1

Chapter 2

The Domestic and International Finance Marketplace

© 2001 South-Western College Publishing

2

Credit Unions

Primary and Secondary

Markets

Sole Proprietorship Partnership Corporations

Net Savers Become Investors

Financial Markets

Savings Institution Mutual FundsPension FundsInsurance Companies

Financial Institutions

Financial Companies

Banks

Supply Funds Supply Funds

Money Markets

Capital Markets

First Comes the National Financial System

Investment Banking

Help corporations sell new security issues

Underwrite Guarantee sale at a fixed price

Best effort No guarantee

Secondary Market Listed exchanges

Designated place of business Requirements of securities listed or traded

Over-the -counter ( OTC ) market Networks connected by communications Dealers post prices to buy and sell

Stock market indexes DJIA DJTA S & P 500 NASDAQ

Regulations State

Blue sky laws Federal

Securities Act of 1933 &1934 Securities & Exchange Commission

(SEC) Ethical issues

Insider trading SEC attempts to prevent profiting from unpublished information

Global Financial

Transactions

Import

Export

Foreign Branch

Licensing Arrangements

Joint Ventures

Multinational Corporations

Manufacturing

Distribution

International Finance

Global Risks

Fluctuating Exchange Rates Government Regulations Tax Laws Business Practices Political Environment

Eurocurrency Currency deposited outside of the country of

origin Eurodollars are dollars deposited outside of

the US A new currency called the Euro has been

created by many European countries The Euro is not the same as Eurocurrency

Some Important Terms

Exchange Rate Direct Quote Indirect Quote Spot Rate Forward Exchange Rate

Forward Exchange Rates

Exchange rates for currencies delivered at some future date, i.e., 30, 90, or 180 days

Premium: where spot rate is expected to increase in

the future Discount:

where spot rate is expected to decrease in the future

Standard amount of currency

Standard future time ( maturity date)

At a price set at the present time

Foreign currency futures contrast

Contracts traded on Chicago Mercantile Exchange ( CME )

Delivery

Remember

Options:

A call is the right to buy a currency

A put is the right to sell a currency

13

Market Efficiency

“Glue” that bonds the PV of a firm’s net cash flow to shareholder’s wealth

Market Efficiency

Capital markets are efficient if prices instantaneously and fully reflect all the risk and economically relevant information about a security’s prospective returns.

3 Degrees of Market Efficiency

Weak-form Semistrong-form Strong-form

Weak-form

Security prices fully reflect all historical information

No investor can earn excess returns using historical prices or returns

Semistrong-form

Security prices fully reflect historical and publicly available

information

No investor can earn excess returns based on an investment strategy

using public information

Strong-form

Security prices fully reflect all historical, public and private information

Markets are quite efficient!