foreign exchange and international financial markets
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Foreign Exchange and International Financial MarketsTRANSCRIPT
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Chapter 8 - 1
Chapter 8
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
Foreign Exchange and International Financial
Markets
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Chapter 8 - 2
Learning Objectives
• Describe how demand and supply affect the price of foreign exchange
• Discuss the role of international banks in the foreign-exchange market
• Learn how firms use the spot and forward markets to settle international transactions
• Discuss arbitrage in foreign exchange• Explore the international capital market
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Chapter 8 - 3
The Economics of Foreign Exchange
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Chapter 8 - 4
Demand for Yen
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The demand for yen is derived from foreigner’s demand for Japanese
products
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Chapter 8 - 5
Supply of Yen
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The supply of yen is derived from Japanese demand for foreign
products
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Chapter 8 - 6
The Market for Yen
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Equilibrium is reached when supply and demand are equal
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Chapter 8 - 7
Foreign Exchange Rate Quotes
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IndirectQuote
DirectQuote
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Chapter 8 - 8
Summary of Discussion
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Chapter 8 - 9
Structure of the Foreign Exchange Market
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Chapter 8 - 10
Currencies Involved in Foreign-Exchange Market Transactions
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Chapter 8 - 11
The Role of Banks
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Foreign-Exchange Market
Speculation and Arbitrage
Spread Between Bid and Ask Prices
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Chapter 8 - 12
Types of Markets
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Wholesale Retail
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Chapter 8 - 13
Foreign-Exchange Clients
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•Commercial Customers
•Exchange-Rate Speculators
•Currency Arbitrageurs
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Chapter 8 - 14
Types of Currencies
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Convertible vs. Inconvertible
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Chapter 8 - 15
Summary of Discussion
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Chapter 8 - 16
Spot and Forward Markets
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Chapter 8 - 17
Types of Markets
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•Spot Market•Forward Market
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Chapter 8 - 18
Futures Transactions
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•Swap Transactions•Currency Futures•Currency Options
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Chapter 8 - 19
Forward Pricing of Foreign Currency
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Current Price of the British Pound (£)
Firm’s Holdings of (£) Assets
Firm’s Holdings of (£) Liabilities
• Selling at Forward Discount
• Selling at Forward Premium
Reduce Increase
Increase Reduce
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Chapter 8 - 20
Summary of Discussion
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Chapter 8 - 21
Arbitrage and the Currency Market
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Chapter 8 - 22
Arbitrage of Goods
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The Law of One Price
Buy in “Cheap” Market
Sell in “Expensive” Market
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Chapter 8 - 23
Purchasing Power Parity
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PPP
ExpensiveMarket
CheapMarket
Cost of Currency “B”
Price of Good “X”
Cost of Currency “A”
Price of Good “X”
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Chapter 8 - 24
Arbitrage of Money
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Professional Traders
Covered Interest
Three-PointTwo-Point
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Chapter 8 - 25
Two-Point Arbitrage
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Risk-Free Profit
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Chapter 8 - 26
Three-Point Arbitrage
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$2 = £1 £1 = ¥200
$1 = ¥120
Sell £1, G
et $2
Sell $2, Get ¥240
Sell ¥240, Get £1.2
Step 2
Step 1 Step 3
New York Tokyo
London
Gain£0.2
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Chapter 8 - 27
Covered-Interest Arbitrage
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Currencies of Two Countries
Interest Rate Differences
Forward Discount/Premium≠
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Chapter 8 - 28
The International Fisher Effect
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Country’s Inflation Rate
Expected to Increase
Expected to Decrease
Nominal Interest
Forward Premium
Forward Discount
Higher Shrink Widen
Lower Widen Shrink
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Chapter 8 - 29
Summary of Discussion
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Chapter 8 - 30
The International Capital Market
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Chapter 8 - 31
The Eight Largest Banks
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Rank Company Country Revenues ($Mil)
1 ING Group Netherlands 147,052
2 Bank of America United States 134,194
3 BNP Paribas France 128,726
4 J.P. Morgan Chase & Co United States 115,475
5 Citigroup United States 111,055
6 Crédit Agricole France 105,003
7 HSBC Holdings United Kingdom 102,680
8 Banco Santander Spain 100,350
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Chapter 8 - 32
International Banking
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CorrespondentRelationship
SubsidiaryBank
Affiliated BankBranch Bank
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Chapter 8 - 33
International Commercial Banking
Services
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Everyday Transactions
Currency Exchange
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Chapter 8 - 34Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
Mergers andAcquisitions
Long-TermDebt and Equity
Investment Banking
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Chapter 8 - 35
Eurocurrency Market
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Foreign Currency on Deposit
London Interbank Offer Rate (LIBOR)
International Banking Facility (IBF)
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Chapter 8 - 36
• Foreign Bonds• Eurobonds• Global Bonds
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The International Bond Market
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Chapter 8 - 37
Global Equity Markets
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•Capital Markets
•Country Funds
•Financial Services
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Chapter 8 - 38
Offshore Financial Centers
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Bahamas
Bahrain
Cayman Islands
Luxembourg
Bermuda
Netherlands Antilles
Singapore
Switzerland
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Chapter 8 - 39
Summary of Discussion
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Chapter 8 - 40
Chapter 8
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Foreign Exchange and International Financial
Markets
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Chapter 8 - 41Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
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