Internation Finance

1
1

CONTENTS:

1. Foreign Exchange Market
2. International Money Market
3. International Credit Market
4. International Bond Market
5. International Stock Market

2
2
INTERNATIONAL FINANCIAL MARKET
Financial Market:
A financial market is a market in which people and
entities can trade financial securities (stocks and
bonds) at low transaction costs and at prices that
reflect supply and demand.

International Financial Market:
The international financial markets are financial markets
where individuals buy and sell foreign assets such as stock,
bonds, currencies at international level etc...
The foreign exchange markets would be an example of a
foreign financial market.

3
1. FOREIGN EXCHANGE MARKET:
The foreign exchange market allows currencies to be
exchanged in order to facilitate international trade or
financial transactions.

The market in which participants are able to buy, sell and
exchange of currencies. Foreign exchange markets are
made up of banks, firms, central banks, investment
management firms.

Large commercial banks serve this market by holding
inventories of each currency, so that they can accommodate
requests by individuals or MNCs.

4
The foreign exchange market assists international trade
and investments by enabling currency conversion.
For example, it permits a business in the United States to
import goods from the European Union member states,
especially Euro zone members, and pay Euros, even
though its income is in United States dollars.
It also supports direct speculation and evaluation relative
to the value of currencies, and the carry trade,
speculation based on the interest rate differential
between two currencies

5
For one currency to be exchanged for another currency,
there needs to be an exchange rate that specifies the rate
at which one currency can be exchanged for another.

Systems used for Exchange Rate:
1. Gold Standard
2. Fixed Exchange Rate System
3. Floating Exchange Rate System

6
1. Gold Standard:
A monetary system in which a country's government allows its currency
unit to be freely converted into fixed amounts of gold and vice versa.
The exchange rate under the gold standard monetary system is
determined by the economic difference for an ounce of gold between
two currencies. Each currency was convertible into gold as a specified
rate. Thus, the exchange rate between two currencies was determined
by their relative convertibility rates per ounce of gold.
2. Fixed Exchange Rate System:
A fixed exchange-rate system (also known as pegged exchange rate
system) is a currency system in which governments try to keep the
value of their currencies constant against one another. This makes
trade and investments between the two currency areas easier and
more predictable, and is especially useful for small economies in which
external trade forms a large part of their GDP. It can also be used as a
means to control inflation

7
An international agreement (known as the Bretton
Woods Agreement) called for fixed exchange rates
between currencies. Govt. would intervene to prevent
exchange rates from moving more than 1 percent above
or below their initial established level.

3. Floating Exchange Rate System:
The more widely traded currencies were allowed to
fluctuate in accordance with market forces, and the
official boundaries were terminated. A currency that uses
a floating exchange rate is known as a floating currency.
Floating exchange rate started in 1971.

8
Foreign Exchange Transactions:
The exchange of one currency for another, or the conversion of one
currency into another currency. Foreign exchange also refers to the
global market where currencies are traded virtually around-the-clock. The
term foreign exchange is usually abbreviated as "forex" and occasionally
as "FX.

spot market.
The spot market or cash market is a public financial
market in which financial instruments or commodities are
traded for immediate delivery
The immediate exchange rate is known as the spot rate.

9
Spot Market Structure:

Hundreds of banks facilitate foreign exchange transactions,
but the top 20 handle about 50 % of the transactions.
Deutsche Bank (Germany), Citibank (U.S) and J.P Morgan
Chase are the largest traders of foreign exchange.

Some banks and other financial institutions have formed
alliance (like FX Alliance) to offer currency transactions over
the internet.

Banks in London, New York, and Tokyo are the three largest
foreign exchange trading centers, conduct mush of the
foreign exchange trading.

10
Banks in every major city all over the world facilitate foreign
exchange transactions between MNCs.

Transactions between countries done electronically through state
bank.

Trading between banks occurs in the interbank market. (It is the
top-level foreign exchange market where banks exchange different
currencies. The banks can either deal with one another directly, or
through electronic brokering platforms.)

Many other financial institutions such as securities firm can provide
the same exchange center.

Major airport around the world have foreign exchange center, where
individual can exchanged currencies.

11
Attributes of Banks are Important to Foreign
Exchange Customers:

Competitiveness of quote
Special relationship between the bank and its
customer
Speed of execution
Advice about current market conditions
Forecasting advice

12

Foreign Exchange Transactions:

Banks provide foreign exchange services for a
fee: the banks bid (buy) quote for a foreign
currency will be less than its ask (sell) quote.

13
Bid And Ask Rate:
A two-way price quotation that indicates the best price at which a security
can be sold and bought at a given point in time. The bid price represents
the maximum price that a buyer or buyers are willing to pay for a security.
The ask price represents the minimum price that a seller or sellers are
willing to receive for the security.

