Transcript C H A P T E R 3

FINC3240
International Finance
Chapter 3
International Financial Markets
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Markets
A. Foreign Exchange Market
B. International Money Markets
C. International Credit Market
D. International Bond Market
E. International Stock Markets
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Foreign Exchange Market
a. Spot Markets and spot rate
b. Spot Markets Time Zones
night trading desk
Biggest trader: Deutsche Bank, Citibank, J.P. Morgan Chase
Biggest trading center: London, New York, Tokyo
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Foreign Exchange Market
c. Forward Markets and forward
rate
d. Futures Markets
e. Options Markets
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Foreign Exchange Quotations
1. Direct vs. Indirect Quotes:
the direct quote is the local currency price of one unit of
foreign currency. e.g. EUR/USD 1.3855
the indirect quote is the foreign currency price of one
unit of local currency. e.g. USD/EUR 0.7218
reciprocal of direct quote.
2. Cross Exchange Rates
the amount of one foreign currency per unit of another
foreign currency.
EUR/USD 1.3855; USD/CAD 1.0968; EUR/CAD ?
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Exhibit 3.2 Direct and Indirect Exchange Rate
Quotations
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Cross Exchange Rates

Exchange rate between two non-dollar
currencies can be calculated based on
their respective quotations relative to the
US dollar.
1 British Pound (GBP)= 1.6421 USD
GBP/USD
1 Euro (EUR) = 1.3527 USD
EUR/USD
GBP/EUR:
1.6421 1.3527 1.6421
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1.2139




1
1
1
1.3527
1
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Bid/Ask Spread
Exchange rates are typically quoted by
banks on a Bid/Ask basis; the quotations
found in newspapers are usually Bid/Ask
Averages.
Bid=Buy; Ask=Sell
bid/ask spread =
Real quote: http://www.usforex.com
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Exhibit 3.1 Computation of the Bid/Ask Spread
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Foreign Exchange Derivatives
Foreign Exchange (Currency)
Forward, Futures, and Options are
contracts that:
1) specify a fixed amount of currency
2) to be purchased at a predetermined exchange
rate
3) at a specified time
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International Money Markets
1. Domestic money market
short-term borrowings or securities that mature within one
year.
2. International money market
Eurodollars: dollar deposits in banks in Europe
Asiandollars:
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International Money Markets

Why firms or individuals would borrow in
international money markets?
1. firms need foreign currency for a short-term to do
international business
2. the cost of borrowing abroad may be lower
3. better off if borrow a foreign currency that will depreciate
against home currency

Why firms or individuals would invest in
international money markets?
1. the interest earned from investing abroad may be higher
2. better off if investing in a foreign currency that will
appreciate against home currency
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International Credit Market
1. Eurocredit Market
a. Eurocredit loans (5 years)
b. London Interbank Offer Rate (LIBOR)
e.g. LIBOR plus 3 percent
2. Syndicated Loans
When banks are unwilling or unable to process a
very large loan they form groups know as
syndicates
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International Bond Market
1. Long-term debt (10 years)
2. Foreign bond vs. Eurobond
Foreign bond: bonds issued by a borrower foreign to the
country where the bond is placed. E.g. A U.S. borrower
issues a bond denominated in Japanese Yen and sell to
investors in Japan.
Eurobond: bonds sold in countries other than the country of
the currency denominating the bonds. E.g. A U.S. borrower
issues a bond denominated in Japanese Yen and sell to
investors in Europe.
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International Stock Markets
1. Issuance of Stock in Foreign Markets
2. Issuance of Stock by Non-U.S. Firms in
the U.S.
3. American Depository Receipts (ADRs)
4. Stock Market Characteristics Vary Among
Countries
voting rights for shareholders, legal protection,
enforcement of laws, corruption, accounting requirements
5. Co-movement of International Stock
Markets
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Exhibit 3.4 Comparison of Global Stock
Exchanges
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Source: World Development Indicators, World Bank
Example 1
Explain how the appreciation of the
Australian dollar against the U.S.
dollar would affect the return to a
U.S. firm that invested in an
Australian money market security.
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Example 2
Utah Bank’s bid price for Canadian
dollar is $.7938 and its ask price is
$.8100. what is the bid/ask
percentage spread?
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Example 3
Assume Poland’s currency (the zloty)
is worth $.17 and the Japanese yen
is worth $.008. what is the cross rate
of the zloty with respect to yen? That
is, how many yen equal a zloty?
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Summary
Homework 3:
Q&A 4,7,8,10,18,22,24.
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