1. International Financial Markets Antony Mueller The Continental Economics Institute www.continentaleconomics.com

2. Investing abroad Investing in stocks, bonds, real estate, direct investment, mergers and acquisitions, derivatives Investing in stocks, bonds, real estate, direct investment, mergers and acquisitions, derivatives Aims: Market share, market access, cost efficiency, diversification Aims: Market share, market access, cost efficiency, diversification Additional risks: country risk in the form of political risk, payment risk, currency risk Additional risks: country risk in the form of political risk, payment risk, currency risk

3. Diversification The right kind of diversification will reduce risk without loss of revenue or increase revenue at the same overall risk level The right kind of diversification will reduce risk without loss of revenue or increase revenue at the same overall risk level Problem: With increased internationalization, the diversification effect has been lowered, particularly with stocks and bonds Problem: With increased internationalization, the diversification effect has been lowered, particularly with stocks and bonds Currency diversification still intact Currency diversification still intact

4. Hedging Hedging and Speculation bilateral Hedging and Speculation bilateral Any selling needs buying Any selling needs buying Different expectations and needs make markets Different expectations and needs make markets Futures markets serve this need Futures markets serve this need Derivatives: futures and options, over-the- counter (OTC) Derivatives: futures and options, over-the- counter (OTC)

5. Techniques Short: right to sell Short: right to sell Long: right to buy Long: right to buy Sell short Sell short Buy short Buy short Sell long Sell long Buy long Buy long

6. Operations Sell – Buy + Short – Long + Sell – Buy + Short – Long + Winning market direction +/- Winning market direction +/- -. - = + -. - = + +. + = + +. + = + -. + = - -. + = - +. - = - +. - = -

7. Currency speculation Dollar short versus Euro Dollar short versus Euro You buy dollars now, exchange into Euros You buy dollars now, exchange into Euros Leverage through borrowing Leverage through borrowing You have a liability in dollars You have a liability in dollars You have asset in euros You have asset in euros Risk is interest rate differential Risk is interest rate differential

8. Currency hedging Exporter expects dollar income in the future Exporter expects dollar income in the future He sells dollars now on the futures market He sells dollars now on the futures market Importer has to pay dollar bill in the future Importer has to pay dollar bill in the future He buys dollars now on the futures market He buys dollars now on the futures market Speculators make the market more liquid Speculators make the market more liquid

9. Options Calls and puts and combinations Calls and puts and combinations Call +, put – Call +, put – Same basic arithmetic as in slide 6 Same basic arithmetic as in slide 6 However, seller earns premium, buyer pays premium However, seller earns premium, buyer pays premium You sell a put, win when quotation rises You sell a put, win when quotation rises You buy a put, win when quotations falls You buy a put, win when quotations falls

10. Financial Engineering Highly complex and mathematical Highly complex and mathematical Discussion whether it is market stabilizing or has increased systematic risk Discussion whether it is market stabilizing or has increased systematic risk Risk of chain reaction (LTCM) Risk of chain reaction (LTCM) “fat tails”-problem “fat tails”-problem Historical volatilities, regression to the mean, monetary policy, liquidity Historical volatilities, regression to the mean, monetary policy, liquidity