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