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Week 1: What is International Finance? - Coggle Diagram
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