1. The International Financial System
INTERNATIONAL BUSINESS
CHAPTER IX
INTERNATIONAL FINANCIAL MARKETS
The International Financial System

2. Learning Objectives
Discuss the purposes, development, and financial centers of the international capital market.
Describe the international bond, international equity, and Eurocurrency markets.
Discuss the four primary functions of the foreign exchange market
Explain how currencies are quoted and the different rates given
Identify the main instruments and institutions of the foreign exchange market
Explain why and how government restrict currency convertibility

3. INTERNATIONAL CAPITAL MARKET
System that allocates financial resources in the form of debt and equity according to their most efficient uses.

4. INTERNATIONAL CAPITAL MARKET
Purposes of National Capital Markets
Purpose of the International Capital Market
Forces Expanding the International Capital Market
World Financial Centers

5. Purposes of National Capital Markets
National Capital Markets help individuals and
institutions borrow the money that other
individuals and institutions want to lend.

6. Purposes of National Capital Markets
The most common Capital-Market Intermediaries:
Commercial Banks Lend borrowers their investors’ deposits at a specific rate of interest
Investment Banks Help clients to invest excess capital and to borrow need capital.

7. Purposes of National Capital Markets
Role of Debt
Role of Equity

8. Role of Debt
Debt: Loans in which the borrowers promises to repay the borrowed amount plus a predetermined rate of interest.
Bond: Debt instrument that specifies the timing of principal and interest payments.

9. Role of Equity
Equity: Part-ownership of a company in which the equity holder participates with other part owners in the company’s financial gains and losses
Stock: Shares of ownership in a company’s assets that give shareholders a claim on the company’s future cash flows

10. Role of Equity
Liquidity: Ease with which bondholders and shareholders may convert their investments into cash.

11. Purposes of National Capital Markets
Equity
Share
Bond
Company
Assets
Stock
Debt

12. Purposes of the International Capital Markets
International Capital Market : Network of individuals, companies financial institutions, and governments that invest and borrow across national boundaries.

13. Purposes of the International Capital Markets
Expanding the Money Supply for Borrowers
Reducing the Cost of Money for Borrowers
Reducing Risk for Lenders

14. Reducing Risk for Lenders
Two Ways:
Investors enjoy a greater set of opportunities from which to choose.
Investing in international securities benefits investors because some economies are growing while others are in decline.

15. Forces Expanding the International Capital Market
Information Technology
Deregulation
Financial Instruments.

16. Forces Expanding the International Capital Market
Securitization : Unbundling and repacking of hard-to-trade financial assets into more liquid, negotiable, and marketable financial instruments( or securities)

17. World Financial Centers

18. World Financial Centers
Offshore financial center: Country or
territory whose financial sector features
very few regulations and few, if any, taxes.

19. MAIN COMPONENTS OF THE INTERNATIONAL CAPITAL MARKET
International Bond Market
International Equity Market
Eurocurrency Market

20. International Bond Market
Market consisting of all bonds sold by issuing
companies, government, or other organizations outside their own countries .

21. International Bond Market
Types of International Bonds
Interest Rates

22. Types of International Bonds
Eurobond
Foreign Bond.

23. Eurobond Eurobond Bond issued outside the country in whose
currency it is denominated.

24. Foreign bond Foreign bond
Bond sold outside the borrower’s country and denominated in the currency of the country in which it is sold .

25. Interest Rates
A Driving Force
How can investors who are seeking higher returns and borrowers who are seeking to pay lower interest rates both come out ahead?
By using bonds in the international bond market, borrowers from newly industrialized and developing countries can borrow money from other nations where interest rates are lower.
Investors in developed countries buy bonds in newly industrialized and developing nations in order to obtain higher returns on their investments.

26. International Equity Market
Market consisting of all stocks bought and sold outside the issuer’s home country.

27. International Equity Market
Spread of Privatization
Economic Growth in Developing Countries.
Activity of Investment Banks
Advent of Cybermarkets

28. Eurocurrency Market Eurocurrency market
Market consisting of all the world’s currencies ( referred to as “Eurocurrency” ) that are banked outside their countries of origin.

29. Eurocurrency Market Deposits Originate Primarily from Four Sources:
Governments with excess funds generated by a prolonged trade surplus
Commercial Banks with large deposits of excess currency
International companies with large amounts of excess cash
Extremely wealthy individuals.

