Transcript Chapter 9 International Financial Markets Chapter Preview • Discuss the international capital market • Describe the international bond, international equity, and Eurocurrency markets • Identify the.

Chapter 9
International
Financial Markets
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
© Prentice Hall, 2008
International Business 4e
Chapter 9 - 2
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

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Stock shares in financial gains or losses
International Business 4e
Chapter 9 - 3
International Capital Market
Network of people, firms, financial institutions, and
governments borrowing and investing internationally
Borrowers
 Expands money supply
 Reduces cost of money
Lenders
 Spread / reduce risk
 Offset gains / losses
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International Business 4e
Chapter 9 - 4
International Capital
Market Drivers
Information technology
Deregulation
Financial instruments
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International Business 4e
Chapter 9 - 5
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
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International Business 4e
Chapter 9 - 6
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
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International Business 4e
Chapter 9 - 7
International Equity Market
Market of stocks bought and sold
outside the issuer’s home country
Privatization
Developing nations
Investment banks
Electronic markets
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International Business 4e
Chapter 9 - 8
Eurocurrency Market
Unregulated market of
currencies banked outside
their countries of origin




Governments
Commercial banks
International
companies
Wealthy individuals
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International Business 4e
Chapter 9 - 9
Foreign Exchange Market
Market in which currencies are bought and sold
and their prices are determined
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
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
International Business 4e
Chapter 9 - 10
Quoting Currencies
Quoted currency = numerator
Base currency = denominator
(¥/$) = Japanese yen needed to buy one U.S. dollar
Yen is quoted currency, dollar is base currency
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International Business 4e
Chapter 9 - 11
Currency Values
Change in U.S. dollar
against Polish zloty
Change in Polish zloty against
U.S. dollar
Make zloty base currency (1÷ PLZ/$)
February 1: $.20/PLZ
March 1: $.25/PLZ
February 1: PLZ 5/$
March 1: PLZ 4/$
%change = [(4-5)/5] x 100 = -20%
%change = [(.25-.20)/.20] x 100 = 25%
U.S. dollar fell 20%
Polish zloty rose 25%
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International Business 4e
Chapter 9 - 12
Cross Rate
• Exchange rate calculated using two other exchange rates
• Use direct or indirect exchange rates against a third currency
Dollar
Euro
Pound
SFranc
Peso
Yen
CdnDlr
Canada
1.3931
1.6466
2.4561
1.0695
0.1198
0.0122
....
Japan
114.50
135.32
201.85
87.898
9.8420
....
82.185
Mexico
11.633
13.749
20.510
8.9309
....
0.1016
8.3504
Switzerland
1.3026
1.5395
2.2965
....
0.1120
0.0114
0.9350
United Kingdom
0.5672
0.6704
....
0.4355
0.0488
0.0050
0.4071
Euro
0.8461
....
1.4917
0.6495
0.0727
0.0074
0.6073
....
1.1819
1.7630
0.7677
0.0860
0.0087
0.7178
United States
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International Business 4e
Chapter 9 - 13
Cross Rate Example
Direct quote method
1)
2)
3)
4)
Quote on euro = € 0.8461/$
Quote on yen = ¥ 114.50/$
€ 0.8461/$ ÷ ¥ 114.50/$ = € 0.0074/¥
Costs 0.0074 euros to buy 1 yen
Indirect quote method
1)
2)
3)
4)
5)
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Quote on euro = $ 1.1819/€
Quote on yen = $ 0.008734/¥
$ 1.1819/€ ÷ $ 0.008734/¥ = € 135.32/¥
Final step: 1 ÷ € 135.32/¥ = € 0.0074/¥
Costs 0.0074 euros to buy 1 yen
Spot Rate
Exchange rate requiring delivery
of traded currency within two business days
Repatriate income
from sales abroad
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Pay supplier in
its own currency
International Business 4e
Invest in another
national market
Chapter 9 - 15
Forward Rate
Rate at which two parties will exchange
currencies on a specified future date
 Forward Contract
 Derivative
 Premium vs. Discount
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International Business 4e
Chapter 9 - 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
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International Business 4e
Chapter 9 - 17
24 Hour Trading
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International Business 4e
Chapter 9 - 18
Key Market Institutions
Interbank
market
Market in which
the world’s largest
banks exchange
currencies at spot
and forward rates
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Securities
exchange
Exchange that
specializes in
currency futures
and options
transactions
International Business 4e
Over-the-Counter
(OTC) market
Global computer
network of foreign
exchange traders
and other market
participants
Chapter 9 - 19
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
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International Business 4e
Chapter 9 - 20
Currency Restriction Policies
Multiple exchange rate system
Import deposit requirements
Quantity restrictions
What’s a firm to do??
“Countertrade”
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International Business 4e
Chapter 9 - 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
© Prentice Hall, 2008
International Business 4e
Chapter 9 - 22