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8/19/2019 International Financial Markets 03
1/32
Cost and Management Accounting: An Introduction, 7 th edition
Colin DruryISBN 978-1-40803-213-9 © 2011 Cengage Learning EMEA
Chapter 3
International FinancialMarkets
International Financial Management, 2 nd edition
e!! Ma"ura an" #olan" $o%ISBN 978-1-4080-3229-9 © 2011 Cengage Learning EMEA
8/19/2019 International Financial Markets 03
2/32
Cost and Management Accounting: An Introduction, 7 th edition
Colin DruryISBN 978-1-40803-213-9 © 2011 Cengage Learning EMEA
Chapter Objectives
• To describe the background and corporateuse of the following international financialmarkets ! foreign e"change market
! international mone# market
! international credit market ! international bond market
! international stock markets
International Financial Management, 2 nd edition
e!! Ma"ura an" #olan" $o%ISBN 978-1-4080-3229-9 © 2011 Cengage Learning EMEA
8/19/2019 International Financial Markets 03
3/32
Cost and Management Accounting: An Introduction, 7 th edition
Colin DruryISBN 978-1-40803-213-9 © 2011 Cengage Learning EMEA
Motives for $sing InternationalFinancial Markets %&'
• The markets for real or financial assets areprevented from full integration b# barriers
like ta" differentials( tariffs( )uotas( laborimmobilit#( communication costs( cultural(and financial reporting differences*
• +et( such market imperfections also create
uni)ue opportunities for specific geographicmarkets( helping these markets attractforeign creditors and investors*
International Financial Management, 2 nd edition
e!! Ma"ura an" #olan" $o%ISBN 978-1-4080-3229-9 © 2011 Cengage Learning EMEA
8/19/2019 International Financial Markets 03
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Cost and Management Accounting: An Introduction, 7 th edition
Colin DruryISBN 978-1-40803-213-9 © 2011 Cengage Learning EMEA
Motives for $sing InternationalFinancial Markets %,'
• Investors invest in foreign markets ! to take advantage of favorable economic
conditions-
! when the# e"pect foreign currencies toappreciate against their own- and
! to reap the benefits of international
diversification*
International Financial Management, 2 nd edition
e!! Ma"ura an" #olan" $o%ISBN 978-1-4080-3229-9 © 2011 Cengage Learning EMEA
8/19/2019 International Financial Markets 03
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Cost and Management Accounting: An Introduction, 7 th edition
Colin DruryISBN 978-1-40803-213-9 © 2011 Cengage Learning EMEA
Motives for $sing InternationalFinancial Markets %3'
• Creditors provide credit in foreign markets ! to capitali.e on higher foreign interest rates
! when the# e"pect foreign currencies to appreciateagainst their own( and
! to reap the benefits of diversification*
• /orrowers borrow in foreign markets
! to capitali.e on lower foreign interest rates( and ! when the# e"pect foreign currencies to depreciate
against their own*
International Financial Management, 2 nd edition
e!! Ma"ura an" #olan" $o%ISBN 978-1-4080-3229-9 © 2011 Cengage Learning EMEA
8/19/2019 International Financial Markets 03
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Cost and Management Accounting: An Introduction, 7 th edition
Colin DruryISBN 978-1-40803-213-9 © 2011 Cengage Learning EMEA
Foreign 0"change Market• The foreign e"change market allows
currencies to be e"changed in order tofacilitate international trade or financialtransactions*
• The s#stem for e"changing foreigncurrencies has evolved from the gold
standard( to agreements on fi"ede"change rates( to a floating rate s#stem*
International Financial Management, 2 nd edition
e!! Ma"ura an" #olan" $o%ISBN 978-1-4080-3229-9 © 2011 Cengage Learning EMEA
8/19/2019 International Financial Markets 03
7/32
Cost and Management Accounting: An Introduction, 7 th edition
Colin DruryISBN 978-1-40803-213-9 © 2011 Cengage Learning EMEA
Foreign 0"change
Transactions %&'• The market for immediate e"change is
known as the spot market*
• Trading between banks occurs in theinterbank market* 1ithin this market(brokers sometimes act as
intermediaries*