EXAMPLE:
A Canadian company will need to purchase 100,000 US dollars to pay for
imported goods.
The USDCAD quoted rate is 1.0625 on the bid and 1.0675 on the offer, by
convention the USD is the unit currency and CAD is the terms currency.
The company will have to buy the USD on the dealer's offer, and will pay
1.0675 for each dollar bought.
The importer pays 100,000 x 1.0675= 106,750 CAD.

14
Currency Spread:
The difference between ask and bid rate is called spread.

Spread = Ask rate Bid rate

Bid/Ask Spread =
ask rate bid rate
ask rate
Example:
Suppose bid price for = $1.52
ask price = $1.60.
bid/ask % spread = (1.601.52)/1.60 = 5%

15

The bid/ask spread is normally larger for those currencies
that are less frequently traded.

The spread is also larger for retail transactions than for
wholesale transactions between banks or large
corporations.

Exchange rate quotations for widely traded currencies are
frequently listed in the news media on a daily basis.

The quotations normally reflect the ask prices for large
transactions.

16
Factors Influencing the Size of Spreads:

1.Trading Volume - The higher the volume, or the more
active a market, the lower the bid-ask spread.

2.Currency Rate Volatility - With higher volatility,
currency dealers are exposed to higher risk. Spreads
will increase with higher volatility.

3.Perceived Economic/Political Risks - Risks such as
political instability, higher inflation and changing
economic conditions will affect the spreads associated
with a particular currency. The higher the uncertainty,
the greater the expected spread.

17
4.Processing cost models claim that spread is the
compensation for dealers who offer immediacy while
bearing some fixed costs of market making. Such costs
may include subscriptions to electronic information,
connection to the dealing system, and administrative
expense

5.Inventory risk models generally argue that spread is
the compensation for dealers who provide immediacy
and assume risk by holding inventory at the same time
18
6.Information cost models:

Also known as asymmetric information or adverse
selection models

Maintain that spread is the compensation for dealers who
might lose money when trading with better-informed
agents. If some investors are better informed than others,
the person who places a firm quote will lose to investors
with superior information. To cover the possible loss
caused by trading with better-informed agents, dealers
quote higher selling prices and lower buying prices
19
Interpreting Foreign Exchange Quotations:

Quotation Systems
There are two systems of quoting a foreign exchange rate.

Direct Quote.
A system under which the units of local currency are equated against one
unit of foreign currency. For instance, Rs / $ = 60 implies that Rs 60 is equal
to $1.

Indirect Quote.
A system under which the units of foreign currency are equated against one
unit of local currency. For instance, $ / = 1.45 implies that $ 1.45 is equal to
1.

20
Cross Exchange Rate:
A cross exchange rate reflects the amount of one foreign
currency per unit of another foreign currency.
The currency exchange rate between two currencies, both
of which are not the official currencies of the country in
which the exchange rate quote is given in.
For example, if an exchange rate between the Euro and the
Japanese Yen was quoted in an American newspaper, this
would be considered a cross rate in this context, because
neither the euro or the yen is the standard currency of the
U.S.

21
Value of 1 unit of currency A in units of currency B

= value of currency A in $
value of currency B in $

Example: If the Mexican peso is worth $.07 and the
Canadian dollar is worth $.70, the value of the peso in
Canadian dollars (C$) is calculated as follow:

Value of in C$ = value of peso in $ = $.07 = C$ .10
value of C$ in $ $.70

22
For example:
you can easily find, say, the eurodollar or the yendollar
exchange rates in financial media. However, the euroyen
exchange rate may not be listed. Because the dollar is the
common currency in this example, you can calculate the euro
yen (and also the yeneuro) exchange rate.

Section C4 of the WSJ of Monday, September 10, 2012, listed
the yendollar and eurodollar rates as 78.56 and 0.7802,
respectively. Suppose you want to know the euroyen exchange
rate. In this case,
/$ = 78.56 and /$ 0.7801 and you want to know the / ?

= 0.7801
78.56 = 0.0099

23
Forward Contract:
A forward contract is an agreement between two parties
to exchange a specified amount of a currency at a
specified exchange rate, on a specified date in the future.
An marketplace that sets the price of a financial
instrument or asset for future delivery is called forward
market.
The most common forward contracts are for 30, 60, 90,
180 and 360 days.
MNCs commonly used the forward market to hedge
future payments that they expect to make or receive in a
foreign currency. In this way, do not have to worry about
fluctuation in the spot rate until the time of their future
payment.

24
Future Contract:
A currency futures contract specifies a standard
volume of a particular currency to be exchanged
on a specific settlement date. Unlike forward
contracts however, futures contracts are sold on
exchanges.
A futures contract is a standardized contract,
traded on a futures exchange, to buy or sell a
certain underlying instrument at a certain date in
the future, at a specified price.

