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1、,International Financial Markets,3,Chapter,South-Western/Thomson Learning 2003,To describe the background and corporate use of the following international financial markets: foreign exchange market, Eurocurrency market, Eurocredit market, Eurobond market, and international stock markets.,Chapter Obj
2、ectives,Motives for Using International Financial Markets,The markets for real or financial assets are prevented from complete integration by barriers such as tax differentials, tariffs, quotas, labor immobility, communication costs, cultural differences, and financial reporting differences. Yet, th
3、ese barriers can also create unique opportunities for specific geographic markets that will attract foreign investors.,Investors invest in foreign markets: to take advantage of favorable economic conditions; when they expect foreign currencies to appreciate against their own; and to reap the benefit
4、s of international diversification.,Motives for Using International Financial Markets,Creditors provide credit in foreign markets: to capitalize on higher foreign interest rates; when they expect foreign currencies to appreciate against their own; and to reap the benefits of international diversific
5、ation.,Motives for Using International Financial Markets,Borrowers borrow in foreign markets: to capitalize on lower foreign interest rates; and when they expect foreign currencies to depreciate against their own.,Motives for Using International Financial Markets,Foreign Exchange Market,The foreign
6、exchange market allows currencies to be exchanged in order to facilitate international trade or financial transactions. The system for establishing exchange rates has evolved over time. From 1876 to 1913, each currency was convertible into gold at a specified rate, as dictated by the gold standard.,
7、Foreign Exchange Market,This was followed by a period of instability, as World War I began and the Great Depression followed. The 1944 Bretton Woods Agreement called for fixed currency exchange rates. By 1971, the U.S. dollar appeared to be overvalued. The Smithsonian Agreement devalued the U.S. dol
8、lar and widened the boundaries for exchange rate fluctuations from 1% to 2%.,Foreign Exchange Market,Even then, governments still had difficulties maintaining exchange rates within the stated boundaries. In 1973, the official boundaries for the more widely traded currencies were eliminated and the f
9、loating exchange rate system came into effect.,Foreign Exchange Transactions,There is no specific building or location where traders exchange currencies. Trading also occurs around the clock. The market for immediate exchange is known as the spot market. The forward market enables an MNC to lock in
10、the exchange rate at which it will buy or sell a certain quantity of currency on a specified future date.,Hundreds of banks facilitate foreign exchange transactions, though the top 20 handle about 50% of the transactions. At any point in time, arbitrage ensures that exchange rates are similar across
11、 banks. Trading between banks occurs in the interbank market. Within this market, foreign exchange brokerage firms sometimes act as middlemen.,Foreign Exchange Transactions,The following attributes of banks are important to foreign exchange customers: competitiveness of quote special relationship be
12、tween the bank and its customer speed of execution advice about current market conditions forecasting advice,Foreign Exchange Transactions,Banks provide foreign exchange services for a fee: the banks bid (buy) quote for a foreign currency will be less than its ask (sell) quote. This is the bid/ask s
13、pread. bid/ask % spread = ask rate bid rate ask rate Example: Suppose bid price for = $1.52, ask price = $1.60. bid/ask % spread = (1.601.52)/1.60 = 5%,Foreign Exchange Transactions,The bid/ask spread is normally larger for those currencies that are less frequently traded. The spread is also larger
14、for “retail” transactions than for “wholesale” transactions between banks or large corporations.,Foreign Exchange Transactions,Interpreting Foreign Exchange Quotations,Exchange rate quotations for widely traded currencies are frequently listed in the news media on a daily basis. Forward rates may be
15、 quoted too. The quotations normally reflect the ask prices for large transactions.,Direct quotations represent the value of a foreign currency in dollars, while indirect quotations represent the number of units of a foreign currency per dollar. Note that exchange rate quotations sometimes include I
16、MFs special drawing rights (SDRs). The same currency may also be used by more than one country.,Interpreting Foreign Exchange Quotations,A cross exchange rate reflects the amount of one foreign currency per unit of another foreign currency. Value of 1 unit of currency A in units of currency B = value of currency A in $ value of currency B in $,Interpreting Foreign Exchange Quotations,Check out these foreign exchange sites: http:/merce.ubc.ca/xr/ http:/sonnet-financial.co
