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FINC3240 International Finance

FINC3240 International Finance. Chapter 3 International Financial Markets. Markets. A. Foreign Exchange Market B. International Money Markets C. International Credit Market D. International Bond Market E. International Stock Markets. Foreign Exchange Market.

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FINC3240 International Finance

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  1. FINC3240International Finance Chapter 3 International Financial Markets

  2. Markets A. Foreign Exchange Market B. International Money Markets C. International Credit Market D. International Bond Market E. International Stock Markets

  3. Foreign Exchange Market a. Spot Markets and spot rate b. Spot Markets Time Zones night trading desk Biggest trader: Deutsche Bank, Citibank, J.P. Morgan Chase Biggest trading center: London, New York, Tokyo

  4. Foreign Exchange Market c. Forward Markets and forward rate d. Futures Markets e. Options Markets

  5. Foreign Exchange Quotations 1. Direct vs. Indirect Quotes: the direct quote is the local currency price of one unit of foreign currency. e.g. EUR/USD 1.3855 the indirect quote is the foreign currency price of one unit of local currency. e.g. USD/EUR 0.7218 reciprocal of direct quote. 2. Cross Exchange Rates the amount of one foreign currency per unit of another foreign currency. EUR/USD 1.3855; USD/CAD 1.0968; EUR/CAD ?

  6. Exhibit 3.2 Direct and Indirect Exchange Rate Quotations

  7. Cross Exchange Rates • Exchange rate between two non-dollar currencies can be calculated based on their respective quotations relative to the US dollar. 1British Pound (GBP)= 1.6421 USD GBP/USD 1 Euro (EUR) = 1.3527 USD EUR/USD GBP/EUR:

  8. Bid/Ask Spread Exchange rates are typically quoted by banks on a Bid/Ask basis; the quotations found in newspapers are usually Bid/Ask Averages. Bid=Buy; Ask=Sell bid/ask spread = Real quote: http://www.usforex.com

  9. Exhibit 3.1 Computation of the Bid/Ask Spread

  10. Foreign Exchange Derivatives Foreign Exchange (Currency) Forward, Futures, and Options are contracts that: 1) specify a fixed amount of currency 2) to be purchased at a predetermined exchange rate 3) at a specified time

  11. International Money Markets 1. Domestic money market short-term borrowings or securities that mature within one year. 2. International money market Eurodollars: dollar deposits in banks in Europe Asiandollars:

  12. International Money Markets • Why firms or individuals would borrow in international money markets? 1. firms need foreign currency for a short-term to do international business 2. the cost of borrowing abroad may be lower 3. better off if borrow a foreign currency that will depreciate against home currency • Why firms or individuals would invest in international money markets? 1. the interest earned from investing abroad may be higher 2. better off if investing in a foreign currency that will appreciate against home currency

  13. International Credit Market 1. Eurocredit Market a. Eurocredit loans (5 years) b. London Interbank Offer Rate (LIBOR) e.g. LIBOR plus 3 percent 2. Syndicated Loans When banks are unwilling or unable to process a very large loan they form groups know as syndicates

  14. International Bond Market 1. Long-term debt (10 years) 2. Foreign bond vs. Eurobond Foreign bond: bonds issued by a borrower foreign to the country where the bond is placed. E.g. A U.S. borrower issues a bond denominated in Japanese Yen and sell to investors in Japan. Eurobond: bonds sold in countries other than the country of the currency denominating the bonds. E.g. A U.S. borrower issues a bond denominated in Japanese Yen and sell to investors in Europe.

  15. International Stock Markets 1. Issuance of Stock in Foreign Markets 2. Issuance of Stock by Non-U.S. Firms in the U.S. 3. American Depository Receipts (ADRs) 4. Stock Market Characteristics Vary Among Countries voting rights for shareholders, legal protection, enforcement of laws, corruption, accounting requirements 5. Co-movement of International Stock Markets

  16. Exhibit 3.4 Comparison of Global Stock Exchanges Source: World Development Indicators, World Bank

  17. Example 1 Explain how the appreciation of the Australian dollar against the U.S. dollar would affect the return to a U.S. firm that invested in an Australian money market security.

  18. Example 2 Utah Bank’s bid price for Canadian dollar is $.7938 and its ask price is $.8100. what is the bid/ask percentage spread?

  19. Example 3 Assume Poland’s currency (the zloty) is worth $.17 and the Japanese yen is worth $.008. what is the cross rate of the zloty with respect to yen? That is, how many yen equal a zloty?

  20. Summary Homework 3: Q&A 4,7,8,10,18,22,24.

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