international financial markets. © prentice hall, 2006international business 3e chapter 9 - 2...
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International International Financial MarketsFinancial Markets
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© Prentice Hall, 2006 International Business 3e Chapter 9 - 2
Chapter PreviewChapter Preview
• Discuss the international capital market
• Describe the international bond, international equity and Eurocurrency markets
• Identify the foreign exchange market’s functions
• Explain currency quotes and the rates given
• Identify the instruments of foreign exchange
• Discuss government restrictions on currencies
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© Prentice Hall, 2006 International Business 3e Chapter 9 - 3
Capital MarketCapital Market
System that allocates financial resources according to their most efficient uses- Debt: Repay principal plus interest
• Bond has timed principal & interest payments
- Equity: Part ownership of a company• Stock shares in financial gains or losses
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© Prentice Hall, 2006 International Business 3e Chapter 9 - 4
International Capital MarketInternational Capital Market
Network of people, firms, financial institutions and governments borrowing and investing internationally- Borrowers
• Expands money supply• Reduces cost of money
- Lenders• Spread / reduce risk• Offset gains / losses
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© Prentice Hall, 2006 International Business 3e Chapter 9 - 5
International CapitalInternational CapitalMarket DriversMarket Drivers
Information technology
Deregulation
Financial instruments
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© Prentice Hall, 2006 International Business 3e Chapter 9 - 6
Offshore Financial CentersOffshore Financial Centers
Country or territory whose financial sector features few regulations and few, if any, taxes- Operational center
• Extensive financial activity and currency trading
- Booking center• Mostly for bookkeeping and tax purposes
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© Prentice Hall, 2006 International Business 3e Chapter 9 - 7
International Bond MarketInternational Bond Market
Market of bonds sold by issuing companies, governments and others outside their own countries- Eurobond
• Bond that is issued outside the country in whose currency the bond is denominated
- Foreign bond• Bond sold outside a borrower’s country and denominated in
the currency of the country in which it is sold
- Interest rates• Driving growth are differential interest rates between
developed and developing nations
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© Prentice Hall, 2006 International Business 3e Chapter 9 - 8
International Equity MarketInternational Equity Market
Market of stocks bought and sold outside the issuer’s home country- Privatization
- Developing nations
- Investment banks
- Electronic markets
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© Prentice Hall, 2006 International Business 3e Chapter 9 - 9
Eurocurrency MarketEurocurrency Market
• Unregulated market of currencies banked outside their countries of origin
- Governments
- Commercial banks
- International companies
- Wealthy individuals
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© Prentice Hall, 2006 International Business 3e Chapter 9 - 10
Foreign Exchange MarketForeign Exchange Market
Market in which currencies are bought and sold and their prices are determined- Conversion: To facilitate sale or purchase, or invest
directly abroad- Hedging: Insure against potential losses from
adverse exchange-rate changes- Arbitrage: Instantaneous purchase and sale of a
currency in different markets for profit- Speculation: Sequential purchase and sale (or vice-
versa) of a currency for profit
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© Prentice Hall, 2006 International Business 3e Chapter 9 - 11
Quoting CurrenciesQuoting Currencies
Quoted currency = numeratorBase currency = denominator(¥/$) = Japanese yen needed to buy one U.S. dollarYen is quoted currency, dollar is base currency
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© Prentice Hall, 2006 International Business 3e Chapter 9 - 12
Currency ValuesCurrency Values
• Change in US dollar against Polish zloty February 1: PLZ 5/$ March 1: PLZ 4/$% change = [(4-5)/5] x 100 = -20%
US dollar fell 20%
• Change in Polish zloty against US dollarMake zloty base currency (1÷ PLZ/$) February 1: $.20/PLZ March 1: $.25/PLZ% change = [(.25-.20)/.20] x 100 = 25%
Polish zloty rose 25%
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© Prentice Hall, 2006 International Business 3e Chapter 9 - 13
Cross RateCross Rate
• Exchange rate calculated using two other exchange rates
• Use direct or indirect exchange rates against a third currency
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© Prentice Hall, 2006 International Business 3e Chapter 9 - 14
Cross Rate ExampleCross Rate Example
Direct quote method- Quote on euro = € 0.8461/$- Quote on yen = ¥ 114.50/$- € 0.8461/$ ÷ ¥ 114.50/$ = € 0.0074/¥- Costs 0.0074 euros to buy 1 yenIndirect quote method- Quote on euro = $ 1.1819/€- Quote on yen = $ 0.008734/¥- $ 1.1819/€ ÷ $ 0.008734/¥ = € 135.32/¥- Final step: 1 ÷ € 135.32/¥ = € 0.0074/¥- Costs 0.0074 euros to buy 1 yen
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© Prentice Hall, 2006 International Business 3e Chapter 9 - 15
Spot RateSpot Rate
Exchange rate requiring delivery of traded currency within two business days- Repatriate income from sales abroad
- Pay supplier in its own currency
- Invest in another national market
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© Prentice Hall, 2006 International Business 3e Chapter 9 - 16
Forward RateForward Rate
Rate at which two parties will exchange currencies on a specified future date- Forward Contract
- Derivative
- Premium vs. Discount
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© Prentice Hall, 2006 International Business 3e Chapter 9 - 17
Swaps, Options and FuturesSwaps, Options and Futures
Currency swap- Simultaneous purchase and sale of foreign exchange
for two different dates
Currency option- Option to exchange a specific amount of a currency
on a specific date at a specific rate
Currency futures contract- Contract requiring the exchange of a specific amount
of a currency on a specific date at a specific rate, with all conditions fixed and not adjustable
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© Prentice Hall, 2006 International Business 3e Chapter 9 - 18
Key Market InstitutionsKey Market Institutions
Interbank market- Market in which the world’s largest banks exchange
currencies at spot and forward rates
Securities exchange- Exchange that specializes in currency futures and
options transactions
Over-the-Counter (OTC) market- Global computer network of foreign exchange traders
and other market participants
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© Prentice Hall, 2006 International Business 3e Chapter 9 - 19
Goals of Currency RestrictionGoals of Currency Restriction
Preserve hard currency to repay debts owed to other nations
Preserve hard currency to pay for imports and finance trade deficits
Protect a currency from speculators
Constrain individuals and companies from investing abroad
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© Prentice Hall, 2006 International Business 3e Chapter 9 - 20
Currency Restriction PoliciesCurrency Restriction Policies
Multiple exchange rate system
Import deposit requirements
Quantity restrictions
What’s a firm to do? “Countertrade”