25
Options Contract:
A contract that grants the holder the right, but not
the obligation, to buy or sell currency at a specified
exchange rate during a specified period of time.
Currency options contracts give the right to buy or
sell a specific currency at a specific price within a
specific period of time. They are sold on
exchanges too.
A currency call option provide the right to buy a
specific currency at a specific price (called the strike
price or exercise).
A currency put option provides the right to sell a
specific currency at a specific within a specific period
of time.

26
INTERNATIONAL MONEY MARKET
In the most countries, local corporations
commonly need to borrow short term funds to
support their operations.
Country government may also need to borrow
short term funds to finance their budget deficits.
Individuals or local institutional investors in those
countries provide funds through short term
deposits at commercial banks.
Corporations OR Govt. need short term
funds in a foreign currency:
1.They may need to borrow funds to pay for
imports in a foreign currency.

27
2.If they need funds to support local operations,
they may consider borrowing in a currency in
which the interest rate is lower.
3.They may consider borrowing in a currency that
will less depreciate against their home currency.
Origins and Development:
There are two important components of
international market.
1. European Money Market
2. Asian Money Market

28
Eurocurrency Market:
Origin of the European money market can be
traced to the Eurocurrency market that
developed during the 1960 and 1970.
To conduct international trade with European
countries, United States corporations deposited
US dollars in European banks. The banks were
willing to accept the deposits because they could
lend the dollars to corporate customer.
These dollars deposited in banks in Europe
came to known as Eurodollars, and the market
for Eurodollars came to be known as the
Eurocurrency Market.
Prof. Mohsin Raza 25
29
The growth of the Eurocurrency market was
increased, when regulatory changes in the USA.
When the USA limited foreign lending by US
banks in 1968, than foreign MNCs could obtain
the US dollars from banks in Europe via the
Eurocurrency Market.
Organization of Petroleum Exporting Countries
(OPEC) also contributed in the growth of the
Eurocurrency market. Because OPEC requires
payment for oil in dollars, the OPEC countries
deposited their portion of revenue in the
European banks that why some time called
Petrodollars.
30
Asian Money Market:
Like European money market, in the some Asian
bank involve most of deposit in dollars, that is
called Asian Dollar Market.
That market to accommodate the needs of
businesses that were using the US dollar as a
medium of exchange for international trade.
Asian Market centered in Hong Kong and
Singapore, where large banks accept deposits
and makes loans in various foreign currencies.

31
Standardizing Global Bank Regulations:
Three of the more significant regulatory events
allowing for a more competitive global playing
field are
1. The Single European Act
2. The Basel Accord
3. The Basel II Accord
Single European Act: Single European Act has
opened up the European banking industry in
1992 throughout the European Union (EU)
countries.
Some provisions of Single European Act for the
banking industry.
32
1. Capital can flow freely throughout Europe.
2. Banks can offer a wide variety of lending,
leasing, and securities activities in the EU.
3. Regulation regarding competition, merger
and taxes are similar throughout the EU.
4. A bank established in any one of the EU
countries has the right to expand into any or
all of the other EU countries.
The Basel Accord:
in July 1988, in the Basel Accord signed by
central banks governors of the 12 countries
agreed on standardized guidelines.

33
Under these guidelines,
1. Banks must maintain capital equal to al least
4% of their assets.
2. For this banks assets weighted by risk.
3. Off-balance sheet items are also accounted.
4. Banks focusing on services.
The Basel II Accord:
Banking regulators that form the so called Basel
Committee are completing a new accord to
correct some inconsistencies that still exist.
The Basel II Accord is attempting to account for
such differences among banks.

34
1.To encourage banks to improve their techniques
for controlling operational risk, which could
reduce failure in the banking system.
2.The Basel Committee also plans to require
banks to provide more information to existing
and prospective shareholders about their
exposure to different types of bank.

35
INTERNATIONAL CREDIT MARKET
MNCs and domestic firms sometimes obtain
medium term funds through term loans from local
financial institutions or through the issuance of
notes in their local markets.
MNCs also have access to medium term funds
through banks located in foreign markets.
Loans of one year or longer extended by banks
to MNCs or Govt. agencies in Europe are
commonly called Eurocredits or Eurocredit
Loans.
These loan are provided in the so called
Eurocredit Market.
36
The loans have commonly 5 years maturity
period.
To avoid risk banks commonly used floating
rates. The loan rate floats in accordance with the
movement of some market interest rate, such as
the Landon InterBank Offer rate (LIBOR),
which is the rate commonly charged for loans
between banks.
A Eurocredit loan may have a loan rate that
adjusts every 6 months and is set at LIBOR plus
3 percent. The premium paid above LIBOR will
depend on credit risk of borrower.

