1. Developed by Cool Pictures and MultiMedia Presentations Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Developed by Cool Pictures and MultiMedia Presentations Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved.

2. Developed by Cool Pictures and MultiMedia Presentations Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved. What We Are Striving To Accomplish 1.To understand exchange rates and find out how currencies are traded and quoted on world financial markets. 2.To examine how the international currency-exchange system evolved and to understand the difference between fixed and floating rates of exchange. 3.To realize the value of eurocurrency accounts - accounts that are free of governmental interference - to the conduct of international business. 4.To explore the similarities and differences between domestic sources of capital and international sources of capital. 5.To explain how international bond and equities markets meet the diverse borrowing and investing needs of corporations that trade overseas.

3. Developed by Cool Pictures and MultiMedia Presentations Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Exchange Rates Products must be purchased in the same currency as the country the product is sold from thus an exchange rate is necessary to convert on country’s currency into another’s. The theory that the prices of tradable goods will tend to equalize across countries is called purchase power parity (PPP). Sometimes the exchange rates can be estimated by the Law of One Price theory.

4. Developed by Cool Pictures and MultiMedia Presentations Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Currencies Market Direct Exchange Quotation Amount of home country currency needed to purchase one unit of foreign currency. Indirect Exchange Quotation Units of foreign currency that could be purchased with one unit of home currency. Spot Exchange Rates Contracts that provide for two parties to exchange currencies, with delivery in two business days. Forward Exchange Rates Contracts that provide for two parties to exchange currencies on a future date at an agreed upon exchange rate.

5. Developed by Cool Pictures and MultiMedia Presentations Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Exchanging Currencies Triangular Arbitrage Making a profit through currency by exchanging one currency for a second, the second for a third, and the third back to the first. Cross Rates Exchange rate quotations which do not include the U.S. dollar as one of the two currencies quoted. American Terms Quoting a currency rate as the U.S. dollar against another country’s currency. European Terms Quoting a currency rate as a country’s currency against the U.S. dollar.

6. Developed by Cool Pictures and MultiMedia Presentations Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Evolution of the Global Monetary System The Gold Standard, 1880’s through outbreak of WWI Consisted of: fixed rate of exchange, “money” backed by gold reserves, gold acted as an automatic adjustment if trade or investment imbalances occurred. Floating Exchange Rates, 1973- Present Floating value of currency versus each other, direct intervention, external and domestic economic policy action, coordinated intervention. The Bretton Woods Agreement, 1944-1971 44 countries agreed on the plan. Plan established: “adjustable peg”, International Monetary Fund, and the World Bank. 25 years of stability. Times of Crisis, 1971-1973 Nixon suspends dollar conversion into gold, U.S. dollar devalued, world currencies revalued and allowed to vary, chaos ensued. Interwar Years, 1919-1939 British pound sterling weakened, U.S. returned to gold standard until 1930’s, countries resorted to isolationist policies and protectionism

7. Developed by Cool Pictures and MultiMedia Presentations Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Eurocurrency Markets Eurodollars - U.S. dollars deposited in banks outside the United States; not confined to Europe. Eurocurrency - bank deposit in a currency other than the currency of the country where the bank is located; not confined to banks in Europe. Eurocurrency accounts are not controlled or managed by governments Interbank Interest Rates - interest rate charged by banks to banks in the major international financial centers. Euromarkets - money and capital markets in which transactions are denominated in a currency other than that of the place of the transaction.

8. Developed by Cool Pictures and MultiMedia Presentations Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Eurocurrency Interest Rates Eurocurrencies are one of the purest indicators of what currencies should yield in terms of interest.

9. Developed by Cool Pictures and MultiMedia Presentations Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved. International Capital Markets Serve as links among capital markets of individual countries. Through them firms can raise capital; with debit or equity with fixed or floating interest rates in any of a dozen currencies maturities range from one month to thirty years European Investment Bank

10. Developed by Cool Pictures and MultiMedia Presentations Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved. International Financing Characteristics to consider: Is borrower domestic or foreign Is borrower raising capital denominated in the domestic currency or foreign currency Four categories of financial transactions Categorizing International Financial Transactions: Issuing Bonds in London

11. Developed by Cool Pictures and MultiMedia Presentations Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Structure of International Banking Correspondent banks - based in a foreign country (unrelated by ownership). Representative office - sales office for an international bank located in a foreign country; cannot accept deposits or make loans.

12. Developed by Cool Pictures and MultiMedia Presentations Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved. International Bond Market Provides the bulk of financing Foreign bonds - issued by a foreign corporation or government for sale in a country different from its home country, and denominated in the currency of the country in which it is issued. Bearer bond - bond owned officially by whoever is holding it. Eurobond - bond that is denominated in a currency other than the currency of the country in which the bond is sold.

13. Developed by Cool Pictures and MultiMedia Presentations Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved. International Equities Markets Purpose of foreign listings and issues Expand investor base to gain access into capital markets by listing stocks on major foreign exchanges.