International Financial Management, 2 nd edition
e!! Ma"ura an" #olan" $o%ISBN 978-1-4080-3229-9 © 2011 Cengage Learning EMEA
8/19/2019 International Financial Markets 03
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Cost and Management Accounting: An Introduction, 7 th edition
Colin DruryISBN 978-1-40803-213-9 © 2011 Cengage Learning EMEA
Foreign 0"change
Transactions %,'• The forward market enables an M2C to lock
in the e"change rate at which it will bu# or
sell a certain )uantit# of currenc# on aspecified future date*
• Customers in need of foreign e"change areconcerned with )uote competitiveness(
special banking relationship( speed ofe"ecution( advice about current marketconditions( and forecasting advice*
International Financial Management, 2 nd edition
e!! Ma"ura an" #olan" $o%ISBN 978-1-4080-3229-9 © 2011 Cengage Learning EMEA
8/19/2019 International Financial Markets 03
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Cost and Management Accounting: An Introduction, 7 th edition
Colin DruryISBN 978-1-40803-213-9 © 2011 Cengage Learning EMEA
Foreign 0"change
Transactions %3'• /anks provide foreign e"change services for afee a banks bid %bu#' )uote for a foreigncurrenc# will be less than its ask %sell' )uote*
bid4ask spread 5 ask rate ! bid ratea&' ra(e
0"ample 6uppose bid price for 7 5 8&*9,(ask price 5 8&*:;*
6pread 5 %&*:; ! &*9,' 5 *;9 or 9<1)*0
International Financial Management, 2 nd edition
e!! Ma"ura an" #olan" $o%ISBN 978-1-4080-3229-9 © 2011 Cengage Learning EMEA
8/19/2019 International Financial Markets 03
10/32
Cost and Management Accounting: An Introduction, 7 th edition
Colin DruryISBN 978-1-40803-213-9 © 2011 Cengage Learning EMEA
Foreign 0"change
Transactions %='• The spread on currenc# )uotations is
positivel# influenced b# order costs(
inventor# costs( and currenc# risk( andnegativel# influenced b# competition( andvolume*
• The markets for heavil# traded currencieslike the >( 7( and ? are ver# li)uid*
International Financial Management, 2 nd edition
e!! Ma"ura an" #olan" $o%ISBN 978-1-4080-3229-9 © 2011 Cengage Learning EMEA
8/19/2019 International Financial Markets 03
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Cost and Management Accounting: An Introduction, 7 th edition
Colin DruryISBN 978-1-40803-213-9 © 2011 Cengage Learning EMEA
Interpreting Foreign 0"change@uotations %&'
• The e"change rate )uotations published innewspapers normall# reflect the ask prices
for large transactions*• Airect )uotations represent the value of aforeign currenc# in terms of the homecurrenc# %e*g* 7 or euro'( while indirect
)uotations represent the number of units ofa foreign currenc# per unit of homecurrenc#*
International Financial Management, 2 nd edition
e!! Ma"ura an" #olan" $o%ISBN 978-1-4080-3229-9 © 2011 Cengage Learning EMEA
8/19/2019 International Financial Markets 03
12/32
Cost and Management Accounting: An Introduction, 7 th edition
Colin DruryISBN 978-1-40803-213-9 © 2011 Cengage Learning EMEA
Interpreting Foreign 0"change@uotations %,'
• 2otation
B8&*: to the 7&
can be written as
8&*:47 or 8&*:7&
and treated as 8&*: 5 7&
International Financial Management, 2 nd edition
e!! Ma"ura an" #olan" $o%ISBN 978-1-4080-3229-9 © 2011 Cengage Learning EMEA
8/19/2019 International Financial Markets 03
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Cost and Management Accounting: An Introduction, 7 th edition
Colin DruryISBN 978-1-40803-213-9 © 2011 Cengage Learning EMEA
Interpreting Foreign 0"change@uotations %3'
Indirect )uotation 5 &
Airect )uotation
6oD with the 7 as the home currenc# D
8&*: 7& 5 7 %&4&*:' 8& or 7;*:,98&
International Financial Management, 2 nd edition
e!! Ma"ura an" #olan" $o%ISBN 978-1-4080-3229-9 © 2011 Cengage Learning EMEA
8/19/2019 International Financial Markets 03
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Cost and Management Accounting: An Introduction, 7 th edition
Colin DruryISBN 978-1-40803-213-9 © 2011 Cengage Learning EMEA
Interpreting Foreign 0"change@uotations %='
• E crosse"change rate reflects the amount of oneforeign currenc# per unit of another foreign currenc#*
0"ample Airect )uote 8&*97&( 8*;;G&?
