1 c h a p t e r 3 international financial markets

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C H A P T E R 3C H A P T E R 3

International Financial International Financial MarketsMarkets

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Chapter OverviewChapter Overview

A. A. Foreign Exchange MarketForeign Exchange Market

B. B. Interpreting Foreign Exchange Interpreting Foreign Exchange QuotationsQuotations

C. C. International Money MarketsInternational Money Markets

D. International Credit MarketD. International Credit Market

E. E. International Bond MarketInternational Bond Market

F. F. International Stock MarketsInternational Stock Markets

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Chapter 3 ObjectivesChapter 3 Objectives

This chapter will describe the:This chapter will describe the:

A. Foreign exchange marketA. Foreign exchange market

B. International money marketB. International money market

C. International credit marketC. International credit market

D. International bond marketD. International bond market

E. International stock marketsE. International stock markets

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A. Foreign Exchange MarketA. Foreign Exchange Market

1. History of Foreign Exchange1. History of Foreign Exchange

a. Gold Standarda. Gold Standard

b. Agreements on Fixed Exchange Ratesb. Agreements on Fixed Exchange Rates

c. Floating Exchange Rate Systemc. Floating Exchange Rate System

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2. Foreign Exchange Transaction2. Foreign Exchange Transactiona. Spot Marketa. Spot Marketb. Use of the Dollar in the Spot b. Use of the Dollar in the Spot

MarketMarketc. Spot Market Time Zonesc. Spot Market Time Zonesd. Spot Market Liquidityd. Spot Market Liquidity

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e. Attributes of Banks That Provide e. Attributes of Banks That Provide Foreign ExchangeForeign Exchange

1). Competitiveness of quote. 1). Competitiveness of quote.

2). Special relationship with the bank. 2). Special relationship with the bank.

3). Speed of execution. 3). Speed of execution.

4). Advice about current market 4). Advice about current market conditions. conditions.

5). Forecasting advice.5). Forecasting advice.

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3. Foreign Exchange Quotations 3. Foreign Exchange Quotations

a. Spot Market Interaction Among a. Spot Market Interaction Among BanksBanks

b. Bid/Ask Spread of Banksb. Bid/Ask Spread of Banks

c. Comparison of Bid/Ask Spread c. Comparison of Bid/Ask Spread Among CurrenciesAmong Currencies

d. Factors that Affect the Spreadd. Factors that Affect the Spread

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B. Interpreting Foreign Exchange B. Interpreting Foreign Exchange QuotationsQuotations

1. Direct versus Indirect Quotes:1. Direct versus Indirect Quotes:

the direct quote is the local the direct quote is the local currency price of one unit of foreign currency price of one unit of foreign currencycurrency

e.g. In New York City $1.38/€e.g. In New York City $1.38/€

2. Cross Exchange Rates2. Cross Exchange Rates

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3. Forward, Futures and Options 3. Forward, Futures and Options MarketsMarketsa. All are methods to hedge a. All are methods to hedge

against negative exchange rate against negative exchange rate changeschanges

b. All three are contracts that:b. All three are contracts that:1.) specify a fixed amount of 1.) specify a fixed amount of

currencycurrency2.) to be bought or purchased at a 2.) to be bought or purchased at a

fixed exchange ratefixed exchange rate3.) at a specified time3.) at a specified time

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4. Currency Futures Contract4. Currency Futures Contract

5. Currency Options Contract5. Currency Options Contract

a. options to buy = callsa. options to buy = calls

b. options to sell = putsb. options to sell = puts

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C. International Money MarketsC. International Money Markets

1. Origins and Development1. Origins and Development

a. European Money Marketa. European Money Market

What is eurocurrency?What is eurocurrency?

b. Asian Money Marketb. Asian Money Market

2. Money Market Interest Rates 2. Money Market Interest Rates Among CurrenciesAmong Currencies

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C. International Money MarketsC. International Money Markets

3. Global Bank Regulations: 3. Global Bank Regulations:

Attempts at Standardization Attempts at Standardization

a. Single European Act, 1992a. Single European Act, 1992

b. Basel Accord, December 1987b. Basel Accord, December 1987

c. Basel II Accord, at presentc. Basel II Accord, at present

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D. International Credit MarketD. International Credit Market

1. Overview:1. Overview:a. Eurocredit loans (medium-a. Eurocredit loans (medium-

term)term)b. London Interbank Offer Rateb. London Interbank Offer Rate

(LIBOR)(LIBOR)2. Syndicated Loans2. Syndicated Loans

When banks are unwilling or unable to When banks are unwilling or unable to process process a very large loan they form groups a very large loan they form groups know as know as syndicatessyndicates

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E. International Bond MarketE. International Bond Market

1. Eurobond Market1. Eurobond Market

a. Features of Eurobondsa. Features of Eurobonds

b. Denominationsb. Denominations

c. Underwriting Processc. Underwriting Process

d. Secondary Marketd. Secondary Market

2. Development of Other Bond Markets 2. Development of Other Bond Markets

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F. International Stock MarketsF. International Stock Markets

1. Issuance of Stock in Foreign Markets1. Issuance of Stock in Foreign Marketsa. Impact of the Euroa. Impact of the Euro

2. 2. Issuance of Stock by Non-U.S. Firms in the U.S.Issuance of Stock by Non-U.S. Firms in the U.S.

3. 3. Investing in Foreign Stock MarketInvesting in Foreign Stock Market

Comparison of Stock MarketsComparison of Stock Markets

4. 4. Issuance of Foreign Stock in the U.S. Issuance of Foreign Stock in the U.S.

American Depository Receipts (ADRs)American Depository Receipts (ADRs)

5. 5. Stock Market Characteristics Vary Among Stock Market Characteristics Vary Among CountriesCountries

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Insert Exhibit 3.5 page 71Insert Exhibit 3.5 page 71

Foreign Cash Flow Chart of an MNC

1 c h a p t e r 3 international financial markets

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