international business, 5 th edition chapter 8 foreign exchange and international financial markets

8-2 Chapter Objectives 1 Describe how demand and supply determine the price of foreign exchange Discuss the role of international banks in the foreign-exchange market Assess the different ways firms can use the spot and forward markets to settle international transactions

8-3 Chapter Objectives 2 Summarize the role of arbitrage in the foreign-exchange market Discuss the important aspects of the international capital market

8-4 Foreign Exchange Foreign exchange is a commodity that consists of currencies issued by countries other than one’s own.

8-5 Figure 8.1 Demand for Yen Demand for Japanese Yen is Derived from Foreigner’s Demand for Japanese Products

8-6 Figure 8.2 Supply of Yen Supply for Japanese Yen is Derived from Japanese Demand for Foreign Products

8-7 Figure 8.3 The Market for Yen

8-8 Foreign-Exchange Rates Direct exchange rate –Direct quote –Price of the foreign currency in terms of home currency Indirect exchange rate –Indirect quote –Price of the home country in terms of the foreign currency

8-9 Figure 8.4 Direct and Indirect Exchange Rates

8-10 Map 8.1 A Day of Foreign-Exchange Trading

8-11 Foreign-Exchange Trading The Chinese foreign- exchange trader is an important link in the $1.9 trillion-per-day global exchange market.

8-12 Figure 8.5 Currencies Involved in Foreign- Exchange Market Transactions

8-13 The Role of Banks Buy or sell major traded currencies Markets –Wholesale market –Retail market

8-14 Bank Foreign Exchange Clients Commercial customers Speculators Arbitrageurs

8-15 Spot and Forward Markets CurrencyU.S. $ Equivalent per U.S. $ Wed.Tues.Wed.Tues. Britain (Pound) Day Forward Day Forward Day Forward

8-16 Mechanisms for Future Foreign Exchanges Currency future Currency option –Call option –Put option

8-17 Arbitrage Arbitrage is the riskless purchase of a product in one market for immediate resale in a second market in order to profit from a price discrepancy. There are two types of arbitrage activities that affect the foreign-exchange market: arbitrage of goods and arbitrage of money.

8-18 Arbitrage of Goods Arbitrage of Money

8-19 Arbitrage of Money Two-point Covered-interestThree-point

8-20 Figure 8.6 Three-Point Arbitrage

8-21 Table 8.1 The World’s Largest Banks Citigroup Fortis Credit Agricole HSBC Holdings BNP paribas UBS Bank of America J.P. Morgan & Chase Co. Deutsche Bank HBOS

8-22 Establishment of Overseas Banking Operations Subsidiary bank Affiliated bankBranch bank

8-23 The Eurocurrency Market Originated in the early 1950s Eurodollars – U.S. dollars deposited in European bank accounts –Euroyen –Europounds Eurocurrency – currency on deposit outside in banks worldwide Euroloans quoted on basis of LIBOR

8-24 The International Bond Market Major source of debt financing for –World’s governments –International organizations –Larger firms Two types of bonds –Foreign bonds –Eurobonds

8-25 Figure 8.7 International Bond Issues 2005, by Currency (in billions of U.S. dollars)

8-26 Global Equity Markets Start-up companies are no longer restricted to raising new equity only from domestic sources Development of country funds –Mutual fund specializing in a given country’s funds

8-27 Offshore Financial Centers Focus on offering banking and other financial services to nonresident customers Locations –Bahamas, Bahrain, the Cayman Islands, Bermuda, the Netherlands Antilles, Singapore, Luxembourg, Switzerland