30. Eurocurrency Market Interbank Interest Rates
Interest rates that the world’s largest banks charge one another for loans.

31. FOREIGN EXCHANGE MARKET
Market in which currencies are bought
and sold and their prices determined .

32. FOREIGN EXCHANGE MARKET
Exchange rate
Rate at which one currency is exchange
for another .

33. Functions of the Foreign Exchange Market
Currency Conversion
Currency Hedging
Currency Arbitrage
Currency Speculation

34. Functions of the Foreign Exchange Market
Currency Hedging
Practice of insuring against potential losses that result from adverse changes in exchange rates .

35. Functions of the Foreign Exchange Market
Currency Arbitrage
Instantaneous purchase and sale of a currency in different markets for profit.

36. Functions of the Foreign Exchange Market
Interest arbitrage
Profit-motivated purchase and sale of interest-paying securities denominated in different currencies.

37. Functions of the Foreign Exchange Market
Currency speculation
Purchase or sale of a currency with the expectation that its value will change and generate a profit .

38. HOW THE FOREIGN EXCHANGE MARKET WORKS
Quoting Currencies
Spot Rates
Forward Rates
Swaps, Options, and Futures.

39. Quoting Currencies
Quoted Currency: In a quoted exchange rate ,the currency with which another currency is to be purchased.
Base Currency: In a quoted exchange rate, the currency that is to be purchased with another currency.

40. Quoting Currencies Direct and Indirect Rate Quotes
Calculating Percent Change
Cross Rates

41. Spot Rates
Spot Rate: Exchange rate requiring delivery of the traded currency within 2 business days.
Spot Market: Market for currency transactions at spot rates.

42. Forward Rates
Forward Rate: Exchange rate a which two parties agree to exchange currencies on a specified future date.
Forward Market: Market for currency transactions at forward rates .

43. Forward Rates
Forward contract: Contract that requires the exchange of an agreed-upon amount of a currency on an agreed-upon date at a specific exchange rate .
Derivative: Financial instrument whose value derives from other commodities or financial instruments

44. Swaps, Options, and Futures
Currency Swap: Simultaneous purchase and sale of foreign exchange for two different dates.
Currency Option: Right, or option ,to exchange a specific amount of a currency on a specific date at a specific rate.

45. Swaps, Options, and Futures
Currency Futures Contract: Contract requiring the exchange of a specific amount of currency on a specific date at a specific exchange rate, with all conditions fixed and not adjustable.

46. FOREIGN EXCHANGE MARKET TODAY
Trading Centers
Important currencies
Institutions of the Foreign Exchange
Market

47. Trading Centers
Most of world’s mayor cities participate in trading on the foreign exchange market.
Three mayor cities:
The United Kingdom
The United States
Japan

48. Important Currencies
Vehicle currencies: Currency used as an intermediary to convert funds between two other currencies.

49. Institutions of the Foreign Exchange Market
Interbank Market
Securities Exchanges
Over-the-Counter Market

50. Interbank Market
Interbank Market: Market in which the world’s largest banks exchange currencies at spot and forward rates.
Clearing: Process of aggregating the currencies that one bank owes another and them carrying out the transaction.

51. Securities Exchange
Securities Exchange: Exchange specializing in currency futures and options transactions.

52. Over-the- Counter Market
Over-the- counter (OTC) market: Exchange consisting of a global computer network of foreign exchange traders and other market participants.

53. CURRENCY CONVERTIBILITY
Convertible (hard) Currency: Currency that trades freely in the foreign exchange market, with its price determined by the forces of supply and demand.

54. CURRENCY CONVERTIBILITY
Goals of Currency Restriction
Policies for Restricting Currencies

55. Goals of Currency Restriction
To preserve a country reserve of hard currencies.
To preserve hard currencies to pay for imports and to finance trade deficits.
To protect a currency from speculators.

56. Policies for Restricting Currencies
Restrict currencies convertibility
Government’s requires:
Foreign exchange transactions be performed at or approved by the country’s central banks.
Import licenses for some or all import transactions.

57. Policies for Restricting Currencies
Countertrade: Practice of selling goods or services that are paid for , in whole or part ,with other goods or services.

58. THE END