Wild IB5e PPT Instructor 09
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Transcript of Wild IB5e PPT Instructor 09
International International Financial MarketsFinancial Markets
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall
International Business 5e 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
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall
International Business 5e Chapter 9 - 3
Capital MarketCapital Market
Debt: Repay principal plus interest Bond has timed principal & interest payments
Equity: Part ownership of a company Stock shares in financial gains or losses
System that allocates financial resourcesaccording to their most efficient uses
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall
International Business 5e 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
Borrowers
Expands money supply Reduces cost of money
Lenders
Spread / reduce risk Offset gains / losses
Lenders
Spread / reduce risk Offset gains / losses
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall
International Business 5e Chapter 9 - 5
International CapitalInternational CapitalMarket DriversMarket Drivers
Information technologyInformation technology
DeregulationDeregulation
Financial instrumentsFinancial instruments
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall
International Business 5e Chapter 9 - 6
Country or territorywhose financial sector
features few regulationsand few, if any, taxes
Country or territorywhose financial sector
features few regulationsand few, if any, taxes
Operational centerExtensive financial activity
and currency trading
Operational centerExtensive financial activity
and currency trading
Booking centerMostly for bookkeeping
and tax purposes
Booking centerMostly for bookkeeping
and tax purposes
Offshore Financial CentersOffshore Financial Centers
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall
International Business 5e Chapter 9 - 7
International Bond MarketInternational Bond Market
Foreign bond Interest ratesEurobond
Bond that is issued outside the country in whose currency the bond is denominated
Bond sold outside a borrower’s country and denominated in the currency of the country in which it is sold
Driving growth are differential interest rates between developed and developing nations
Market of bonds sold by issuing companies, governments, and others outside their own countries
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall
International Business 5e Chapter 9 - 8
International Equity MarketInternational Equity Market
Market of stocks bought and soldMarket of stocks bought and soldoutside the issuer’s home countryoutside the issuer’s home country
Market of stocks bought and soldMarket of stocks bought and soldoutside the issuer’s home countryoutside the issuer’s home country
PrivatizationPrivatizationPrivatizationPrivatization
Investment banksInvestment banksInvestment banksInvestment banks
Developing nationsDeveloping nationsDeveloping nationsDeveloping nations
Electronic marketsElectronic marketsElectronic marketsElectronic markets
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall
International Business 5e Chapter 9 - 9
Governments Commercial banks International companies Wealthy individuals
Eurocurrency MarketEurocurrency Market
Unregulated market of currencies banked outside
their countries of origin
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall
International Business 5e Chapter 9 - 10
Foreign Exchange MarketForeign Exchange Market
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
Market in which currencies are bought and soldand their prices are determined
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall
International Business 5e Chapter 9 - 11
Quoting CurrenciesQuoting Currencies
Quoted currency = numeratorBase currency = denominatorQuoted currency = numeratorBase currency = denominator
(¥/$) = Japanese yen needed to buy one U.S. dollar(¥/$) = Japanese yen needed to buy one U.S. dollar
Yen is quoted currency, dollar is base currencyYen is quoted currency, dollar is base currency
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall
International Business 5e Chapter 9 - 12
Currency ValuesCurrency Values
Change in U.S. dollar against Norwegian
krone
February 1: NOK 5/$ March 1: NOK 4/$
%change = [(4-5)/5] x 100 = -20%
U.S. dollar fell 20%
Change in Norwegian krone against U.S. dollar
Make krone base currency (1÷ NOK/$) February 1: $.20/NOK March 1: $.25/NOK
%change = [(.25-.20)/.20] x 100 = 25%
Norwegian krone rose 25%
Change in Norwegian krone against U.S. dollar
Make krone base currency (1÷ NOK/$) February 1: $.20/NOK March 1: $.25/NOK
%change = [(.25-.20)/.20] x 100 = 25%
