1. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. International Financial Management 10 th Edition by Jeff Madura 1

2. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2 3 International Financial Markets Chapter Objectives This chapter will describe the: A. Foreign exchange market B. International money market C. International credit market D. International bond market E. International stock markets 2

3. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3 Foreign Exchange Market 1.Allows for the exchange of one currency for another. 2.Exchange rate specifies the rate at which one currency can be exchanged for another.

4. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4 History of Foreign Exchange 1.Gold Standard (1876 – 1913) 2.Agreements on Fixed Exchange Rates a.Bretton Woods Agreement 1944 b.Smithsonian Agreement 1971 3.Floating Exchange Rate System

5. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5 Foreign Exchange Transactions 1.Over the counter market 2.Foreign exchange dealers serve as intermediaries 3.Spot Market: transaction for immediate exchange at the spot rate.

6. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6 Spot Market 1.Spot market structure: electronic 2.Use of the Dollar in the spot market: commonly accepted medium of exchange 3.Spot market time zones 4.Spot market liquidity: more buyers and sellers means more liquidity

7. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7 Attributes of Banks That Provide Foreign Exchange 1.Competitiveness of quote 2.Special relationship with the bank 3.Speed of execution 4.Advice about current market conditions 5.Forecasting advice

8. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8 Foreign Exchange Quotations

9. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9 Factors That Affect the Spread 1.Order costs 2.Inventory costs 3.Competition 4.Volume 5.Currency risk

10. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 10 Interpreting Foreign Exchange Quotations 1.Direct Quotation represents the value of a foreign currency in dollars (number of dollars per currency) Example: $1.40 per Euro 2.Indirect quotation represents the number of units of a foreign currency per dollar Example: €0.7143 per Dollar 3.Cross Exchange Rates: exchange rate between two nondollar currencies.

11. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 11 Forward, Futures, and Option Markets 1.Forward Contracts: agreements between a foreign exchange dealer and an MNC that specifies the currencies to be exchanged, the exchange rate, and the date at which the transaction will occur. 2.Futures Contracts: similar to forward contracts but sold on an exchange 3.Option Contracts a.Currency Call Option: provides the right to buy currency at a specified strike price within a specified period of time. b.Currency Put Option: provides the right to sell currency at specified strike price within a specified period of time.

12. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 12 International Money Market 1.Corporations or governments in a particular country need for short-term funds denominated in a currency different from their home currency. 2.Reasons for international money market: a.Need to borrow funds to pay for imports denominated in a foreign currency. b.Borrowing in a currency in which the interest rate is lower.

13. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13 Origins and Development 1.European Money Market: Dollar deposits in banks in Europe and other continents are called Eurodollars or Eurocurrency. 2.Asian Money Market: centered in Hong Kong and Singapore

14. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 14 Standardized Global Bank Regulations 1.Single European Act 2.Basel Accord 3.Basel II Accord

15. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 15 International Credit Market 1.Eurocredit Market: loans denominated in dollars or other currencies often maturities of 5 years. 2.London Interbank Offer Rate (LIBOR): rate charged for loans between banks 3.Syndicated Loans

16. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 16 International Bond Market 1.Foreign bonds: issued by borrower foreign to the country where the bond is placed. 2.Eurobonds: bonds sold in countries other than the country of the currency denominating the bond

17. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 17 Eurobonds 1.Features: a.Bearer bonds b.Annual coupon payments c.Convertible or callable 2.Denominations 3.Underwriting Process a.multinational syndicate 4.Secondary Market

18. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 18 International Stock Markets 1.Issuance of Stock in Foreign Markets 2.Issuance of Foreign Stock in the U.S. a.Yankee stock offerings b.American Depository Receipts (ADR)

19. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 19 Exhibit 3.5 Comparison of Stock Exchanges (as of 2008) 19

20. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 20 Exhibit 3.6 Impact of Governance on Stock Market Participation and Trading Activity 20

21. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 21 Exhibit 3.7 Foreign Cash Flow Chart of an MNC 21