Description
Highlights the dynamics of international financial markets.
International Financial Markets
and monetary system
Chapter : 3
By group 2
Motives for Using
International Financial Markets
? The markets for real or financial assets are
prevented from complete integration by
barriers such as tax differentials, tariffs,
quotas, labor immobility, communication costs,
cultural differences, and financial reporting
differences.
? Yet, these barriers can also create unique
opportunities for specific geographic markets
that will attract foreign investors.
Motives for Using
International Financial Markets
? Investors invest in foreign markets:
? to take advantage of favorable economic
conditions;
? when they expect foreign currencies to appreciate
against their own; and
? to reap the benefits of international diversification.
Motives for Using
International Financial Markets
? Creditors provide credit in foreign markets:
? to capitalize on higher foreign interest rates;
? when they expect foreign currencies to appreciate
against their own; and
? to reap the benefits of international diversification.
Motives for Using
International Financial Markets
? Borrowers borrow in foreign markets:
? to capitalize on lower foreign interest rates; and
? when they expect foreign currencies to depreciate
against their own.
Foreign Exchange
Market
? The foreign exchange market allows currencies to be
exchanged in order to facilitate international trade or
financial transactions.
? The system for establishing exchange rates has evolved
over time.
? Bimetallism: Before 1875
? Classical Gold Standard: 1875-1914
? Interwar Period: 1915-1944
? Bretton Woods System: 1945-1972
? The Flexible Exchange Rate Regime: 1973-Present
Bimetallism: Before 1875
? A “double standard” in the sense that both gold
and silver were used as money.
? Some countries were on the gold standard,
some on the silver standard, some on both.
? Both gold and silver were used as international
means of payment and the exchange rates
among currencies were determined by either
their gold or silver contents.
? Gresham’s Law implied that it would be the least
valuable metal that would tend to circulate.
Classical Gold Standard: 1875-
1914
? During this period in most major countries:
? Gold alone was assured of unrestricted coinage
? There was two-way convertibility between gold and
national currencies at a stable ratio.
? Gold could be freely exported or imported.
? The exchange rate between two country’s
currencies would be determined by their relative
gold contents.
Classical Gold Standard: 1875-
1914
For example, if the dollar is pegged to gold at
U.S.$30 = 1 ounce of gold, and the British pound
is pegged to gold at £6 = 1 ounce of gold, it must
be the case that the exchange rate is
determined by the relative gold contents:
$30 = £6
$5 = £1
Classical Gold Standard: 1875-
1914
? Highly stable exchange rates under the classical
gold standard provided an environment that was
conducive to international trade and investment.
? Misalignment of exchange rates and
international imbalances of payment were
automatically corrected by the price-specie-flow
mechanism.
Classical Gold Standard: 1875-
1914
? There are shortcomings:
? The supply of newly minted gold is so restricted that
the growth of world trade and investment can be
hampered for the lack of sufficient monetary
reserves.
? Even if the world returned to a gold standard, any
national government could abandon the standard.
Interwar Period: 1915-1944
? Exchange rates fluctuated as countries widely
used “predatory” depreciations of their
currencies as a means of gaining advantage in
the world export market.
? Attempts were made to restore the gold
standard, but participants lacked the political will
to “follow the rules of the game”.
? The result for international trade and investment
was profoundly detrimental.
Bretton Woods System: 1945-
1972
? Named for a 1944 meeting of 44 nations at
Bretton Woods, New Hampshire.
? The purpose was to design a postwar
international monetary system.
? The goal was exchange rate stability without the
gold standard.
? The result was the creation of the IMF and the
World Bank.
Bretton Woods System: 1945-
1972
? Under the Bretton Woods system, the U.S. dollar
was pegged to gold at $35 per ounce and other
currencies were pegged to the U.S. dollar.
? Each country was responsible for maintaining its
exchange rate within ±1% of the adopted par
value by buying or selling foreign reserves as
necessary.
? The Bretton Woods system was a dollar-based
gold exchange standard.
The Flexible Exchange Rate Regime:1973-
Present
? Flexible exchange rates were declared
acceptable to the IMF members.
? Central banks were allowed to intervene in the
exchange rate markets to iron out unwarranted
volatilities.
? Gold was abandoned as an international reserve
asset.
? Non-oil-exporting countries and less-developed
countries were given greater access to IMF
funds.
Current Exchange Rate
Arrangements
? Free Float
? The largest number of countries, about 48, allow market
forces to determine their currency’s value.
? Managed Float
? About 25 countries combine government intervention with
market forces to set exchange rates.
? Pegged to another currency
? Such as the U.S. dollar or euro (through franc or mark).
? No national currency
? Some countries do not bother printing their own, they just
use the U.S. dollar. For example, Ecuador has recently
dollarized.
FOREX Market Participants
? The FOREX market is a two-tiered market:
? Interbank Market (Wholesale)
? About 700 banks worldwide stand ready to make
a market in Foreign exchange.
? Nonbank dealers account for about 20% of the
market.
? There are FX brokers who match buy and sell
orders but do not carry inventory and FX
specialists.
? Client Market (Retail)
? Market participants include international banks, their
customers, nonbank dealers, FOREX brokers, and
central banks.
Correspondent Banking
Relationships
? Large commercial banks maintain demand deposit accounts
with one another which facilitates the efficient functioning of
the forex market.
? International commercial banks communicate with one
another with:
? SWIFT: The Society for Worldwide Interbank Financial
Telecommunications.
? CHIPS: Clearing House Interbank Payments System
? ECHO Exchange Clearing House Limited, the first global
clearinghouse for settling interbank FOREX transactions.
Foreign Exchange
Transactions
? There is no specific building or location where traders
exchange currencies. Trading also occurs around the
clock.
? The market for immediate exchange is known as the
spot market.
? The forward market enables an MNC to lock in the
exchange rate at which it will buy or sell a certain
quantity of currency on a specified future date.
? At any point in time, arbitrage ensures that exchange
rates are similar across banks.
The Spot Market
? The market for immediate exchange is known
as the spot market.
? Banks provide foreign exchange services for a
fee: the bank’s bid (buy) quote for a foreign
currency will be less than its ask (sell) quote.
This is the bid/ask spread.
Interpreting
Foreign Exchange Quotations
? Direct quotations represent the value of a foreign
currency in dollars, while indirect quotations represent
the number of units of a foreign currency per dollar.
• e.g. “a Japanese Yen is worth about a penny”
• e.g. “you get 100 yen to the dollar”.
? Note that exchange rate quotations sometimes include
IMF’s special drawing rights (SDRs).
? The same currency may also be used by more than one
country.
The New York forei gn exchange sel l i ng rates bel ow appl y to
tradi ng among banks i n amounts of $1 mi l l i on and more, as quoted
at 4 p.m. Eastern ti me by Dow Jones Tel erate Inc. and other sources.
Retai l transacti ons provi de fewer uni ts of forei gn currency per
dol l ar.
Special Drawing Rights (SDR) are based on exchange rates for
the U.S., German, British, French, and Japanese currencies. Source:
International Monetary Fund.
European Currency Unit (ECU) is based on a basket of community
currencies.
a-fixing, Moscow Interbank Currency Exchange.
EXCHANGE RATES
Country
Argentina (Peso)
Australia (Dollar)
Austria (Schilling)
Bahrain (Dinar)
Belgium (Franc)
Brazil (Real)
Britain (Pound)
30-Day Forward
90-Day Forward
180-Day Forward
Canada (Dollar)
30-Day Forward
90-Day Forward
180-Day Forward
Chile (Peso)
China (Renminbi)
Colombia (Peso)
Czech. Rep (Krouna)
Commercial rate
Denmark (Krone)
Ecuador (Sucre)
Floating rate
Finland (Markka)
France (Franc)
30-Day Forward
90-Day Forward
180-Day Forward
Germany (Mark)
30-Day Forward
90-Day Forward
180-Day Forward
Greece (Drachma)
Hong Kong (Dollar)
Hungary (Forint)
India (Rupee)
Indonesia (Rupiah)
Ireland (Punt)
Israel (Shekel)
Italy (Lira)
Wed.
1.0012
.7805
.09043
2.6525
.03080
.9607
1.6880
1.6869
1.6843
1.6802
.7399
.7414
.7442
.7479
.002352
.1201
.0009985
....
.03662
.1663
....
.0002766
.2121
.1879
.1882
.1889
.1901
.6352
.6364
.6389
.6430
.004049
.1292
.006139
.02787
.0004233
1.6664
.3079
.0006483
Tues.
1.0012
.7902
.09101
2.6525
.03105
.9615
1.6946
1.6935
1.6910
1.6867
.7370
.7386
.7413
.7450
.002356
.1201
.0009985
....
.03677
.1677
....
.0002787
.2135
.1893
.1896
.1903
.1914
.6394
.6407
.6432
.6472
.004068
.1292
.006164
.02786
.0004233
1.6714
.3085
.0006510
Wed.
.9988
1.2812
11.058
.3770
32.470
1.0409
.5924
.5928
.5937
.5952
1.3516
1.3488
1.3437
1.3370
425.25
8.3272
1001.50
....
27.307
6.0118
....
3615.00
4.7150
5.3220
5.3126
5.2935
5.2617
1.5744
1.5714
1.5652
1.5552
246.98
7.7390
162.89
35.875
2362.15
.6001
3.2474
1542.50
Tues.
.9988
1.2655
10.988
.3770
32.205
1.0401
.5901
.5905
.5914
.5929
1.3568
1.3539
1.3489
1.3422
424.40
8.3276
1001.50
....
27.194
5.9633
....
3587.50
4.6841
5.2838
5.2741
5.2558
5.2243
1.5639
1.5607
1.5547
1.5450
245.80
7.7390
162.23
35.890
2362.63
.5983
3.2412
1536.00
U.S. $ equiv. per U.S. $
Currency
Country
Japan (Yen)
30-Day Forward
90-Day Forward
180-Day Forward
Jordan (Dinar)
Kuwait (Dinar)
Lebanon (Pound)
Malaysia (Ringgit)
Malta (Lira)
Mexico (Peso)
Floating rate
Netherland (Guilder)
New Zealand (Dollar)
Norway (Krone)
Pakistan (Rupee)
Peru (new Sol)
Philippines (Peso)
Poland (Zloty)
Portugal (Escudo)
Russia (Ruble) (a)
Saudi Arabia (Riyal)
Singapore (Dollar)
Slovak Rep. (Koruna)
South Africa (Rand)
South Korea (Won)
Spain (Peseta)
Sweden (Krona)
Switzerland (Franc)
30-Day Forward
90-Day Forward
180-Day Forward
Taiwan (Dollar)
Thailand (Baht)
Turkey (Lira)
United Arab (Dirham)
Uruguay (New Peso)
Financial
Venezuela (Bolivar)
SDR
ECU
Wed.
.008639
.008676
.008750
.008865
1.4075
3.3367
.0006445
.4018
2.7624
....
.1278
.5655
.7072
.1540
.02529
.3814
.03800
.3460
.006307
.0001787
.2666
.7116
.03259
.2141
.001184
.007546
.1431
.7334
.7357
.7401
.7470
.03638
.03902
.00000911
.2723
....
.1145
.002098
- - -
1.4315
1.2308
Tues.
.008681
.008718
.008791
.008907
1.4075
3.3389
.0006445
.4002
2.7701
....
.1277
.5699
.7106
.1548
.02529
.3840
.03802
.3475
.006369
.0001788
.2667
.7124
.03259
.2142
.001184
.007603
.1435
.7387
.7411
.7454
.7523
.03637
.03906
.00000915
.2723
....
.1145
.002096
1.4326
1.2404
Wed.
115.75
115.26
114.28
112.80
.7105
.2997
1551.50
2.4885
.3620
....
7.8220
1.7685
1.4140
6.4926
39.540
2.6218
26.318
2.8900
158.55
5595.00
3.7503
1.4053
30.688
4.6705
844.75
132.52
6.9865
1.3635
1.3593
1.3511
1.3386
27.489
25.625
109755.00
3.6720
....
8.7300
476.70
.6986
..........
Tues.
115.20
114.71
113.76
112.28
.7105
.2995
1551.50
2.4990
.3610
....
7.8330
1.7547
1.4073
6.4599
39.540
2.6039
26.300
2.8780
157.02
5594.00
3.7502
1.4037
30.688
4.6690
844.65
131.53
6.9697
1.3537
1.3494
1.3416
1.3293
27.493
25.605
109235.00
3.6720
....
8.7300
477.12
.6980
...........
U.S. $ equiv.
Currency
per U.S. $
Wednesday, January 8, 1997
Example :Spot Rate Quotations
The direct
quote for
British pound
is:
£1 = $1.688
The New York forei gn exchange sel l i ng rates bel ow appl y to
tradi ng among banks i n amounts of $1 mi l l i on and more, as quoted
at 4 p.m. Eastern ti me by Dow Jones Tel erate Inc. and other sources.
Retai l transacti ons provi de fewer uni ts of forei gn currency per
dol l ar.
Special Drawing Rights (SDR) are based on exchange rates for
the U.S., German, British, French, and Japanese currencies. Source:
International Monetary Fund.
European Currency Unit (ECU) is based on a basket of community
currencies.
a-fixing, Moscow Interbank Currency Exchange.
EXCHANGE RATES
Country
Argentina (Peso)
Australia (Dollar)
Austria (Schilling)
Bahrain (Dinar)
Belgium (Franc)
Brazil (Real)
Britain (Pound)
30-Day Forward
90-Day Forward
180-Day Forward
Canada (Dollar)
30-Day Forward
90-Day Forward
180-Day Forward
Chile (Peso)
China (Renminbi)
Colombia (Peso)
Czech. Rep (Krouna)
Commercial rate
Denmark (Krone)
Ecuador (Sucre)
Floating rate
Finland (Markka)
France (Franc)
30-Day Forward
90-Day Forward
180-Day Forward
Germany (Mark)
30-Day Forward
90-Day Forward
180-Day Forward
Greece (Drachma)
Hong Kong (Dollar)
Hungary (Forint)
India (Rupee)
Indonesia (Rupiah)
Ireland (Punt)
Israel (Shekel)
Italy (Lira)
Wed.
1.0012
.7805
.09043
2.6525
.03080
.9607
1.6880
1.6869
1.6843
1.6802
.7399
.7414
.7442
.7479
.002352
.1201
.0009985
....
.03662
.1663
....
.0002766
.2121
.1879
.1882
.1889
.1901
.6352
.6364
.6389
.6430
.004049
.1292
.006139
.02787
.0004233
1.6664
.3079
.0006483
Tues.
1.0012
.7902
.09101
2.6525
.03105
.9615
1.6946
1.6935
1.6910
1.6867
.7370
.7386
.7413
.7450
.002356
.1201
.0009985
....
.03677
.1677
....
.0002787
.2135
.1893
.1896
.1903
.1914
.6394
.6407
.6432
.6472
.004068
.1292
.006164
.02786
.0004233
1.6714
.3085
.0006510
Wed.
.9988
1.2812
11.058
.3770
32.470
1.0409
.5924
.5928
.5937
.5952
1.3516
1.3488
1.3437
1.3370
425.25
8.3272
1001.50
....
27.307
6.0118
....
3615.00
4.7150
5.3220
5.3126
5.2935
5.2617
1.5744
1.5714
1.5652
1.5552
246.98
7.7390
162.89
35.875
2362.15
.6001
3.2474
1542.50
Tues.
.9988
1.2655
10.988
.3770
32.205
1.0401
.5901
.5905
.5914
.5929
1.3568
1.3539
1.3489
1.3422
424.40
8.3276
1001.50
....
27.194
5.9633
....
3587.50
4.6841
5.2838
5.2741
5.2558
5.2243
1.5639
1.5607
1.5547
1.5450
245.80
7.7390
162.23
35.890
2362.63
.5983
3.2412
1536.00
U.S. $ equiv. per U.S. $
Currency
Country
Japan (Yen)
30-Day Forward
90-Day Forward
180-Day Forward
Jordan (Dinar)
Kuwait (Dinar)
Lebanon (Pound)
Malaysia (Ringgit)
Malta (Lira)
Mexico (Peso)
Floating rate
Netherland (Guilder)
New Zealand (Dollar)
Norway (Krone)
Pakistan (Rupee)
Peru (new Sol)
Philippines (Peso)
Poland (Zloty)
Portugal (Escudo)
Russia (Ruble) (a)
Saudi Arabia (Riyal)
Singapore (Dollar)
Slovak Rep. (Koruna)
South Africa (Rand)
South Korea (Won)
Spain (Peseta)
Sweden (Krona)
Switzerland (Franc)
30-Day Forward
90-Day Forward
180-Day Forward
Taiwan (Dollar)
Thailand (Baht)
Turkey (Lira)
United Arab (Dirham)
Uruguay (New Peso)
Financial
Venezuela (Bolivar)
SDR
ECU
Wed.
.008639
.008676
.008750
.008865
1.4075
3.3367
.0006445
.4018
2.7624
....
.1278
.5655
.7072
.1540
.02529
.3814
.03800
.3460
.006307
.0001787
.2666
.7116
.03259
.2141
.001184
.007546
.1431
.7334
.7357
.7401
.7470
.03638
.03902
.00000911
.2723
....
.1145
.002098
- - -
1.4315
1.2308
Tues.
.008681
.008718
.008791
.008907
1.4075
3.3389
.0006445
.4002
2.7701
....
.1277
.5699
.7106
.1548
.02529
.3840
.03802
.3475
.006369
.0001788
.2667
.7124
.03259
.2142
.001184
.007603
.1435
.7387
.7411
.7454
.7523
.03637
.03906
.00000915
.2723
....
.1145
.002096
1.4326
1.2404
Wed.
115.75
115.26
114.28
112.80
.7105
.2997
1551.50
2.4885
.3620
....
7.8220
1.7685
1.4140
6.4926
39.540
2.6218
26.318
2.8900
158.55
5595.00
3.7503
1.4053
30.688
4.6705
844.75
132.52
6.9865
1.3635
1.3593
1.3511
1.3386
27.489
25.625
109755.00
3.6720
....
8.7300
476.70
.6986
..........
Tues.
115.20
114.71
113.76
112.28
.7105
.2995
1551.50
2.4990
.3610
....
7.8330
1.7547
1.4073
6.4599
39.540
2.6039
26.300
2.8780
157.02
5594.00
3.7502
1.4037
30.688
4.6690
844.65
131.53
6.9697
1.3537
1.3494
1.3416
1.3293
27.493
25.605
109235.00
3.6720
....
8.7300
477.12
.6980
...........
U.S. $ equiv.
Currency
per U.S. $
Wednesday, January 8, 1997
Example :Spot Rate Quotations
The indirect
quote for
British pound
is:
£.5924 = $1
The New York forei gn exchange sel l i ng rates bel ow appl y to
tradi ng among banks i n amounts of $1 mi l l i on and more, as quoted
at 4 p.m. Eastern ti me by Dow Jones Tel erate Inc. and other sources.
Retai l transacti ons provi de fewer uni ts of forei gn currency per
dol l ar.
Special Drawing Rights (SDR) are based on exchange rates for
the U.S., German, British, French, and Japanese currencies. Source:
International Monetary Fund.
European Currency Unit (ECU) is based on a basket of community
currencies.
a-fixing, Moscow Interbank Currency Exchange.
EXCHANGE RATES
Country
Argentina (Peso)
Australia (Dollar)
Austria (Schilling)
Bahrain (Dinar)
Belgium (Franc)
Brazil (Real)
Britain (Pound)
30-Day Forward
90-Day Forward
180-Day Forward
Canada (Dollar)
30-Day Forward
90-Day Forward
180-Day Forward
Chile (Peso)
China (Renminbi)
Colombia (Peso)
Czech. Rep (Krouna)
Commercial rate
Denmark (Krone)
Ecuador (Sucre)
Floating rate
Finland (Markka)
France (Franc)
30-Day Forward
90-Day Forward
180-Day Forward
Germany (Mark)
30-Day Forward
90-Day Forward
180-Day Forward
Greece (Drachma)
Hong Kong (Dollar)
Hungary (Forint)
India (Rupee)
Indonesia (Rupiah)
Ireland (Punt)
Israel (Shekel)
Italy (Lira)
Wed.
1.0012
.7805
.09043
2.6525
.03080
.9607
1.6880
1.6869
1.6843
1.6802
.7399
.7414
.7442
.7479
.002352
.1201
.0009985
....
.03662
.1663
....
.0002766
.2121
.1879
.1882
.1889
.1901
.6352
.6364
.6389
.6430
.004049
.1292
.006139
.02787
.0004233
1.6664
.3079
.0006483
Tues.
1.0012
.7902
.09101
2.6525
.03105
.9615
1.6946
1.6935
1.6910
1.6867
.7370
.7386
.7413
.7450
.002356
.1201
.0009985
....
.03677
.1677
....
.0002787
.2135
.1893
.1896
.1903
.1914
.6394
.6407
.6432
.6472
.004068
.1292
.006164
.02786
.0004233
1.6714
.3085
.0006510
Wed.
.9988
1.2812
11.058
.3770
32.470
1.0409
.5924
.5928
.5937
.5952
1.3516
1.3488
1.3437
1.3370
425.25
8.3272
1001.50
....
27.307
6.0118
....
3615.00
4.7150
5.3220
5.3126
5.2935
5.2617
1.5744
1.5714
1.5652
1.5552
246.98
7.7390
162.89
35.875
2362.15
.6001
3.2474
1542.50
Tues.
.9988
1.2655
10.988
.3770
32.205
1.0401
.5901
.5905
.5914
.5929
1.3568
1.3539
1.3489
1.3422
424.40
8.3276
1001.50
....
27.194
5.9633
....
3587.50
4.6841
5.2838
5.2741
5.2558
5.2243
1.5639
1.5607
1.5547
1.5450
245.80
7.7390
162.23
35.890
2362.63
.5983
3.2412
1536.00
U.S. $ equiv. per U.S. $
Currency
Country
Japan (Yen)
30-Day Forward
90-Day Forward
180-Day Forward
Jordan (Dinar)
Kuwait (Dinar)
Lebanon (Pound)
Malaysia (Ringgit)
Malta (Lira)
Mexico (Peso)
Floating rate
Netherland (Guilder)
New Zealand (Dollar)
Norway (Krone)
Pakistan (Rupee)
Peru (new Sol)
Philippines (Peso)
Poland (Zloty)
Portugal (Escudo)
Russia (Ruble) (a)
Saudi Arabia (Riyal)
Singapore (Dollar)
Slovak Rep. (Koruna)
South Africa (Rand)
South Korea (Won)
Spain (Peseta)
Sweden (Krona)
Switzerland (Franc)
30-Day Forward
90-Day Forward
180-Day Forward
Taiwan (Dollar)
Thailand (Baht)
Turkey (Lira)
United Arab (Dirham)
Uruguay (New Peso)
Financial
Venezuela (Bolivar)
SDR
ECU
Wed.
.008639
.008676
.008750
.008865
1.4075
3.3367
.0006445
.4018
2.7624
....
.1278
.5655
.7072
.1540
.02529
.3814
.03800
.3460
.006307
.0001787
.2666
.7116
.03259
.2141
.001184
.007546
.1431
.7334
.7357
.7401
.7470
.03638
.03902
.00000911
.2723
....
.1145
.002098
- - -
1.4315
1.2308
Tues.
.008681
.008718
.008791
.008907
1.4075
3.3389
.0006445
.4002
2.7701
....
.1277
.5699
.7106
.1548
.02529
.3840
.03802
.3475
.006369
.0001788
.2667
.7124
.03259
.2142
.001184
.007603
.1435
.7387
.7411
.7454
.7523
.03637
.03906
.00000915
.2723
....
.1145
.002096
1.4326
1.2404
Wed.
115.75
115.26
114.28
112.80
.7105
.2997
1551.50
2.4885
.3620
....
7.8220
1.7685
1.4140
6.4926
39.540
2.6218
26.318
2.8900
158.55
5595.00
3.7503
1.4053
30.688
4.6705
844.75
132.52
6.9865
1.3635
1.3593
1.3511
1.3386
27.489
25.625
109755.00
3.6720
....
8.7300
476.70
.6986
..........
Tues.
115.20
114.71
113.76
112.28
.7105
.2995
1551.50
2.4990
.3610
....
7.8330
1.7547
1.4073
6.4599
39.540
2.6039
26.300
2.8780
157.02
5594.00
3.7502
1.4037
30.688
4.6690
844.65
131.53
6.9697
1.3537
1.3494
1.3416
1.3293
27.493
25.605
109235.00
3.6720
....
8.7300
477.12
.6980
...........
U.S. $ equiv.
Currency
per U.S. $
Wednesday, January 8, 1997
Spot Rate Quotations
Note that the
direct quote is
the reciprocal
of the indirect
quote:
5924 .
1
688 . 1 =
Example :direct-indirect quote
• Direct quote : $1.031/Euro
• Indirect quote = 1/1.031 i.e 0.97 Eoros to a
$
The Bid-Ask Spread
? The bid price is the price a dealer is willing to
pay you for something.
? The ask price is the amount the dealer wants
you to pay for the thing.
? The bid-ask spread is the difference between
the bid and ask prices.
?
bid/ask % spread =
ask rate – bid rate
ask rate
The Bid-Ask Spread
? Example: Suppose bid price for £ = $1.52, ask
price = $1.60.
bid/ask % spread = (1.60–1.52)/1.60 = 5%
?The bid/ask spread is normally larger for those
currencies that are less frequently traded.
? The spread is also larger for “retail” transactions than for
“wholesale” transactions between banks or large
corporations.
Example : spread
? Bank’s bid rate $1.52/pound, ask rate
$1.6/pound
? You have $1000, plan to go to London
? Bank would give you 1000/1.6 = 625 pounds
? What if your trip is cancelled & you want to
convert pounds???
? You will get 625 X 1.52 = $950 only
? Difference of $ 50
Example : spread %
? Another bank : Charlotte bank spread $0.0074 – 0.0070
/ yen
? Is the spread % higher/lower than previous example??
? Previous case spread = (1.6-1.52)/1.6 = 5%
? Charlotte bank : (0.0074 – 0.0070 )/ 0.0074 = 5.4%
? Thus though spread seems lower , in % terms higher &
thus more differential
Cross exchange rate
? A cross exchange rate reflects the amount of
one foreign currency per unit of another
foreign currency.
? Value of 1 unit of currency A in units of
currency B = value of currency A in
$
value of currency B in $
? Suppose that S($/DM) = .50
? i.e. $1 = 2 DM
? and that S(¥/DM) = 50
? i.e. DM1 = ¥50
? What must the $/¥ cross rate be?
¥100 $1 or .01 ¥) / ($
¥100
1 $
¥50
1
2
1 $
,
¥
$
¥
$
since
= = ¬ = ×
× =
S
DM
DM
DM
DM
Example :Cross exchange rate
? Suppose that peso worth $0.07, canadian dollar
worth $0.70
? What must the cross rate be?
? 0.07/0.7= C$0.10/peso
Example :Cross exchange rate
Foreign Exchange
Transactions
? The following attributes of banks are important
to foreign exchange customers:
? competitiveness of quote
? special relationship between the bank and its
customer
? speed of execution
? advice about current market conditions
? forecasting advice
Currency Futures and Options
Market
? A currency futures contract specifies a
standard volume of a particular currency to be
exchanged on a specific settlement date.
Unlike forward contracts however, futures
contracts are sold on exchanges.
? Currency options contracts give the right to
buy or sell a specific currency at a specific
price within a specific period of time. They are
sold on exchanges too.
Examples : Futures
? Mexican company Memphis orders supplies
from European country (Euro)
? Expects Euro to rise against meso in future
? Buy future contract to lock in price that will pay
in future
? Alternatively if receivables from , sell futures
Eurocurrency Market
? U.S. dollar deposits placed in banks in Europe
and other continents are called Eurodollars.
? In the 1960s and 70s, the Eurodollar market,
or what is now referred to as the Eurocurrency
market, grew to accommodate increasing
international business and to bypass stricter
U.S. regulations on banks in the U.S.
$
Eurocurrency Market
? The Eurocurrency market is made up of
several large banks called Eurobanks that
accept deposits and provide loans in various
currencies.
? For example, the Eurocurrency market has
historically recycled the oil revenues
(petrodollars) from oil-exporting (OPEC)
countries to other countries.
Eurocurrency Market
?Although the Eurocurrency market focuses on
large-volume transactions, there are times
when no single bank is willing to lend the
needed amount.
?A syndicate of Eurobanks may then be
composed to underwrite the loans. Front-end
management and commitment fees are usually
charged for such syndicated Eurocurrency
loans.
$
Eurocurrency Market
? The recent standardization of regulations
around the world has promoted the
globalization of the banking industry.
? In particular, the Single European Act has
opened up the European banking industry.
? The 1988 Basel Accord signed by G-10 central
banks outlined common capital standards,
such as the structure of risk weights, for their
banking industries.
$
$
Eurocurrency Market
? The Eurocurrency market in Asia is sometimes
referred to separately as the Asian dollar
market.
? The primary function of banks in the Asian
dollar market is to channel funds from
depositors to borrowers.
? Another function is interbank lending and
borrowing.
LOANS
Eurocredit Market
? Loans of one year or longer are extended by
Eurobanks to MNCs or government agencies
in the Eurocredit market. These loans are
known as Eurocredit loans.
? Floating rates are commonly used, since the
banks’ asset and liability maturities may not
match - Eurobanks accept short-term deposits
but sometimes provide longer term loans.
Eurobond Market
There are two types of international bonds.
?Bonds denominated in the currency of the
country where they are placed but issued by
borrowers foreign to the country are called
foreign bonds or parallel bonds.
?Bonds that are sold in countries other than the
country represented by the currency
denominating them are called Eurobonds.
BONDS
Eurobond Market
? The emergence of the Eurobond market is
partially due to the 1963 Interest
Equalization Tax imposed in the U.S.
? The tax discouraged U.S. investors from
investing in foreign securities, so non-U.S.
borrowers looked elsewhere for funds.
? Then in 1984, U.S. corporations were
allowed to issue bearer bonds directly to
non-U.S. investors, and the withholding tax
on bond purchases was abolished.
BONDS
Eurobond Market
? Eurobonds are underwritten by a multi-national
syndicate of investment banks and
simultaneously placed in many countries
through second-stage, and in many cases,
third-stage, underwriters.
? Eurobonds are usually issued in bearer form,
pay annual coupons, may be convertible, may
have variable rates, and typically have few
protective covenants.
BONDS
Eurobond Market
? Interest rates for each currency and credit
conditions in the Eurobond market change
constantly, causing the popularity of the
market to vary among currencies.
? About 70% of the Eurobonds are denominated
in the U.S. dollar.
? In the secondary market, the market makers
are often the same underwriters who sell the
primary issues.
BONDS
Comparing Interest Rates
Among Currencies
? Interest rates vary substantially for different
countries, ranging from about 1% in Japan to
about 60% in Russia.
? Interest rates are crucial because they affect
the MNC’s cost of financing.
? The interest rate for a specific currency is
determined by the demand for and supply of
funds in that currency.
Quantity of $
Interest
Rate
for $
S
D
Quantity of Real
Interest
Rate
for Real
S
D
Why U.S. Dollar Interest Rates Differ from
Brazilian Real Interest Rates
? The curves are further to the right for the dollar
because the U.S. economy is larger.
? The curves are higher for the Brazilian Real
because of the higher inflation in Brazil.
Comparing Interest Rates
Among Currencies
? As the demand and supply schedules change
over time for a specific currency, the
equilibrium interest rate for that currency will
also change.
? Note that the freedom to transfer funds across
countries causes the demand and supply
conditions for funds to be somewhat
integrated, such that interest rate movements
become integrated too.
International Stock
Markets
? In addition to issuing stock locally, MNCs can
also obtain funds by issuing stock in
international markets.
? This will enhance the firm’s image and name
recognition, and diversify the shareholder
base. The stocks may also be more easily
digested.
? Note that market competition should increase
the efficiency of new issues.
International Stock
Markets
? The locations of the MNC’s operations can
influence the decision about where to place
stock, in view of the cash flows needed to
cover dividend payments.
? Market characteristics are important too. Stock
markets may differ in size, trading activity
level, regulatory requirements, taxation rate,
and proportion of individual versus institutional
share ownership.
Market Structure,
Trading Practices, and Costs
? Dealer Market
? The stock is sold by dealers, who stand ready to buy
and sell the security for their own account.
? In the U.S., the OTC market is a dealer market.
? Auction Market
? Organized exchanges have specialists who match
buy and sell orders. Buy and sell orders may get
matched without the specialist buying and selling as a
dealer.
? Automated Exchanges
? Computers match buy and sell orders.
International Equity Market
Benchmarks
? North America
? Europe
? Asia/Pacific Rim
North American Equity Market
Benchmarks
Name
Symbol
Dow Jones Industrial Average DJIA
NASDAQ Combined Composite CCMP
S&P 500 SPX
TSE 300 TS300
Mexico BOLSA Index MEXBOL
European Equity Market
Benchmarks
Name
Symbol
FT-SE 100
UKX
CAC 40
CAC
Frankfurt DAX Index
DAX
IBEX Index
IBEX
Milan MIB30
MIB30
BEL20 Index
BEL20
Asia/ Pacific Rim Equity Market
Benchmarks
Name
Symbol
NIKKEI 225 Index NKY
Hang Seng Index HSI
Sing Straits Times Index STI
ASX All Ordinaries Index AS300
Cross-Listing of Shares
? Cross-Listing refers to a firm having its equity
shares listed on one or more foreign
exchanges.
? The number of firms doing this has exploded
in recent years.
Advantages of Cross-Listing
? It expands the investor base for a firm.
? Establishes name recognition for the firm in
new capital markets, paving the way for new
issues.
? May offer marketing advantages.
? May mitigate possibility of hostile takeovers.
Yankee Stock Offerings
? The direct sale of new equity capital to U.S.
public investors by foreign firms.
? Privatization in South America and Eastern
Europe
? Equity sales by Mexican firms trying to cash in on
NAFTA
The European Stock Market
? EASDAQ is a sort of a European NASDAQ
that binds together national exchanges.
? UK, Germany, France, Switzerland, Austria,
Italy, Belgium, Denmark, Portugal, Finland,
Greece, Luxembourg, and the Netherlands.
? All trading is denominated in the euro.
American Depository Receipts
? Foreign stocks often trade on U.S. exchanges
as ADRs.
? It is a receipt that represents the number of
foreign shares that are deposited at a U.S.
bank.
? The bank serves as a transfer agent for the
ADRs
American Depository Receipts
? There are many advantages to trading ADRs
as opposed to direct investment in the
company’s shares:
? ADRs are denominated in U.S. dollars, trade on
U.S. exchanges and can be bought through any
broker.
? Dividends are paid in U.S. dollars.
? Most underlying stocks are bearer securities, the
ADRs are registered.
Example : ADR
? If 1share of ADR for French firs “ Pari”= 1
share of stock
? 1 share = 20 euros wh closeden european
markets
? When US stock market opens, 1 Euro = $
1.05
? Thus price of 1 ADR = 1 X 20 X 1.05 = $ 21
? If pari ADR convertible to 2 shares of stock ,
Price of ADR = 2 X 20 X 1.05 = $ 42
Electronic communications
networks
? Electronic communications networks (ECNs)
have been created to match orders between
buyers and sellers in recent years.
? As ECNs become more popular over time,
they may ultimately be merged with one
another or with other exchanges to create a
single global stock exchange.
Comparison of
International Financial Markets
? The foreign cash flow movements of a typical
MNC can be classified into four corporate
functions, all of which generally require the
use of the foreign exchange markets.
?Foreign trade. Exports generate foreign cash
inflows while imports require cash outflows.
Comparison of
International Financial Markets
?Direct foreign investment (DFI). Cash outflows
to acquire foreign assets generate future
inflows.
?Short-term investment or financing in foreign
securities, usually in the Eurocurrency market.
?Longer-term financing in the Eurocredit,
Eurobond, or international stock markets.
Foreign Cash Flow Chart of an MNC
MNC Parent
Foreign
Subsidiaries
Foreign
Business
Clients
Eurocurrency
Market
Eurocredit &
Eurobond
Markets
International
Stock Markets
Foreign
Exchange
Markets
Export/Import
Export/Import
Short-Term
Investment
& Financing
Long-Term
Financing
Foreign
Exchange
Transactions
Medium- &
Long-Term
Financing
Dividend
Remittance
& Financing
Long-Term Financing
Medium- & Long-Term Financing
Short-Term
Investment & Financing
Impact of Global Financial Markets
on an MNC’s Value
( ) ( ) | |
( )
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)
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¦
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¹
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¦
¹
¦
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´
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=
n
t
t
m
j
t j t j
k
1 =
1
, ,
1
ER E CF E
= Value
E (CF
j,t
) = expected cash flows in currency j to be received by
the U.S. parent at the end of period t
E (ER
j,t
) = expected exchange rate at which currency j can be
converted to dollars at the end of period t
k = weighted average cost of capital of the parent
Cost of parent’s funds
borrowed in global
markets
Cost of borrowing
funds in global markets
Improved global image from
issuing stock in global
markets
Cost of parent’s equity
in global markets
Thank you
doc_353229265.pptx
Highlights the dynamics of international financial markets.
International Financial Markets
and monetary system
Chapter : 3
By group 2
Motives for Using
International Financial Markets
? The markets for real or financial assets are
prevented from complete integration by
barriers such as tax differentials, tariffs,
quotas, labor immobility, communication costs,
cultural differences, and financial reporting
differences.
? Yet, these barriers can also create unique
opportunities for specific geographic markets
that will attract foreign investors.
Motives for Using
International Financial Markets
? Investors invest in foreign markets:
? to take advantage of favorable economic
conditions;
? when they expect foreign currencies to appreciate
against their own; and
? to reap the benefits of international diversification.
Motives for Using
International Financial Markets
? Creditors provide credit in foreign markets:
? to capitalize on higher foreign interest rates;
? when they expect foreign currencies to appreciate
against their own; and
? to reap the benefits of international diversification.
Motives for Using
International Financial Markets
? Borrowers borrow in foreign markets:
? to capitalize on lower foreign interest rates; and
? when they expect foreign currencies to depreciate
against their own.
Foreign Exchange
Market
? The foreign exchange market allows currencies to be
exchanged in order to facilitate international trade or
financial transactions.
? The system for establishing exchange rates has evolved
over time.
? Bimetallism: Before 1875
? Classical Gold Standard: 1875-1914
? Interwar Period: 1915-1944
? Bretton Woods System: 1945-1972
? The Flexible Exchange Rate Regime: 1973-Present
Bimetallism: Before 1875
? A “double standard” in the sense that both gold
and silver were used as money.
? Some countries were on the gold standard,
some on the silver standard, some on both.
? Both gold and silver were used as international
means of payment and the exchange rates
among currencies were determined by either
their gold or silver contents.
? Gresham’s Law implied that it would be the least
valuable metal that would tend to circulate.
Classical Gold Standard: 1875-
1914
? During this period in most major countries:
? Gold alone was assured of unrestricted coinage
? There was two-way convertibility between gold and
national currencies at a stable ratio.
? Gold could be freely exported or imported.
? The exchange rate between two country’s
currencies would be determined by their relative
gold contents.
Classical Gold Standard: 1875-
1914
For example, if the dollar is pegged to gold at
U.S.$30 = 1 ounce of gold, and the British pound
is pegged to gold at £6 = 1 ounce of gold, it must
be the case that the exchange rate is
determined by the relative gold contents:
$30 = £6
$5 = £1
Classical Gold Standard: 1875-
1914
? Highly stable exchange rates under the classical
gold standard provided an environment that was
conducive to international trade and investment.
? Misalignment of exchange rates and
international imbalances of payment were
automatically corrected by the price-specie-flow
mechanism.
Classical Gold Standard: 1875-
1914
? There are shortcomings:
? The supply of newly minted gold is so restricted that
the growth of world trade and investment can be
hampered for the lack of sufficient monetary
reserves.
? Even if the world returned to a gold standard, any
national government could abandon the standard.
Interwar Period: 1915-1944
? Exchange rates fluctuated as countries widely
used “predatory” depreciations of their
currencies as a means of gaining advantage in
the world export market.
? Attempts were made to restore the gold
standard, but participants lacked the political will
to “follow the rules of the game”.
? The result for international trade and investment
was profoundly detrimental.
Bretton Woods System: 1945-
1972
? Named for a 1944 meeting of 44 nations at
Bretton Woods, New Hampshire.
? The purpose was to design a postwar
international monetary system.
? The goal was exchange rate stability without the
gold standard.
? The result was the creation of the IMF and the
World Bank.
Bretton Woods System: 1945-
1972
? Under the Bretton Woods system, the U.S. dollar
was pegged to gold at $35 per ounce and other
currencies were pegged to the U.S. dollar.
? Each country was responsible for maintaining its
exchange rate within ±1% of the adopted par
value by buying or selling foreign reserves as
necessary.
? The Bretton Woods system was a dollar-based
gold exchange standard.
The Flexible Exchange Rate Regime:1973-
Present
? Flexible exchange rates were declared
acceptable to the IMF members.
? Central banks were allowed to intervene in the
exchange rate markets to iron out unwarranted
volatilities.
? Gold was abandoned as an international reserve
asset.
? Non-oil-exporting countries and less-developed
countries were given greater access to IMF
funds.
Current Exchange Rate
Arrangements
? Free Float
? The largest number of countries, about 48, allow market
forces to determine their currency’s value.
? Managed Float
? About 25 countries combine government intervention with
market forces to set exchange rates.
? Pegged to another currency
? Such as the U.S. dollar or euro (through franc or mark).
? No national currency
? Some countries do not bother printing their own, they just
use the U.S. dollar. For example, Ecuador has recently
dollarized.
FOREX Market Participants
? The FOREX market is a two-tiered market:
? Interbank Market (Wholesale)
? About 700 banks worldwide stand ready to make
a market in Foreign exchange.
? Nonbank dealers account for about 20% of the
market.
? There are FX brokers who match buy and sell
orders but do not carry inventory and FX
specialists.
? Client Market (Retail)
? Market participants include international banks, their
customers, nonbank dealers, FOREX brokers, and
central banks.
Correspondent Banking
Relationships
? Large commercial banks maintain demand deposit accounts
with one another which facilitates the efficient functioning of
the forex market.
? International commercial banks communicate with one
another with:
? SWIFT: The Society for Worldwide Interbank Financial
Telecommunications.
? CHIPS: Clearing House Interbank Payments System
? ECHO Exchange Clearing House Limited, the first global
clearinghouse for settling interbank FOREX transactions.
Foreign Exchange
Transactions
? There is no specific building or location where traders
exchange currencies. Trading also occurs around the
clock.
? The market for immediate exchange is known as the
spot market.
? The forward market enables an MNC to lock in the
exchange rate at which it will buy or sell a certain
quantity of currency on a specified future date.
? At any point in time, arbitrage ensures that exchange
rates are similar across banks.
The Spot Market
? The market for immediate exchange is known
as the spot market.
? Banks provide foreign exchange services for a
fee: the bank’s bid (buy) quote for a foreign
currency will be less than its ask (sell) quote.
This is the bid/ask spread.
Interpreting
Foreign Exchange Quotations
? Direct quotations represent the value of a foreign
currency in dollars, while indirect quotations represent
the number of units of a foreign currency per dollar.
• e.g. “a Japanese Yen is worth about a penny”
• e.g. “you get 100 yen to the dollar”.
? Note that exchange rate quotations sometimes include
IMF’s special drawing rights (SDRs).
? The same currency may also be used by more than one
country.
The New York forei gn exchange sel l i ng rates bel ow appl y to
tradi ng among banks i n amounts of $1 mi l l i on and more, as quoted
at 4 p.m. Eastern ti me by Dow Jones Tel erate Inc. and other sources.
Retai l transacti ons provi de fewer uni ts of forei gn currency per
dol l ar.
Special Drawing Rights (SDR) are based on exchange rates for
the U.S., German, British, French, and Japanese currencies. Source:
International Monetary Fund.
European Currency Unit (ECU) is based on a basket of community
currencies.
a-fixing, Moscow Interbank Currency Exchange.
EXCHANGE RATES
Country
Argentina (Peso)
Australia (Dollar)
Austria (Schilling)
Bahrain (Dinar)
Belgium (Franc)
Brazil (Real)
Britain (Pound)
30-Day Forward
90-Day Forward
180-Day Forward
Canada (Dollar)
30-Day Forward
90-Day Forward
180-Day Forward
Chile (Peso)
China (Renminbi)
Colombia (Peso)
Czech. Rep (Krouna)
Commercial rate
Denmark (Krone)
Ecuador (Sucre)
Floating rate
Finland (Markka)
France (Franc)
30-Day Forward
90-Day Forward
180-Day Forward
Germany (Mark)
30-Day Forward
90-Day Forward
180-Day Forward
Greece (Drachma)
Hong Kong (Dollar)
Hungary (Forint)
India (Rupee)
Indonesia (Rupiah)
Ireland (Punt)
Israel (Shekel)
Italy (Lira)
Wed.
1.0012
.7805
.09043
2.6525
.03080
.9607
1.6880
1.6869
1.6843
1.6802
.7399
.7414
.7442
.7479
.002352
.1201
.0009985
....
.03662
.1663
....
.0002766
.2121
.1879
.1882
.1889
.1901
.6352
.6364
.6389
.6430
.004049
.1292
.006139
.02787
.0004233
1.6664
.3079
.0006483
Tues.
1.0012
.7902
.09101
2.6525
.03105
.9615
1.6946
1.6935
1.6910
1.6867
.7370
.7386
.7413
.7450
.002356
.1201
.0009985
....
.03677
.1677
....
.0002787
.2135
.1893
.1896
.1903
.1914
.6394
.6407
.6432
.6472
.004068
.1292
.006164
.02786
.0004233
1.6714
.3085
.0006510
Wed.
.9988
1.2812
11.058
.3770
32.470
1.0409
.5924
.5928
.5937
.5952
1.3516
1.3488
1.3437
1.3370
425.25
8.3272
1001.50
....
27.307
6.0118
....
3615.00
4.7150
5.3220
5.3126
5.2935
5.2617
1.5744
1.5714
1.5652
1.5552
246.98
7.7390
162.89
35.875
2362.15
.6001
3.2474
1542.50
Tues.
.9988
1.2655
10.988
.3770
32.205
1.0401
.5901
.5905
.5914
.5929
1.3568
1.3539
1.3489
1.3422
424.40
8.3276
1001.50
....
27.194
5.9633
....
3587.50
4.6841
5.2838
5.2741
5.2558
5.2243
1.5639
1.5607
1.5547
1.5450
245.80
7.7390
162.23
35.890
2362.63
.5983
3.2412
1536.00
U.S. $ equiv. per U.S. $
Currency
Country
Japan (Yen)
30-Day Forward
90-Day Forward
180-Day Forward
Jordan (Dinar)
Kuwait (Dinar)
Lebanon (Pound)
Malaysia (Ringgit)
Malta (Lira)
Mexico (Peso)
Floating rate
Netherland (Guilder)
New Zealand (Dollar)
Norway (Krone)
Pakistan (Rupee)
Peru (new Sol)
Philippines (Peso)
Poland (Zloty)
Portugal (Escudo)
Russia (Ruble) (a)
Saudi Arabia (Riyal)
Singapore (Dollar)
Slovak Rep. (Koruna)
South Africa (Rand)
South Korea (Won)
Spain (Peseta)
Sweden (Krona)
Switzerland (Franc)
30-Day Forward
90-Day Forward
180-Day Forward
Taiwan (Dollar)
Thailand (Baht)
Turkey (Lira)
United Arab (Dirham)
Uruguay (New Peso)
Financial
Venezuela (Bolivar)
SDR
ECU
Wed.
.008639
.008676
.008750
.008865
1.4075
3.3367
.0006445
.4018
2.7624
....
.1278
.5655
.7072
.1540
.02529
.3814
.03800
.3460
.006307
.0001787
.2666
.7116
.03259
.2141
.001184
.007546
.1431
.7334
.7357
.7401
.7470
.03638
.03902
.00000911
.2723
....
.1145
.002098
- - -
1.4315
1.2308
Tues.
.008681
.008718
.008791
.008907
1.4075
3.3389
.0006445
.4002
2.7701
....
.1277
.5699
.7106
.1548
.02529
.3840
.03802
.3475
.006369
.0001788
.2667
.7124
.03259
.2142
.001184
.007603
.1435
.7387
.7411
.7454
.7523
.03637
.03906
.00000915
.2723
....
.1145
.002096
1.4326
1.2404
Wed.
115.75
115.26
114.28
112.80
.7105
.2997
1551.50
2.4885
.3620
....
7.8220
1.7685
1.4140
6.4926
39.540
2.6218
26.318
2.8900
158.55
5595.00
3.7503
1.4053
30.688
4.6705
844.75
132.52
6.9865
1.3635
1.3593
1.3511
1.3386
27.489
25.625
109755.00
3.6720
....
8.7300
476.70
.6986
..........
Tues.
115.20
114.71
113.76
112.28
.7105
.2995
1551.50
2.4990
.3610
....
7.8330
1.7547
1.4073
6.4599
39.540
2.6039
26.300
2.8780
157.02
5594.00
3.7502
1.4037
30.688
4.6690
844.65
131.53
6.9697
1.3537
1.3494
1.3416
1.3293
27.493
25.605
109235.00
3.6720
....
8.7300
477.12
.6980
...........
U.S. $ equiv.
Currency
per U.S. $
Wednesday, January 8, 1997
Example :Spot Rate Quotations
The direct
quote for
British pound
is:
£1 = $1.688
The New York forei gn exchange sel l i ng rates bel ow appl y to
tradi ng among banks i n amounts of $1 mi l l i on and more, as quoted
at 4 p.m. Eastern ti me by Dow Jones Tel erate Inc. and other sources.
Retai l transacti ons provi de fewer uni ts of forei gn currency per
dol l ar.
Special Drawing Rights (SDR) are based on exchange rates for
the U.S., German, British, French, and Japanese currencies. Source:
International Monetary Fund.
European Currency Unit (ECU) is based on a basket of community
currencies.
a-fixing, Moscow Interbank Currency Exchange.
EXCHANGE RATES
Country
Argentina (Peso)
Australia (Dollar)
Austria (Schilling)
Bahrain (Dinar)
Belgium (Franc)
Brazil (Real)
Britain (Pound)
30-Day Forward
90-Day Forward
180-Day Forward
Canada (Dollar)
30-Day Forward
90-Day Forward
180-Day Forward
Chile (Peso)
China (Renminbi)
Colombia (Peso)
Czech. Rep (Krouna)
Commercial rate
Denmark (Krone)
Ecuador (Sucre)
Floating rate
Finland (Markka)
France (Franc)
30-Day Forward
90-Day Forward
180-Day Forward
Germany (Mark)
30-Day Forward
90-Day Forward
180-Day Forward
Greece (Drachma)
Hong Kong (Dollar)
Hungary (Forint)
India (Rupee)
Indonesia (Rupiah)
Ireland (Punt)
Israel (Shekel)
Italy (Lira)
Wed.
1.0012
.7805
.09043
2.6525
.03080
.9607
1.6880
1.6869
1.6843
1.6802
.7399
.7414
.7442
.7479
.002352
.1201
.0009985
....
.03662
.1663
....
.0002766
.2121
.1879
.1882
.1889
.1901
.6352
.6364
.6389
.6430
.004049
.1292
.006139
.02787
.0004233
1.6664
.3079
.0006483
Tues.
1.0012
.7902
.09101
2.6525
.03105
.9615
1.6946
1.6935
1.6910
1.6867
.7370
.7386
.7413
.7450
.002356
.1201
.0009985
....
.03677
.1677
....
.0002787
.2135
.1893
.1896
.1903
.1914
.6394
.6407
.6432
.6472
.004068
.1292
.006164
.02786
.0004233
1.6714
.3085
.0006510
Wed.
.9988
1.2812
11.058
.3770
32.470
1.0409
.5924
.5928
.5937
.5952
1.3516
1.3488
1.3437
1.3370
425.25
8.3272
1001.50
....
27.307
6.0118
....
3615.00
4.7150
5.3220
5.3126
5.2935
5.2617
1.5744
1.5714
1.5652
1.5552
246.98
7.7390
162.89
35.875
2362.15
.6001
3.2474
1542.50
Tues.
.9988
1.2655
10.988
.3770
32.205
1.0401
.5901
.5905
.5914
.5929
1.3568
1.3539
1.3489
1.3422
424.40
8.3276
1001.50
....
27.194
5.9633
....
3587.50
4.6841
5.2838
5.2741
5.2558
5.2243
1.5639
1.5607
1.5547
1.5450
245.80
7.7390
162.23
35.890
2362.63
.5983
3.2412
1536.00
U.S. $ equiv. per U.S. $
Currency
Country
Japan (Yen)
30-Day Forward
90-Day Forward
180-Day Forward
Jordan (Dinar)
Kuwait (Dinar)
Lebanon (Pound)
Malaysia (Ringgit)
Malta (Lira)
Mexico (Peso)
Floating rate
Netherland (Guilder)
New Zealand (Dollar)
Norway (Krone)
Pakistan (Rupee)
Peru (new Sol)
Philippines (Peso)
Poland (Zloty)
Portugal (Escudo)
Russia (Ruble) (a)
Saudi Arabia (Riyal)
Singapore (Dollar)
Slovak Rep. (Koruna)
South Africa (Rand)
South Korea (Won)
Spain (Peseta)
Sweden (Krona)
Switzerland (Franc)
30-Day Forward
90-Day Forward
180-Day Forward
Taiwan (Dollar)
Thailand (Baht)
Turkey (Lira)
United Arab (Dirham)
Uruguay (New Peso)
Financial
Venezuela (Bolivar)
SDR
ECU
Wed.
.008639
.008676
.008750
.008865
1.4075
3.3367
.0006445
.4018
2.7624
....
.1278
.5655
.7072
.1540
.02529
.3814
.03800
.3460
.006307
.0001787
.2666
.7116
.03259
.2141
.001184
.007546
.1431
.7334
.7357
.7401
.7470
.03638
.03902
.00000911
.2723
....
.1145
.002098
- - -
1.4315
1.2308
Tues.
.008681
.008718
.008791
.008907
1.4075
3.3389
.0006445
.4002
2.7701
....
.1277
.5699
.7106
.1548
.02529
.3840
.03802
.3475
.006369
.0001788
.2667
.7124
.03259
.2142
.001184
.007603
.1435
.7387
.7411
.7454
.7523
.03637
.03906
.00000915
.2723
....
.1145
.002096
1.4326
1.2404
Wed.
115.75
115.26
114.28
112.80
.7105
.2997
1551.50
2.4885
.3620
....
7.8220
1.7685
1.4140
6.4926
39.540
2.6218
26.318
2.8900
158.55
5595.00
3.7503
1.4053
30.688
4.6705
844.75
132.52
6.9865
1.3635
1.3593
1.3511
1.3386
27.489
25.625
109755.00
3.6720
....
8.7300
476.70
.6986
..........
Tues.
115.20
114.71
113.76
112.28
.7105
.2995
1551.50
2.4990
.3610
....
