Please enable JavaScript.
Coggle requires JavaScript to display documents.
International Financial Markets - Coggle Diagram
International Financial Markets
International Money Market
Corporations or governments need short-term funds denominated in a currency different from their home currency.
The international money market has grown because firm
s:
May need to borrow funds to pay for imports
denominated in a foreign currency.
May choose to borrow in a currency in which the interest rate is lower.
May choose to borrow in a currency that is expected to depreciate against their home currency
Origins and Development :
European Money Market
Asian Money Market
Money Market Interest Rates Among Currencies
Money market rates vary due to differences in the interaction of the total supply of short-term funds available (bank deposits) in a specific country versus the total demand for short-term funds by borrowers in that country
Global Integration of Money Market Interest Rates
Risk of International Money Market Securities
International Credit Market
MNCs sometimes obtain medium-term funds through term loans from local financial institutions or through the issuance of notes (medium-term debt obligations) in their local markets
Loans of 1 year or longer extended by banks to MNCs or government agencies in Europe are commonly called Eurocredits or Eurocredit loans
To avoid interest rate risk, banks commonly use floating rate loans with rates tied to the London Interbank Offer Rate (LIBOR)
Syndicated Loans in the Credit Market
Regulations in the Credit Market
Single European Act
Basel Accord
Basel II Accord
Basel III Accord
Impact of the Credit Crisis on the Credit Market
Foreign Exchange Market
History of Foreign Exchange
Gold Standard (1876 - 1913)
Agreements on Fixed Exchange Rates
Floating Exchange Rate System
Foreign Exchange Transactions
Foreign exchange dealers
Spot Market
Use of the dollar in spot markets
Spot market time zones
Spot market liquidity
Attributes of Banks That Provide Foreign Exchange
Competitiveness of quote
Competitiveness of quote
Advice about current market conditions
Forecasting advice
Speed of execution
Foreign Exchange Quotations
Bid/Ask spread of banks
Factors That Affect the Spread
Order costs
Inventory costs
Currency risk
Volume
Competition
Comparison of Bid/Ask spread among currencies
Bid/Ask spread=
(ask rate-bid rate )/ask rate
Interpreting Foreign Exchange Quotations
Direct versus indirect quotations at one point in time
Direct Quotation
Indirect quotation
Direct versus indirect exchange rate over time
Source of exchange rate quotations
Cross Exchange Rates
Currency Derivatives
Forward Contracts
Currency futures contracts
Currency Options Contracts
Currency Call Option
Currency Put Option
INTERNATIONAL
BOND MARKET
Foreign bonds: are issued by borrower foreign to the
country where the bond is placed
Eurobonds
Features of Eurobonds
Bearer bonds
Annual coupon payments
Convertible or callable
Denominations of Eurobonds: Commonly denominated in a number of currencies
Secondary Market: Market makers are in many cases the same underwriters who sell the primary issues
Development of
Other Bond Markets
Have developed in Asia and South America
Yields among countries tend to be highly correlated over time
When economic conditions weaken, aggregate demand for funds
declines with the decline in corporate expansion
When economic conditions strengthen, aggregate demand for
funds increases with the increase in corporate expansion
Risk of International Bonds
Interest Rate Risk: the value of bonds to decline in response to
rising long-term interest rates
Exchange Rate Risk: represents the potential for the value of bonds to the bond depreciates against the home currency decline (from the investor’s perspective) because the currency denominating
Liquidity Risk: represents the potential for the value of bonds to
decline because there is not a consistently active market for the bonds
Credit Risk — represents the potential for default
Impact of the Greek Crisis on Bonds
Spring 2010: Greece experienced weak economic conditions
and a large increase in the government budget deficit
Concern spread to other European countries such as Spain,
Portugal, and Ireland that had large budget deficits
May 2010: Many European countries and the IMF
agreed to provide Greece with new loans
Contagion Effects:
Forced creditors to recognize that government debt is not always risk free
Forced creditors to recognize that government debt is not always risk free
Weakened some other European countries
INTERNATIONAL
STOCK MARKETS
Issuance of Stock
in Foreign Markets
Some U.S. firms issue stock in foreign markets
to enhance their global image
Impact of the Euro: resulted in more stock offerings in
Europe by U.S. and European based MNCs
Issuance of Foreign Stock
in the U.S
Yankee stock offerings
American Depository Receipts
Non-U.S. Firms Listing
on U.S. Exchanges
Non-U.S. firms have their shares listed on the New York Stock Exchange or the Nasdaq
market so that the shares can easily be traded in the secondary market
Effect of Sarbanes-Oxley Act on Foreign Stock Listings: Many non-U.S. firms decided to place new issues of their stock in the United Kingdom instead of in the United States so that they would not have to comply with the law
Investing in Foreign
Stock Markets
Many investors purchase stocks outside of the home country
Recently, firms outside the U.S. have been issuing stock more frequently
Comparing the size of stock markets
How Market Characteristics
Vary among Countries
Factors that influence trading activity:
Rights vary by country
Legal protection of shareholders
Government enforcement of securities laws
Accounting laws
Integration of Stock Markets
Stock market conditions reflect the host country’s condition.
If the country is integrated, the stock market will be also
Integration of International Stock Markets
and Credit Markets
The key link is the risk premium, which affects the rate of return
required by financial institutions
How Financial Markets Serve MNCs
Corporate functions that require
foreign exchange markets
Longer-term financing in the international bond or stock markets
Short-term investment or financing in foreign securities
Foreign trade with business clients
Direct foreign investment, or the acquisition of foreign real assets
