TECHNOLOGY INTERNATIONAL TECHNOLOGY INTERNATIONAL PAYMENTS AND FINANCINGPAYMENTS AND FINANCING

Lecture 1. Introduction to the international financing                     1.1. Financial globalization and IT                     1.2. Foreign exchange market - the theoretical

1.1. 1.1. Financial GlobalizationFinancial Globalization

International finance = all monetary transfers taking place between countries..

financial (free movement of K²)

Globalization

commercial (free movement of B² + S²)

The most important phenomena in EM

heterogeneous participants work through:  their own investment horizons  performance objectives  risk tolerance

Traditional commercial activities exchanges and OTC markets

replaced

If two investors enter at the same time in possession of the same information, they are diametrically opposed conclusions regarding the likely impact of information on prices.

a. Theory of informational efficiencyb. Prospect Theory

a. Theory of informational efficiency

→ 1965 – Eugene Fama in The Behavior of Stock Market Prices structure financial market in three categories of informational efficiency

→ The classical premises of the concept of efficient markets are:

investors are rational (investors risk aversion and want assets that have the highest return for a given level of risk);

markets are efficient (current courses reflect all available information and public);

yields are independent (course changes can be determined only by new information; return from day t is uncorrelated with that of day t+1);

markets can move in random steps - "random walk" (probability distribution of returns is approximately the same of normal distribution - Gauss bell).

b. Prospect Theory

→ 1979 – Daniel Kahneman and Amos Tversky → Prospect Theory: An Analysis of Decision Under Risk.

In recent years, efficient market hypothesis have changed both theoretically and in terms of empirical observations contradict it:

Investors do not always have risk aversion;

Investors do not react to information immediately, but in some cases they act later, guided by trend (herd behavior);

Investors do not behave in a linear manner to new information;

Investors may become even more interested in taking additional risks when investment is placement in losses.

1.2. Foreign exchange market

→ Thomas Oberlechner and Sam Hocking (2004) → Information sources, news, and rumors in financial markets: Insights into the foreign exchange market

→ In the literature the currency market can be presented in the following acronyms: FOREX Retail forex FX Spot FX Spot.

→ International currency market is the largest financial market in the world, with a daily volume of $ 4 trillion;

→ Exchange market was formed in the 70s when international trade system went from fixed rates to floating rates system;

→ International market (Foreign Exchange Market - FOREX) is a complex interchange, whereby market players traded large amounts of money at a fixed exchange rate on a specified date for exchange (conversion) of currencies against each other.

→ Foreign exchange market can be defined as all the relationships that are formed at national and international level between the various national institutions and international vocation between natural or legal persons engaged in foreign operations

→ The main factors that determine the formation rate may be: Changing economic indicators of a country; Important political events in the country and abroad; Performing any sale / purchase of foreign exchange in large volumes; Other major events on capital markets; Rumours in the market or change in "market psychology".

→ Typology of exchange:

• The most traded currencies are called major currencies or hard currency.

• The remaining exchange on the market are known as minor currencies or soft currencies.

The most traded currencies

The terminology used foreign exchange market

a) Foreign exchange (currency rate) and being cross (cross rate) Currency rate = price of a currency in terms of another currency. Cross rate = when both currencies are non-domestic.

Example: In Japan the dollar-sterling exchange is a cross course, while in the United States of America or the UK, there is a cross course.

b) BID and ASK concepts

→ Any Forex quote two prices include: BID (buying rate) ASK (selling rate)

→ !!!!!! ALWAYS ASK quotation is higher then BID quotation

→ The difference between ASK and BID is known as SPREAD and is the gain of foreign exchange dealer

Source: http://www.cursbnr.ro/curs-valutar-banci

Banks quotations for currency pairs EUR / GBP and USD / GBP

c) PIP concept:

= is short for Percentage in Point and highlights the smallest unit of a currency price may vary;

- PIP is the last decimal notation and provides a measure of profit or loss:

Example: movement of the EUR / USD from 1.2250 to 1.2251 is considered to have increased by 1 pip. So for EUR / USD 1 pip = 0.0001

Trading on the currency market this type of "commodity" (currency) has many advantages: There are no fees: No clearing fees, trading fees, government taxes, fees of brokers.

Brokers are paid for their services in the spread between the two prices, the bid (bid price) and ask (asking price).

There are no middlemen: Spot currency trading eliminates intermediaries and allow direct trade with the market responsible for the pricing of currency pairs.

Low cost of transactions: transaction costs (sperad of the bid and ask spread) is typically less than 0.1% in normal market conditions.

It is a market that operates 24 hours, 5 days a week: in this case no one has to wait opening bell.

Nobody can monopolize and control the market: FOREX is so big and has so many participants that no one can control the market price for a long time. Not even central banks can not control the market in the long term, and the commercial banks, their interventions are short term.