Week 1: What is International Finance?

What is IF?

Multinational Enterprise (MNE): has operating branches, subsidiaries, or affiliates located in foreign countries

The global financial marketplace

Assets: debt securities issued by governments, baseline for other forms of financing

Institutions: central banks, commercial, and investment banks which keeps the global financial system stable

Linkages: interbank networks using currency

graph: page 7

The market for currencies

Financial Globalization and Risk

The Fisher equation

nominal interest rate = real interest rate + expected inflation rate (i = r + pi)

more details (page 20)

inflation > nominal interest rates => real interest rates can be negative (example: p22&23)

nominal rates can be negative (weak world growth, deflation)

deflation is bad because it leads to rise the real value of debt

Interventions (to solve deflation problem)

Quantitative easing (QE): central bank buying longer- term government bonds => increase money supply

Set negative nominal interest rates (negative benchmark deposit rates)

Structure of Foreign Exchange Market

The market is based on

market information and expectations

negotiating strength

supply and demand

When the Asian- based trading centers overlap, the global currency markets exhibit the greatest depth and liquidity (?)

Market participants (page 35)

Size of the Foreign Exchange Market (p.36&37)

Foreign Exchange Rates and Quotations

A foreign exchange rate: price of one currency expressed in terms of another currency

A foreign exchange quotation (or quote): a statement of willingness to buy or sell at an announced rate

base (unit) currency: in the numerator

price (quote) currency: in the denominator

Direct quote: home currency/ foreign currency (home currency will be price currency)

Indirect quote: foreign currency/ home currency

Interbank quotations are given as a bid and ask

quote: bid/ ask

mid- point quote: average of bid and ask

many currency pairs are only inactively traded => their exchange rate is determined through their relationship to a widely traded third currency (cross rate)

Intermarket arbitrage (p.44) - Example page 45 (a little bit complicated)

Forward quotation (p.46&47): should read more - too sleepy rn