In"ire+( ,uo(e .0)*7./1 111)11/1
Halue of 7 in ? 5 value of 7 in 8
alue o! in /
3
/1)0.1
/)0091
1**)*7.1International Financial Management, 2 nd edition
e!! Ma"ura an" #olan" $o%ISBN 978-1-4080-3229-9 © 2011 Cengage Learning EMEA
8/19/2019 International Financial Markets 03
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Cost and Management Accounting: An Introduction, 7 th edition
Colin DruryISBN 978-1-40803-213-9 © 2011 Cengage Learning EMEA
Currenc# Futures and
Options Market• Currenc# futures contracts specif# astandard volume of a particular currenc# tobe e"changed on a specific settlement date*The# are sold on e"changes( unlike forwardcontracts*
• Currenc# call %put' options give the right to
bu# %sell' a specific currenc# at a specificprice %called the strike or e"ercise price'within a specific period of time*
International Financial Management, 2 nd edition
e!! Ma"ura an" #olan" $o%ISBN 978-1-4080-3229-9 © 2011 Cengage Learning EMEA
8/19/2019 International Financial Markets 03
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Cost and Management Accounting: An Introduction, 7 th edition
Colin DruryISBN 978-1-40803-213-9 © 2011 Cengage Learning EMEA
International Mone#
Market %&'• Financial institutions in this market serve
M2Cs b# accepting deposits and offering
loans in a variet# of currencies*
International Financial Management, 2 nd edition
e!! Ma"ura an" #olan" $o%ISBN 978-1-4080-3229-9 © 2011 Cengage Learning EMEA
8/19/2019 International Financial Markets 03
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Cost and Management Accounting: An Introduction, 7 th edition
Colin DruryISBN 978-1-40803-213-9 © 2011 Cengage Learning EMEA
International Mone#
Market %,'• /oth the 0uropean and Esian mone#markets originated as markets involving
mostl# dollardenominated deposits*• The 0urocurrenc# market %market for0urodollars' developed during the &G:;sand &G;s( stimulated b# regulator#
changes in the $*6* and the growingimportance of OJ0C*
International Financial Management, 2 nd edition
e!! Ma"ura an" #olan" $o%ISBN 978-1-4080-3229-9 © 2011 Cengage Learning EMEA
8/19/2019 International Financial Markets 03
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Cost and Management Accounting: An Introduction, 7 th edition
Colin DruryISBN 978-1-40803-213-9 © 2011 Cengage Learning EMEA
International Mone#
Market %3'• The growing standardi.ation of globalbanking regulations has contributedtowards the globali.ation of the industr#* ! The 6ingle 0uropean Ect opened up the
0uropean banking industr# and increased itsefficienc#*
! The /asel Eccord outlined riskweighted capital
ade)uac# re)uirements for banks* ! The proposed /asel II Eccord attempts to
account for operational risk*
International Financial Management, 2 nd edition
e!! Ma"ura an" #olan" $o%ISBN 978-1-4080-3229-9 © 2011 Cengage Learning EMEA
8/19/2019 International Financial Markets 03
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Cost and Management Accounting: An Introduction, 7 th edition
Colin DruryISBN 978-1-40803-213-9 © 2011 Cengage Learning EMEA
International Credit Market %&'
• M2Cs sometimes obtain mediumterm fundsthrough banks located in foreign markets*
• 0urocredit loans refer to loans of one #ear orlonger e"tended b# banks in 0urope toforeign M2Cs or government agencies*
• Floating rate loans( such as those based on
the KI/OL( are common( since bank assetand liabilit# maturities ma# not match*
International Financial Management, 2 nd edition
e!! Ma"ura an" #olan" $o%ISBN 978-1-4080-3229-9 © 2011 Cengage Learning EMEA
8/19/2019 International Financial Markets 03
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Cost and Management Accounting: An Introduction, 7 th edition
Colin DruryISBN 978-1-40803-213-9 © 2011 Cengage Learning EMEA
International Credit Market %,'
• 6ometimes a single bank is unwilling orunable to lend the amount needed b# aparticular M2C or government agenc#*
