wild ib5e ppt instructor 09

International International Financial MarketsFinancial Markets

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall


International Business 5e Chapter 9 - 2

Chapter PreviewChapter 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



Capital MarketCapital Market

Debt: Repay principal plus interest Bond has timed principal & interest payments

Equity: Part ownership of a company Stock shares in financial gains or losses

System that allocates financial resourcesaccording to their most efficient uses



International Capital MarketInternational Capital Market

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



International CapitalInternational CapitalMarket DriversMarket Drivers

Information technologyInformation technology

DeregulationDeregulation

Financial instrumentsFinancial instruments



Country or territorywhose financial sector

features few regulationsand few, if any, taxes

Country or territorywhose financial sector

features few regulationsand few, if any, taxes

Operational centerExtensive financial activity

and currency trading

Operational centerExtensive financial activity

and currency trading

Booking centerMostly for bookkeeping

and tax purposes

Booking centerMostly for bookkeeping

and tax purposes

Offshore Financial CentersOffshore Financial Centers



International Bond MarketInternational Bond Market

Foreign bond Interest ratesEurobond

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

Market of bonds sold by issuing companies, governments, and others outside their own countries



International Equity MarketInternational Equity Market

Market of stocks bought and soldMarket of stocks bought and soldoutside the issuer’s home countryoutside the issuer’s home country

Market of stocks bought and soldMarket of stocks bought and soldoutside the issuer’s home countryoutside the issuer’s home country

PrivatizationPrivatizationPrivatizationPrivatization

Investment banksInvestment banksInvestment banksInvestment banks

Developing nationsDeveloping nationsDeveloping nationsDeveloping nations

Electronic marketsElectronic marketsElectronic marketsElectronic markets



Governments Commercial banks International companies Wealthy individuals

Eurocurrency MarketEurocurrency Market

Unregulated market of currencies banked outside

their countries of origin



Foreign Exchange MarketForeign Exchange Market

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

Market in which currencies are bought and soldand their prices are determined



Quoting CurrenciesQuoting Currencies

Quoted currency = numeratorBase currency = denominatorQuoted currency = numeratorBase currency = denominator

(¥/$) = Japanese yen needed to buy one U.S. dollar(¥/$) = Japanese yen needed to buy one U.S. dollar

Yen is quoted currency, dollar is base currencyYen is quoted currency, dollar is base currency



Currency ValuesCurrency 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%

Change in Norwegian krone against U.S. dollar

Make krone base currency (1÷ NOK/$) February 1: $.20/NOK March 1: $.25/NOK

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

Norwegian krone rose 25%

Change in Norwegian krone against U.S. dollar

Make krone base currency (1÷ NOK/$) February 1: $.20/NOK March 1: $.25/NOK

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

Norwegian krone rose 25%



Cross RateCross Rate

• Exchange rate calculated using two other exchange rates• Use direct or indirect exchange rates against a third currency



Cross Rate ExampleCross Rate Example

Direct quote method

1) Quote on euro = € 0.6354/$2) Quote on yen = ¥ 106.81/$3) € 0.6354/$ ÷ ¥ 106.81/$ = € 0.0059/¥4) Costs 0.0059 euros to buy 1 yen

Indirect quote method

1) Quote on euro = $ 1.5737/€2) Quote on yen = $ 0.009362/¥3) $ 1.5737/€ ÷ $ 0.009362/¥ = € 168.09/¥4) Final step: 1 ÷ € 168.09/¥ = € 0.0059/¥5) Costs 0.0059 euros to buy 1 yen



Spot RateSpot Rate

Exchange rate requiring deliveryExchange rate requiring deliveryof traded currency within two business daysof traded currency within two business days

Repatriate incomeRepatriate incomefrom sales abroadfrom sales abroad

Invest in anotherInvest in anothernational marketnational market

Pay supplier inPay supplier inits own currencyits own currency



Forward RateForward Rate

Rate at which two parties will exchangecurrencies on a specified future date

Forward Contract

Derivative

Premium vs. Discount



Currency swapCurrency swapSimultaneous purchase and sale of foreign exchange

for two different dates

Currency swapCurrency swapSimultaneous purchase and sale of foreign exchange

for two different dates

Currency optionCurrency optionOption to exchange a specific amount of a currency on a

specific date at a specific rate

Currency optionCurrency optionOption to exchange a specific amount of a currency on a

specific date at a specific rate

Currency futures contractCurrency futures contractContract requiring the exchange of a specific amount of a currency

on a specific date at a specific rate, with all conditionsfixed and not adjustable

Currency futures contractCurrency futures contractContract requiring the exchange of a specific amount of a currency

on a specific date at a specific rate, with all conditionsfixed and not adjustable

Swaps, Options, and FuturesSwaps, Options, and Futures



24-Hour Trading24-Hour Trading



Key Market InstitutionsKey Market Institutions

Interbankmarket

Securitiesexchange

Market in whichthe world’s largestbanks exchangecurrencies at spotand forward rates

Market in whichthe world’s largestbanks exchangecurrencies at spotand forward rates

Exchange that specializes in currency futures and options transactions

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

Over-the-Counter(OTC) market



Goals of Currency RestrictionGoals of Currency RestrictionGoals of Currency RestrictionGoals of Currency Restriction

Protect a currencyfrom speculators

Protect a currencyfrom speculators

Constrain individualsand companies from

investing abroad

Constrain individualsand companies from

investing abroad

Preserve hard currencyto repay debts owed

to other nations

Preserve hard currencyto repay debts owed

to other nations

Preserve hard currencyto pay for imports andfinance trade deficits

Preserve hard currencyto pay for imports andfinance trade deficits



Currency Restriction PoliciesCurrency Restriction Policies

Multiple exchange rate system

Import deposit requirementsImport deposit requirements

What’s a firm to do?

“Countertrade”

Quantity restrictionsQuantity restrictions



Chapter ReviewChapter 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

International International Financial MarketsFinancial Markets


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.


wild ib5e ppt instructor 09

Documents