37
Syndicated Loans:
Sometime a single bank is unwilling to lend
amount needed by a particular corporation. In
this case, a syndicate of banks may be
organized. Each bank within the syndicate
participants in the lending. A lead bank is
responsible for managing terms with the
borrower. Then the lead bank organizes a group
of banks to underwrite the loans.
Borrowers that receive a syndicated loan incur
various fees besides the interest on the loan.
Front-end management fees are paid to cover
the costs of organizing the syndicate loan.
38
In addition a commitment fee of about .25 or .50
percent is charged annually on the unused
portion of the available credit extended by the
syndicate.
The interest rate on loan depends on the
currency in which loan obtained, creditworthiness
of the borrower, maturity of the loan.
interest rate on loan adjust normally every 6
month.
Syndicated loan not only reduce the default risk
of large loan but they can also add an extra
incentive for the borrower to repay the loan.
39
INTERNATIONAL BOND MARKET
MNCs like domestic firms, can obtain long term
debt by issuing bonds in their local markets.
MNCs can also access long term funds in foreign
market. MNCs may choose to issue in the
international bond markets for three reasons.
1.Issuer recognize that they may be able to attract
a stronger demand by issuing their bonds in a
particular foreign country rather than in their
home country.
2.MNCs may prefer to finance a specific foreign
project in a particular currency and therefore may
attempt to obtain funds where that currency is
widely used.
40
3.Financing in a foreign currency with a lower
interest rate may enable an MNC to reduce its
cost of financing.
Major Participants in the International Bond Market:
1. Commercial banks
2. Mutual Funds
3. Insurance Companies
4. Pension Funds
International bonds are typically classified as
either Foreign Bonds or Eurobonds.
41
EuroBond Market:
Eurobonds are bonds that are sold in country of
the currency denominating the bonds.
The US Govt. was imposed Interest
Equalization Tax (IET) to discourage US
investors from investing in foreign securities.
Thus, non US borrowers that historically had sold
foreign securities to US investors.
Then in 1984, U.S. corporations were allowed to
issue bearer bonds directly to non-U.S.
investors, and the withholding tax on bond
purchases was abolished.
42
Eurobands have become very popular as means
of attracting funds. US based MNC such as
McDonalds issue Eurobonds. Non US firms such
as Nestle use the Eurobond market as sources
of funds.
Features of Eurobonds:
1.Eurobonds are usually issued in bearer form.
2.Pay Annual Coupons.
3.May be convertible.
4.May have floating rates.
Underwriting Process:
Eurobonds are underwritten by Multinational
syndicate of investment banks in many countries,
providing a wide spectrum of funds.
43
Secondary market of Bonds:
Eurobonds also have a secondary market. The
market makers are in many cases the same
underwriters who sell the primary issues.
A technological advance called Euro-clear helps
to inform all traders about outstanding issues for
sales, thus allowing a more active secondary
market.
The major intermediaries in the secondary
markets are based in 10 different countries, with
those in the banks of UK, Bank of America
International, Smith Barney, and Citicorp
International.
44
INTERNATIONAL STOCK MARKETS
In addition to issuing stock locally, MNCs can
also obtain funds by issuing stock in international
markets.
This will enhance the firms image and name
recognition, and diversify the shareholder base.
The stocks may also be more easily digested.
Note that market competition should increase the
efficiency of new issues.
45
Non-U.S. firms may also issue American
depository receipts (ADRs), which are
certificates representing bundles of stock. ADRs
are less strictly regulated.
46
The locations of the MNCs operations can
influence the decision about where to place
stock, in view of the cash flows needed to cover
dividend payments.
Market characteristics are important too. Stock
markets may differ in size, trading activity level,
regulatory requirements, taxation rate, and
proportion of individual versus institutional share
ownership.
Stock issued in the U.S. by non-U.S. firms are
called Yankee stock offerings. Many of such
recent stock offerings resulted from privatization
programs in Latin America and Europe.

47
Electronic communications networks (ECNs)
have been created to match orders between
buyers and sellers in recent years.
As ECNs become more popular over time, they
may ultimately be merged with one another or
with other exchanges to create a single global
stock exchange.
The foreign cash flow movements of a typical
MNC can be classified into four corporate
functions, all of which generally require the use
of the foreign exchange markets.
Foreign trade. Exports generate foreign cash
inflows while imports require cash outflows.

48
Direct foreign investment (DFI). Cash outflows to
acquire foreign assets generate future inflows.
Short-term investment or financing in foreign
securities, usually in the Eurocurrency market.
Longer-term financing in the Eurocredit,
Eurobond, or international stock markets.

49

Internation Finance

Enviado por

Dados do documento

Descrição original:

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

Internation Finance

Enviado por

Direitos autorais:

Formatos disponíveis

1

Você também pode gostar