank market Market Marketin inwhich which the theworld’s world’slargest largest banks banksexchange exchange currencies currenciesat atspot spot and andforward forwardrates rates Copyright © 2010 Pearson Education, Inc publishing as Prentice Hall Securities exchange Over-the-Counter (OTC) market Exchange Exchangethat that specializes specializesin in currency currencyfutures futures and andoptions options transactions transactions International Business 5e Global Globalcomputer computer network networkof offoreign foreign exchange exchangetraders traders and andother othermarket market participants participants Chapter - 19 Goals Goals of of Currency Currency Restriction 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 © 2010 Pearson Education, Inc publishing as Prentice Hall International Business 5e Chapter - 20 Currency Restriction Policies Multiple exchange rate system Import deposit requirements Quantity restrictions What’s a firm to do? “Countertrade” Copyright © 2010 Pearson Education, Inc publishing as Prentice Hall International Business 5e Chapter - 21 Chapter Review • Discuss the international capital market • Describe the international bond, international equity, and Eurocurrency markets • Identify the foreign exchange market’s functions • Explain currency quotes and the rates given • Identify the instruments of foreign exchange • Discuss government restrictions on currencies Copyright © 2010 Pearson Education, Inc publishing as Prentice Hall International Business 5e Chapter - 22 International Financial Markets Copyright © 2010 Pearson Education, Inc publishing as Prentice Hall 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 © 2010 Pearson Education, Inc publishing as Prentice Hall ... Prentice Hall International Business 5e Chapter - 21 Chapter Review • Discuss the international capital market • Describe the international bond, international equity, and Eurocurrency markets •... in financial gains or losses Copyright © 2010 Pearson Education, Inc publishing as Prentice Hall International Business 5e Chapter - International Capital Market Network of people, firms, financial. .. as Prentice Hall International Business 5e Chapter - Offshore Financial Centers Operational center Extensive financial activity and currency trading Country or territory whose financial sector