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 markets
functions
Explain currency quotes and the rates given
Identify the instruments of foreign exchange
Discuss government restrictions on currencies
 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

Stock shares in financial gains or losses
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
INTERNATIONAL CAPITAL
MARKET DRIVERS

Information technology

Deregulation

Financial instruments
 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
 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 Bond sold outside a Driving growth are

issued outside the borrowers country differential interest
country in whose and denominated in rates between
currency the bond the currency of the developed and
is denominated country in which it developing nations
is sold
INTERNATIONAL EQUITY MARKET

Market of stocks bought and sold

outside the issuers home country

Privatization Developing nations

Investment banks Electronic markets

 Eurocurrency Market

Unregulated market of
currencies banked outside
their countries of origin

Governments
Commercial banks
International
companies
Wealthy individuals
FOREIGN EXCHANGE MARKET

Market in which currencies are bought and sold

and their prices are determined

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
 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
 CURRENCY VALUES

Change in U.S. dollar Change in Polish zloty against

against Polish zloty U.S. dollar

Make zloty base currency (1 PLZ/$)

February 1: PLZ 5/$ February 1: $.20/PLZ
March 1: PLZ 4/$ March 1: $.25/PLZ

%change = [(4-5)/5] x 100 = -20% %change = [(.25-.20)/.20] x 100 = 25%

U.S. dollar fell 20% Polish zloty rose 25%

 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
United States .... 1.1819 1.7630 0.7677 0.0860 0.0087 0.7178
 CROSS RATE EXAMPLE
Direct quote method
1) Quote on euro = 0.8461/$
2) Quote on yen = 114.50/$
3) 0.8461/$ 114.50/$ = 0.0074/
4) Costs 0.0074 euros to buy 1 yen

Indirect quote method

1) Quote on euro = $ 1.1819/
2) Quote on yen = $ 0.008734/
3) $ 1.1819/ $ 0.008734/ = 135.32/
4) Final step: 1 135.32/ = 0.0074/
5) Costs 0.0074 euros to buy 1 yen
 SPOT RATE

Exchange rate requiring delivery

of traded currency within two business days

Repatriate income Pay supplier in Invest in another

from sales abroad its own currency national market
 FORWARD RATE

Rate at which two parties will exchange

currencies on a specified future date

Forward Contract

Derivative

Premium vs. Discount

 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
24 HOUR TRADING
 KEY MARKET INSTITUTIONS

Interbank Securities Over-the-Counter

market exchange (OTC) market

Market in which Exchange that Global computer

the worlds largest specializes in network of foreign
banks exchange currency futures exchange traders
currencies at spot and options and other market
and forward rates transactions participants
GOALS OF CURRENCY RESTRICTION

Preserve hard currency Preserve hard currency

to repay debts owed to pay for imports and
to other nations finance trade deficits

Constrain individuals
Protect a currency
and companies from
from speculators
investing abroad
CURRENCY RESTRICTION POLICIES

Multiple exchange rate system

Import deposit requirements

Quantity restrictions

Whats a firm to do??

Countertrade
 CHAPTER REVIEW

Discuss the international capital market

Describe the international bond, international
equity, and Eurocurrency markets
Identify the foreign exchange markets
functions
Explain currency quotes and the rates given
Identify the instruments of foreign exchange
Discuss government restrictions on currencies
 SOURCE

Wild, JJ, Wild, KL and Han, JCY. International

Business: The Challenges of Globalization(4th
edition). New York: Pearson/Prentice Hall, 2008.