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CHAPTER 3: INTERNATIONAL FINANCIAL MARKETS - Coggle Diagram
CHAPTER 3:
INTERNATIONAL FINANCIAL MARKETS
HOW
FINANCIAL
MARKETS
SERVE MNCs
Corporate functions that require foreign exchange markets
Direct foreign investment, or the acquisition of foreign real assets
Short-term investment or financing in foreign securities
Foreign trade with business clients
Longer-term financing in the international bond or stock markets
INTERNATIONAL 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
The 2008 credit crisis caused defaults on loans that led to a halt in housing development, reducing income, spending and employment.
Financial institutions become careful with their funds
and less willing to lend to MNCs
Syndicated loans in the credit market
Maybe a bank is not willing or unable to lend
the required amount of the MNC or government agency.
The bank sets up an organization to guarantee the loans and is responsible for negotiating terms with the borrower
MNCs receive medium-term funds through the terms of loans from local financial institutions or through the issuance of notes (medium-term debt obligations).
FOREIGN EXCHANGE MARKET
Allows for the exchange of one currency for another.
Exchange rate specifies the rate at which one currency can be exchanged for another
Formation process
Gold standard (1876-1913)
Agreement on Fixed Exchange Rates
Floating Exchange Rate
Foreign Exchange Quotations
Factors that affect the spread
Comparison of Bid/ask spread among currencies
Bid/ask spread of Banks
Transactions
Spot market
foreign exchange dealer
use of dollar in spot market
Spot market liquidity
Spot market time zones
Attributes of Bank
INTERNATIONAL STOCK MARKETS
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
Stock market participation and trading activity are higher in countries where managers are encouraged to make decisions that serve shareholder interests, and where there is greater transparency
Factors that influence trading activity:
Rights vary by country
Legal protection of shareholders
Government enforcement of securities laws
Accounting laws
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
Integration of Stock Markets
Stock market conditions reflect the host country’s condition. If the country is integrated, the stock market will be also
Issuance of Foreign Stock in the U.S
American Depository Receipts
Yankee stock offerings
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
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.
INTERNATIONAL MONEY MARKET
Origins and Development
European Money Market
Dollar deposits in banks in Europe and other continents are called Eurodollars or Eurocurrency
Developed during the 1960s and 1970s
Asian Money Market:
Centered in Hong Kong and Singapore
Originated as a market involving mostly dollar-denominated
deposits, and was originally known as the Asian dollar market
Money Market Interest Rates Among Currencies
Global Integration of Money Market Interest Rates
When economic conditions weaken: the corporate need for
liquidity declines, reduce the amount of short-term funds.
When economic conditions strengthen: increase in corporate expansion, need additional liquidity to support their expansion
Highly correlated over time
Risk of International Money Market Securities
Normally, these securities are perceived to be very safe from the risk of default
Even if the I.M.M.S s are not exposed to credit risk,
they are exposed to exchange rate risk
I.M.M.S are debt securities issued by MNCs and government agencies with a short-term maturity (1 year or less)
Dependent on the demand for short-term funds by borrowers,
relative to the supply of available short-term funds that are
provided by savers
Money market rates vary due to differences in the interaction of the total supply of short-term funds available (bank deposits) in the total supply of short-term funds available (bank deposits) in by borrowers in that country
The I.M.M has grown because firms:
Interest rate is lower
Expected to depreciate
Pay for imports
INTERNATIONAL BOND MARKET
Development of Other Bond Markets
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
Have developed in Asia and South America
When economic conditions strengthen, aggregate demand for funds increases with the increase in corporate expansion
Risk of International Bonds
Exchange Rate Risk: represents the potential for the value of bonds to decline (from the investor’s perspective) because the currency denominating the bond depreciates against the home currency
Credit Risk — represents the potential for default
Interest Rate Risk: the value of bonds to decline in response to rising long-term interest rates
Liquidity Risk: represents the potential for the value of bonds to decline because there is not a consistently active market for the bonds
Eurobonds
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
Features of Eurobonds:
Bearer bonds
Annual coupon payments
Convertible or callable
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:
Weakened some other European countries
Forced creditors to recognize that government debt is not always risk free
Foreign bonds: are issued by borrower foreign to the
country where the bond is placed