griffin ib7 inppt_08
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Griffin ib7 inppt_08TRANSCRIPT
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Chapter 8
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 8 - 1
Foreign Exchange and International Financial
Markets
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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
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 8 - 2
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The Economics of Foreign Exchange
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 8 - 3
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Demand for Yen
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 8 - 4
The demand for yen is
derived from foreigner’s
demand for Japanese
products
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Supply of Yen
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 8 - 5
The supply of yen is derived
from Japanese demand for
foreign products
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The Market for Yen
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Equilibrium is reached when
supply and demand are
equal
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Foreign Exchange Rate Quotes
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IndirectQuote
DirectQuote
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Summary of Discussion
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 8 - 8
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Structure of the Foreign Exchange Market
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Currencies Involved in Foreign-Exchange Market Transactions
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 8 - 10
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The Role of Banks
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 8 - 11
Foreign-Exchange Market
Speculation
and Arbitrage
Spread
Between Bid
and Ask Prices
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Types of Markets
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 8 - 12
Wholesa
le
Retail
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Foreign-Exchange Clients
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 8 - 13
• Commercial Customers
• Exchange-Rate Speculators
• Currency Arbitrageurs
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Types of Currencies
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Convertible vs. Inconvertible
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Summary of Discussion
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 8 - 15
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Spot and Forward Markets
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Types of Markets
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•Spot Market
•Forward Market
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Futures Transactions
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 8 - 18
•Swap Transactions
•Currency Futures
•Currency Options
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Forward Pricing of Foreign Currency
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 8 - 19
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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Summary of Discussion
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 8 - 20
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Arbitrage and the Currency Market
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Arbitrage of Goods
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The Law of One Price
Buy in “Cheap”
Market
Sell in
“Expensive”
Market
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Purchasing Power Parity
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 8 - 23
PPP
Expensive
Market
Cheap
Market
Cost of
Currency “B”
Price of
Good “X”
Cost of
Currency “A”
Price of
Good “X”
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Arbitrage of Money
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 8 - 24
Professional Traders
Covered
Interest
Three-
Point
Two-
Point
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Two-Point Arbitrage
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Risk-Free Profit
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Three-Point Arbitrage
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 8 - 26
$1 = ¥120
Sell $2, Get ¥240
Step 2
Step 1 Step 3
New York Tokyo
London
Gain£0.2
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Covered-Interest Arbitrage
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 8 - 27
Currencies of Two Countries
Interest Rate
Differences
Forward
Discount/Premi
um
≠
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The International Fisher Effect
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 8 - 28
Country’s Inflation
Rate
Expected to
Increase
Expected to
Decrease
Nomina
l
Interest
Forwar
d
Premiu
m
Forwar
d
Discou
nt
Higher Shrink Widen
Lower Widen Shrink
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Summary of Discussion
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The International Capital Market
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 8 - 30
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The Eight Largest Banks
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 8 - 31
Ran
k
Company Country Revenues
($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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International Banking
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Correspondent
Relationship
Subsidiary
Bank
Affiliated BankBranch Bank
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International Commercial Banking Services
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Everyday
Transactions
Currency
Exchange
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Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 8 - 34
Mergers andAcquisitions
Long-TermDebt and Equity
Investment Banking
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Eurocurrency Market
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 8 - 35
Foreign Currency on Deposit
London Interbank Offer Rate
(LIBOR)
International Banking Facility
(IBF)
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• Foreign Bonds
• Eurobonds
• Global Bonds
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The International Bond Market
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Global Equity Markets
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 8 - 37
•Capital Markets
•Country Funds
•Financial Services
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Offshore Financial Centers
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 8 - 38
Bahamas
Bahrain
Cayman Islands
Luxembourg
Bermuda
Netherlands
Antilles
Singapore
Switzerland
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Summary of Discussion
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Chapter 8
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 8 - 40
Foreign Exchange and International Financial
Markets
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Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 8 - 41
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