FINC3240 International Finance Chapter 3 International

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FINC3240International Finance

• Chapter 3
• International Financial Markets

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Markets

• A. Foreign Exchange Market
• B. International Money Markets
• C. International Credit Market
• D. International Bond Market
• E. International Stock Markets

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Foreign Exchange Market

• a. Spot Markets and spot rate
• b. Spot Markets Time Zones
• Biggest trader Deutsche Bank, Citibank, J.P.
  Morgan Chase
• Biggest trading center London, New York, Tokyo

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Foreign Exchange Market

• c. Forward Markets and forward rate
• d. Futures Markets
• e. Options Markets

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Foreign Exchange Quotations

• 1. Direct vs. Indirect Quotes
• the direct quote is the local currency price of
  one unit of foreign currency. e.g. 1.3855/
• the indirect quote is the foreign currency price
  of one unit of local currency. e.g. 0.7218/
• 2. Cross Exchange Rates
• the amount of one foreign currency per unit of
  another foreign currency.
• e.g. 0.0700/peso 0.7000/c c/peso?

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Exhibit 3.2 Direct and Indirect Exchange Rate
Quotations
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Cross Exchange Rates

• Exchange rate between two non-dollar currencies
  can be calculated based on their respective
  quotations relative to the US dollar.
• e.g.
• 1 British Pound 1.7867 USD
• 1 Euro 1.2186 USD
• Cross rate
• Euro/GBP(1.7867 USD/GBP) x (0.8206 Euro/USD)
• 1.4662 Euro/GBP

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Bid/Ask Spread

• Exchange rates are typically quoted by banks on
  a Bid/Ask basis the quotations found in
  newspapers are usually Bid/Ask Averages.
• BidBuy AskSell
• bid/ask spread

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Exhibit 3.1 Computation of the Bid/Ask Spread
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Foreign Exchange Derivatives

• Foreign Exchange (Currency) Forward, Futures,
  and Options are contracts that
• 1) specify a fixed amount of currency
• 2) to be purchased at a predetermined exchange
  rate
• 3) at a specified time

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International Money Markets

• 1. Domestic money market
• short-term borrowings or securities that mature
  within one year.
• 2. International money market
• Dont be constrained, go outside to find more
  opportunities!
• e.g. Eurodollars

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International Money Markets

• Why firms or individuals would borrow in
  international money markets?
• 1. firms need foreign currency for a short-term
  to do international business
• 2. the cost of borrowing abroad may be lower
• 3. better off if borrow a foreign currency that
  will depreciate against home currency
• Why firms or individuals would invest in
  international money markets?
• 1. the interest earned from investing abroad may
  be higher
• 2. better off if investing in a foreign currency
  that will appreciate against home currency

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International Credit Market

• 1. Eurocredit Market
• a. Eurocredit loans (5 years)
• b. London Interbank Offer Rate (LIBOR)
• e.g. LIBOR plus 3 percent
• 2. Syndicated Loans
• When banks are unwilling or unable to process a
  very large loan they form groups know as
  syndicates

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International Bond Market

• 1. Long-term debt (10 years)
• 2. Foreign bond vs. Eurobond
• Foreign bond bonds issued by a borrower foreign
  to the country where the bond is placed. E.g. A
  U.S. borrower issues a bond denominated in
  Japanese yen and sell to investors in Japan.
• Eurobond bonds sold in countries other than the
  country of the currency denominating the bonds.

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International Stock Markets

• 1. Issuance of Stock in Foreign Markets
• 2. Issuance of Stock by Non-U.S. Firms in the
  U.S.
• 3. American Depository Receipts (ADRs)
• 4. Stock Market Characteristics Vary Among
  Countries
• voting rights for shareholders, legal
  protection, enforcement of laws, corruption,
  accounting requirements
• 5. Co-movement of International Stock Markets

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Exhibit 3.4 Comparison of Global Stock Exchanges
Source World Development Indicators, World Bank
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Example 1

• Explain how the appreciation of the Australian
  dollar against the U.S. dollar would affect the
  return to a U.S. firm that invested in an
  Australian money market security.

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Example 2

• Utah Banks bid price for Canadian dollar is
  .7938 and its ask price is .81. what is the
  bid/ask percentage spread?

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Example 3

• Assume Polands currency (the zloty) is worth
  .17 and the Japanese yen is worth .008. what is
  the cross rate of the zloty with respect to yen?
  That is, how many yen equal a zloty?

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Summary

• Different international financial markets
• Exchange rate quotations
• Homework
• QA 4,7,8,10,12,16,18,22,24.