International Financial Markets

– The international capital market

• A capital market is a system that allocates financial resources in the forms of debt and equity according to their most efficient uses.

• National vs. International capital markets

– The foreign exchange market

• Market in which currencies are bought and sold and in which currency prices are determined.

Purposes of Purposes of National Capital National Capital

MarketsMarkets

The RoleThe Roleof Debtof Debt

The RoleThe Roleof Equityof Equity

Purposes of the Purposes of the International Capital MarketInternational Capital Market

Expanding the Money SupplyExpanding the Money Supply

Reducing the Cost of MoneyReducing the Cost of Money

Minimizing Investor RiskMinimizing Investor Risk

CapitalCapitalMarketMarket

ExpansionExpansionForcesForces

DeregulationDeregulation

InformationInformationTechnologyTechnology

FinancialFinancialInstrumentsInstruments

Debt Flowing Into Emerging Markets

$0

$20

$40

$60

$80

$100

$120

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

Year

Pri

vate

Deb

t F

low

(no

ng

ove

rnm

ent

deb

t) (

U.S

. $

bill

ion

s)

Non-FDI Flows Into Emerging Markets

$0

$10

$20

$30

$40

$50

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

Year

Flo

w o

f P

ort

folio

Eq

uit

y(n

on

dir

ect

inve

stm

ent)

(U

.S. $

b

illio

ns)

Eurocurrency MarketEurocurrency Market

TypicalTypicalBuyersBuyers

PatternsPatternsof Growthof Growth

Risks andRisks andRewardsRewards

Functions of the Foreign Exchange Market

Currency Conversion

Currency Hedging

Currency Arbitrage

Interest Arbitrage

Currency Speculation