• E lead bank ma# then organi.e a s#ndicate of banks to underwrite the loan*
• /orrowers that receive a s#ndicated loan
t#picall# incur frontend management andcommitment fees( in addition to the intereston the loan*
International Financial Management, 2 nd edition
e!! Ma"ura an" #olan" $o%ISBN 978-1-4080-3229-9 © 2011 Cengage Learning EMEA
8/19/2019 International Financial Markets 03
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Cost and Management Accounting: An Introduction, 7 th edition
Colin DruryISBN 978-1-40803-213-9 © 2011 Cengage Learning EMEA
International /ond Market
%&'There are two t#pes of international bonds&* /onds denominated in the currenc# of the
countr# where the# are placed but issuedb# borrowers foreign to the countr# arecalled foreign bonds or parallel bonds*
,* /onds that are sold in countries other than
the countr# of the currenc# denominatingthe bonds are called 0urobonds*
International Financial Management, 2 nd edition
e!! Ma"ura an" #olan" $o%ISBN 978-1-4080-3229-9 © 2011 Cengage Learning EMEA
8/19/2019 International Financial Markets 03
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Cost and Management Accounting: An Introduction, 7 th edition
Colin DruryISBN 978-1-40803-213-9 © 2011 Cengage Learning EMEA
International /ond Market
%,'• The emergence of the 0urobond marketwas partl# due to the &G:3 $*6* Interest0)uali.ation Ta" %I0T'* The# have becomever# popular( perhaps in part because the#circumvent registration re)uirements*
• $suall#( 0urobonds are issued in bearer
form( pa# annual coupons( and have callprovisions* 6ome also carr# convertibilit#
clauses( or have variable rate provisions*
International Financial Management, 2 nd edition
e!! Ma"ura an" #olan" $o%ISBN 978-1-4080-3229-9 © 2011 Cengage Learning EMEA
8/19/2019 International Financial Markets 03
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Cost and Management Accounting: An Introduction, 7 th edition
Colin DruryISBN 978-1-40803-213-9 © 2011 Cengage Learning EMEA
International /ond Market
%3'• ; to 9< of 0urobonds are denominatedin the $*6* dollar*
• 0urobonds are underwritten b# a multinational s#ndicate of investment banks andsimultaneousl# placed in man# countries*
• In the secondar# market( the market
makers are often the same underwriterswho sell the primar# issues*
International Financial Management, 2 nd edition
e!! Ma"ura an" #olan" $o%ISBN 978-1-4080-3229-9 © 2011 Cengage Learning EMEA
8/19/2019 International Financial Markets 03
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Cost and Management Accounting: An Introduction, 7 th edition
Colin DruryISBN 978-1-40803-213-9 © 2011 Cengage Learning EMEA
Comparing Interest LatesAnnualized Short-Term Interest Rates among Countries in 2001
International Financial Management, 2 nd edition
e!! Ma"ura an" #olan" $o%ISBN 978-1-4080-3229-9 © 2011 Cengage Learning EMEA
8/19/2019 International Financial Markets 03
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Cost and Management Accounting: An Introduction, 7 th edition
Colin DruryISBN 978-1-40803-213-9 © 2011 Cengage Learning EMEA
Comparing Interest Lates Emong Currencies
• Interest rates are crucial because the#affect the M2Cs cost of financing*
• The interest rate for a specific currenc# isdetermined b# the demand for and suppl#of funds in that currenc#*
• Es the demand and suppl# schedules fora specific currenc# change over time( thee)uilibrium interest rate will also change*
International Financial Management, 2 nd edition
e!! Ma"ura an" #olan" $o%ISBN 978-1-4080-3229-9 © 2011 Cengage Learning EMEA
8/19/2019 International Financial Markets 03
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Cost and Management Accounting: An Introduction, 7 th edition
Colin DruryISBN 978-1-40803-213-9 © 2011 Cengage Learning EMEA
5uan(i(y o!.6&
In(ere&(#a(e!or . S .
D.
5uan(i(y o! e&o&
In(ere&(#a(e!or
e&o&
S e&o
De&o
1h# $** Jound Interest LatesAiffer from 0uro Interest Lates
• The suppl# curve is lending( the demand curve isborrowing*
• The curves are higher for the Me"ican peso because of
the higher inflation and greater risk in Me"ico*
i e
i e
International Financial Management, 2 nd edition
e!! Ma"ura an" #olan" $o%ISBN 978-1-4080-3229-9 © 2011 Cengage Learning EMEA
8/19/2019 International Financial Markets 03
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Cost and Management Accounting: An Introduction, 7 th edition
Colin DruryISBN 978-1-40803-213-9 © 2011 Cengage Learning EMEA
International 6tock Markets
%&'• In addition to issuing stock locall#( M2Cs can
also obtain funds b# issuing stock ininternational markets*
• This will enhance the firms image and namerecognition( and diversif# their shareholderbase*
• E stock offering ma# also be more easil#digested when it is issued in several markets*
International Financial Management, 2 nd edition
e!! Ma"ura an" #olan" $o%ISBN 978-1-4080-3229-9 © 2011 Cengage Learning EMEA
8/19/2019 International Financial Markets 03
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Cost and Management Accounting: An Introduction, 7 th edition
Colin DruryISBN 978-1-40803-213-9 © 2011 Cengage Learning EMEA
International 6tock Markets
%,'• 6tock issued in the $*6* b# non$*6* firmsor governments are called +ankee stockofferings* Man# of such recent stock
offerings resulted from privati.ationprograms in Katin Emerica and 0urope*
• 2on$*6* firms ma# also issue Emerican
depositor# receipts %EALs'( which arecertificates representing bundles of stock*
International Financial Management, 2 nd edition
e!! Ma"ura an" #olan" $o%ISBN 978-1-4080-3229-9 © 2011 Cengage Learning EMEA
8/19/2019 International Financial Markets 03
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Cost and Management Accounting: An Introduction, 7 th edition
Colin DruryISBN 978-1-40803-213-9 © 2011 Cengage Learning EMEA
International 6tock Markets
%3'• The locations of an M2Cs operations caninfluence the decision about where to placeits stock( in view of the cash flows needed
to cover dividend pa#ments*
• Market characteristics are important too*6tock markets ma# differ in si.e( trading
activit# level( and proportion of individualversus institutional share ownership*
International Financial Management, 2 nd edition
e!! Ma"ura an" #olan" $o%ISBN 978-1-4080-3229-9 © 2011 Cengage Learning EMEA
8/19/2019 International Financial Markets 03
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Cost and Management Accounting: An Introduction, 7 th edition
Colin DruryISBN 978-1-40803-213-9 © 2011 Cengage Learning EMEA
Comparison of InternationalFinancial Markets
• The foreign cash flow movements of at#pical M2C can be classified into
&* Foreign tradeNe"ports and imports
,* Airect foreign investment %AFI'Nac)uisitionof foreign real assets
3* 6hortterm investment or financing in foreign
securities=* Kongerterm financing in the international
bond or stock markets
International Financial Management, 2 nd edition
e!! Ma"ura an" #olan" $o%ISBN 978-1-4080-3229-9 © 2011 Cengage Learning EMEA
8/19/2019 International Financial Markets 03
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Cost and Management Accounting: An Introduction, 7 th edition
Colin DruryISBN 978-1-40803-213-9 © 2011 Cengage Learning EMEA
$oreign Ca& $lo Car( o! an MNC
In(erna(ional Money
Mar'e(&
In(erna(ionalCre"i( Mar'e(& In(erna(ional
S(o+' Mar'e(&
E%or(:I;or(
Long-
8/19/2019 International Financial Markets 03
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Cost and Management Accounting: An Introduction, 7 th edition
Colin DruryISBN 9 8 1 40803 213 9 © 2011 C i EMEA
ow Financial Markets Effectan M2Cs Halue
• 6ince interest rates commonl# var#among countries( an M2C ma# use theinternational financial markets to reduce
its cost of capital( thereb# achieving ahigher valuation*
International Financial Management, 2 nd edition
e!! Ma"ura an" #olan" $o%ISBN 9 8 1 4080 3229 9 © 2011 C i EMEA
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