International Financial Markets 03

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


2/32



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




3/32



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*




4/32



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*




5/32



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*




6/32



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*




7/32



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*




8/32



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*




9/32



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




10/32



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*




11/32



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#*




12/32



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&




13/32



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&




14/32



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



15/32



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*




16/32



International Mone#

Market %&'• Financial institutions in this market serve

M2Cs b# accepting deposits and offering

loans in a variet# of currencies*




17/32



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*




18/32



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*




19/32



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*




20/32



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*




21/32



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*




22/32




%,'• 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*




23/32




%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*




24/32



Comparing Interest LatesAnnualized Short-Term Interest Rates among Countries in 2001




25/32



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*




26/32



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




27/32



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*




28/32




%,'• 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*




29/32




%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*




30/32



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




31/32



$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-


32/32


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*


e!! Ma"ura an" #olan" $o%ISBN 9 8 1 4080 3229 9 © 2011 C i EMEA

Documents

International Financial Markets 03