Norwegian krone rose 25%
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall
International Business 5e Chapter 9 - 13
Cross RateCross Rate
• Exchange rate calculated using two other exchange rates• Use direct or indirect exchange rates against a third currency
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall
International Business 5e Chapter 9 - 14
Cross Rate ExampleCross Rate Example
Direct quote method
1) Quote on euro = € 0.6354/$2) Quote on yen = ¥ 106.81/$3) € 0.6354/$ ÷ ¥ 106.81/$ = € 0.0059/¥4) Costs 0.0059 euros to buy 1 yen
Indirect quote method
1) Quote on euro = $ 1.5737/€2) Quote on yen = $ 0.009362/¥3) $ 1.5737/€ ÷ $ 0.009362/¥ = € 168.09/¥4) Final step: 1 ÷ € 168.09/¥ = € 0.0059/¥5) Costs 0.0059 euros to buy 1 yen
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall
International Business 5e Chapter 9 - 15
Spot RateSpot Rate
Exchange rate requiring deliveryExchange rate requiring deliveryof traded currency within two business daysof traded currency within two business days
Repatriate incomeRepatriate incomefrom sales abroadfrom sales abroad
Invest in anotherInvest in anothernational marketnational market
Pay supplier inPay supplier inits own currencyits own currency
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall
International Business 5e Chapter 9 - 16
Forward RateForward Rate
Rate at which two parties will exchangecurrencies on a specified future date
Forward Contract
Derivative
Premium vs. Discount
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall
International Business 5e Chapter 9 - 17
Currency swapCurrency swapSimultaneous purchase and sale of foreign exchange
for two different dates
Currency swapCurrency swapSimultaneous purchase and sale of foreign exchange
for two different dates
Currency optionCurrency optionOption to exchange a specific amount of a currency on a
specific date at a specific rate
Currency optionCurrency optionOption to exchange a specific amount of a currency on a
specific date at a specific rate
Currency futures contractCurrency futures contractContract requiring the exchange of a specific amount of a currency
on a specific date at a specific rate, with all conditionsfixed and not adjustable
Currency futures contractCurrency futures contractContract requiring the exchange of a specific amount of a currency
on a specific date at a specific rate, with all conditionsfixed and not adjustable
Swaps, Options, and FuturesSwaps, Options, and Futures
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall
International Business 5e Chapter 9 - 18
24-Hour Trading24-Hour Trading
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall
International Business 5e Chapter 9 - 19
Key Market InstitutionsKey Market Institutions
Interbankmarket
Securitiesexchange
Market in whichthe world’s largestbanks exchangecurrencies at spotand forward rates
Market in whichthe world’s largestbanks exchangecurrencies at spotand forward rates
Exchange that specializes in currency futures and options transactions
Exchange that specializes in currency futures and options transactions
Global computer network of foreignexchange tradersand other marketparticipants
Global computer network of foreignexchange tradersand other marketparticipants
Over-the-Counter(OTC) market
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall
International Business 5e Chapter 9 - 20
Goals of Currency RestrictionGoals of Currency RestrictionGoals of Currency RestrictionGoals of Currency Restriction
Protect a currencyfrom speculators
Protect a currencyfrom speculators
Constrain individualsand companies from
investing abroad
Constrain individualsand companies from
investing abroad
Preserve hard currencyto repay debts owed
to other nations
Preserve hard currencyto repay debts owed
to other nations
Preserve hard currencyto pay for imports andfinance trade deficits
Preserve hard currencyto pay for imports andfinance trade deficits
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall
International Business 5e Chapter 9 - 21
Currency Restriction PoliciesCurrency Restriction Policies
Multiple exchange rate system
Import deposit requirementsImport deposit requirements
What’s a firm to do?
“Countertrade”
Quantity restrictionsQuantity restrictions
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall
International Business 5e Chapter 9 - 22
Chapter ReviewChapter Review
• 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
International International Financial MarketsFinancial Markets
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any
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Printed in the United States of America.
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall