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1、1,Multinational Finance,2,Learning Outcomes,Learning outcomes: A. Foreign exchange market B. International money market C. International bond market D. International stock markets,3,A. Foreign Exchange Market,1. History of Foreign Exchangea. Gold Standard: 1876 till 1913 b. Agreements on Fixed Excha
2、nge Rates: 1944 Bretton Woods Agreement till 1971 c. Floating Exchange Rate System: From 1973,4,A. Foreign Exchange Market,2. Foreign Exchange Transactiona. Spot Market: Intermediary and interbankb. Use of the Dollar in the Spot Market: Dominance of USDc. Spot Market Time Zonesd. Spot Market Liquidi
3、ty,5,A. Foreign Exchange Market,e. Attributes of Banks That Provide Foreign Exchange1). Competitiveness of quote. 2). Special relationship with the bank. 3). Speed of execution. 4). Advice about current market conditions. 5). Forecasting advice.,6,A. Foreign Exchange Market,3. Foreign Exchange Quota
4、tions a. Spot Market Interaction Among Banksb. Bid/Ask Spread of Banksc. Comparison of Bid/Ask Spread Among Currenciesd. Factors that Affect the Spread,Bid/Ask Spread of Banks,Price maker: Intermediary (banks and money changer) Price taker (customer) Bid/Buy Ask/Sell 1 euro : USD$1.29-1.35 Bank will
5、 buy euro at $1.29 Bank will sell euro at $1.35 You will sell euro at $1.29 You will buy euro at $1.29,7,Bid/Ask Spread of Banks,1 USD: 0.74 0.77 euro Bank will buy USD at 0.74 Bank will sell USD at 0.77 You will sell USD at 0.74 You will buy USD at 0.77,8,Comparison of Bid/Ask Spread Among Currenci
6、es,Bid/Ask Spread = (Ask rate Bid rate)/Ask rate Refer to Exhibit 3.1 p.59 Factors that affect spread: Order costs: Processing orders, clearing costs Inventory costs: Opportunity cost. If interest rate is high, so is the opportunity costs. So the spread will be large Competition Currency risk: The e
7、uro 2010, PIGSI,9,Interpreting Foreign Exchange Quotations,Direct quote: Quotation that represent the value of a foreign currency in dollar e.g. 1 euro: $1.031 Indirect quote: Quotation that represent the number of units of a foreign currency per dollar e.g 1USD: 0.97 euro Refer Exhibit 3.2 p.61,10,
8、Exhibit 3.3,Relationship between Direct and Indirect quotation When the euro is appreciating (based on a upward movement of the direct exchange rate) against the USD, the indirect exchange rate is declining That is when the value of euro rises, a smaller of that currency is needed to obtain USD,11,1
9、2,Cross Exchange Rates,It reflects the amount of one foreign currency per unit of another foreign currency Refer to p.64 for e.g. Value of peso in C$ = (Value of peso in $)/Value of C$ in $) Non USD exchange rate,13,Forward, Futures and Options,Forward, Futures and Options Marketsa. All are methods
10、to hedge against negative exchange rate changesb. All three are contracts that:1.) specify a fixed amount of currency2.) to be bought or purchased at a fixed exchange rate3.) at a specified time,14,Forward, Futures and Options,4. Currency Futures Contract5. Currency Options Contracta. options to buy
11、 = callsb. options to sell = puts,15,B. International Money Markets,Why is it needed? Need to borrow funds to pay for imports denominated in foreign currency Need fund to support local operations, they may consider borrowing currency whereby interest rate is low Borrow a currency that is expected to
12、 depreciate in the future,16,B. International Money Markets,Eurocurrency: Dollar deposits in banks in Europe (and on other continents) came to be known as Eurodollar and the market for Eurodollar came to be known as the Eurocurrency market Foreign currency deposited outside of home country Eurodolla
13、rs are U.S. dollars deposited, say, London.,17,C. International Bond Market,Eurobond Market: Bonds sold in countries other than the country of the currency denominating the bondsa. Features of Eurobonds: Bearer, annual coupons and convertibility clause b. Denominationsc. Underwriting Processd. Secon
14、dary Market: Euro clear,Eurobond,Denominated in a currency not native to the country it is issued, but sold in a different market: Euroyen and Eurodollar bonds issued in UK now larger than U.S. corporate bond market) Over 80% of new bonds are Eurobonds.,18,19,D. International Stock Markets,1. Issuan
15、ce of Foreign Stock in the U.S.American Depository Receipts (ADRs) Foreign firms listing in US NYSE or NASDAQ Price of ADR = Price of foreign stock in foreign currency x Spot rate Refer to p.74 for e.g. If Price of ADR is less than PFS x S, then ADR stocks will flow back to France It will be convert
16、ed in the French stock exchange Investors buy ADR (price will go up) and sell in France (price will go down),D. International Stock Markets,Price of ADR = Conversion ratio x price of foreign stock in foreign currency x Spot rate Refer to p.74 for e.g. Price will be converted to be sold in France if the ADR price is less than $42,20,21,Insert Exhibit 3.5 page 71,Foreign Cash Flow Chart of an MNC,