7.8330
1.7547
1.4073
6.4599
39.540
2.6039
26.300
2.8780
157.02
5594.00
3.7502
1.4037
30.688
4.6690
844.65
131.53
6.9697
1.3537
1.3494
1.3416
1.3293
27.493
25.605
109235.00
3.6720
....
8.7300
477.12
.6980
...........
U.S. $ equiv.
Currency
per U.S. $
Wednesday, January 8, 1997
Example :Spot Rate Quotations
The indirect
quote for
British pound
is:
£.5924 = $1
The New York forei gn exchange sel l i ng rates bel ow appl y to
tradi ng among banks i n amounts of $1 mi l l i on and more, as quoted
at 4 p.m. Eastern ti me by Dow Jones Tel erate Inc. and other sources.
Retai l transacti ons provi de fewer uni ts of forei gn currency per
dol l ar.
Special Drawing Rights (SDR) are based on exchange rates for
the U.S., German, British, French, and Japanese currencies. Source:
International Monetary Fund.
European Currency Unit (ECU) is based on a basket of community
currencies.
a-fixing, Moscow Interbank Currency Exchange.
EXCHANGE RATES
Country
Argentina (Peso)
Australia (Dollar)
Austria (Schilling)
Bahrain (Dinar)
Belgium (Franc)
Brazil (Real)
Britain (Pound)
30-Day Forward
90-Day Forward
180-Day Forward
Canada (Dollar)
30-Day Forward
90-Day Forward
180-Day Forward
Chile (Peso)
China (Renminbi)
Colombia (Peso)
Czech. Rep (Krouna)
Commercial rate
Denmark (Krone)
Ecuador (Sucre)
Floating rate
Finland (Markka)
France (Franc)
30-Day Forward
90-Day Forward
180-Day Forward
Germany (Mark)
30-Day Forward
90-Day Forward
180-Day Forward
Greece (Drachma)
Hong Kong (Dollar)
Hungary (Forint)
India (Rupee)
Indonesia (Rupiah)
Ireland (Punt)
Israel (Shekel)
Italy (Lira)
Wed.
1.0012
.7805
.09043
2.6525
.03080
.9607
1.6880
1.6869
1.6843
1.6802
.7399
.7414
.7442
.7479
.002352
.1201
.0009985
....
.03662
.1663
....
.0002766
.2121
.1879
.1882
.1889
.1901
.6352
.6364
.6389
.6430
.004049
.1292
.006139
.02787
.0004233
1.6664
.3079
.0006483
Tues.
1.0012
.7902
.09101
2.6525
.03105
.9615
1.6946
1.6935
1.6910
1.6867
.7370
.7386
.7413
.7450
.002356
.1201
.0009985
....
.03677
.1677
....
.0002787
.2135
.1893
.1896
.1903
.1914
.6394
.6407
.6432
.6472
.004068
.1292
.006164
.02786
.0004233
1.6714
.3085
.0006510
Wed.
.9988
1.2812
11.058
.3770
32.470
1.0409
.5924
.5928
.5937
.5952
1.3516
1.3488
1.3437
1.3370
425.25
8.3272
1001.50
....
27.307
6.0118
....
3615.00
4.7150
5.3220
5.3126
5.2935
5.2617
1.5744
1.5714
1.5652
1.5552
246.98
7.7390
162.89
35.875
2362.15
.6001
3.2474
1542.50
Tues.
.9988
1.2655
10.988
.3770
32.205
1.0401
.5901
.5905
.5914
.5929
1.3568
1.3539
1.3489
1.3422
424.40
8.3276
1001.50
....
27.194
5.9633
....
3587.50
4.6841
5.2838
5.2741
5.2558
5.2243
1.5639
1.5607
1.5547
1.5450
245.80
7.7390
162.23
35.890
2362.63
.5983
3.2412
1536.00
U.S. $ equiv. per U.S. $
Currency
Country
Japan (Yen)
30-Day Forward
90-Day Forward
180-Day Forward
Jordan (Dinar)
Kuwait (Dinar)
Lebanon (Pound)
Malaysia (Ringgit)
Malta (Lira)
Mexico (Peso)
Floating rate
Netherland (Guilder)
New Zealand (Dollar)
Norway (Krone)
Pakistan (Rupee)
Peru (new Sol)
Philippines (Peso)
Poland (Zloty)
Portugal (Escudo)
Russia (Ruble) (a)
Saudi Arabia (Riyal)
Singapore (Dollar)
Slovak Rep. (Koruna)
South Africa (Rand)
South Korea (Won)
Spain (Peseta)
Sweden (Krona)
Switzerland (Franc)
30-Day Forward
90-Day Forward
180-Day Forward
Taiwan (Dollar)
Thailand (Baht)
Turkey (Lira)
United Arab (Dirham)
Uruguay (New Peso)
Financial
Venezuela (Bolivar)
SDR
ECU
Wed.
.008639
.008676
.008750
.008865
1.4075
3.3367
.0006445
.4018
2.7624
....
.1278
.5655
.7072
.1540
.02529
.3814
.03800
.3460
.006307
.0001787
.2666
.7116
.03259
.2141
.001184
.007546
.1431
.7334
.7357
.7401
.7470
.03638
.03902
.00000911
.2723
....
.1145
.002098
- - -
1.4315
1.2308
Tues.
.008681
.008718
.008791
.008907
1.4075
3.3389
.0006445
.4002
2.7701
....
.1277
.5699
.7106
.1548
.02529
.3840
.03802
.3475
.006369
.0001788
.2667
.7124
.03259
.2142
.001184
.007603
.1435
.7387
.7411
.7454
.7523
.03637
.03906
.00000915
.2723
....
.1145
.002096
1.4326
1.2404
Wed.
115.75
115.26
114.28
112.80
.7105
.2997
1551.50
2.4885
.3620
....
7.8220
1.7685
1.4140
6.4926
39.540
2.6218
26.318
2.8900
158.55
5595.00
3.7503
1.4053
30.688
4.6705
844.75
132.52
6.9865
1.3635
1.3593
1.3511
1.3386
27.489
25.625
109755.00
3.6720
....
8.7300
476.70
.6986
..........
Tues.
115.20
114.71
113.76
112.28
.7105
.2995
1551.50
2.4990
.3610
....
7.8330
1.7547
1.4073
6.4599
39.540
2.6039
26.300
2.8780
157.02
5594.00
3.7502
1.4037
30.688
4.6690
844.65
131.53
6.9697
1.3537
1.3494
1.3416
1.3293
27.493
25.605
109235.00
3.6720
....
8.7300
477.12
.6980
...........
U.S. $ equiv.
Currency
per U.S. $
Wednesday, January 8, 1997
Spot Rate Quotations
Note that the
direct quote is
the reciprocal
of the indirect
quote:
5924 .
1
688 . 1 =
Example :direct-indirect quote
• Direct quote : $1.031/Euro
• Indirect quote = 1/1.031 i.e 0.97 Eoros to a
$
The Bid-Ask Spread
? The bid price is the price a dealer is willing to
pay you for something.
? The ask price is the amount the dealer wants
you to pay for the thing.
? The bid-ask spread is the difference between
the bid and ask prices.
?
bid/ask % spread =
ask rate – bid rate
ask rate
The Bid-Ask Spread
? Example: Suppose bid price for £ = $1.52, ask
price = $1.60.
bid/ask % spread = (1.60–1.52)/1.60 = 5%
?The bid/ask spread is normally larger for those
currencies that are less frequently traded.
? The spread is also larger for “retail” transactions than for
“wholesale” transactions between banks or large
corporations.
Example : spread
? Bank’s bid rate $1.52/pound, ask rate
$1.6/pound
? You have $1000, plan to go to London
? Bank would give you 1000/1.6 = 625 pounds
? What if your trip is cancelled & you want to
convert pounds???
? You will get 625 X 1.52 = $950 only
? Difference of $ 50
Example : spread %
? Another bank : Charlotte bank spread $0.0074 – 0.0070
/ yen
? Is the spread % higher/lower than previous example??
? Previous case spread = (1.6-1.52)/1.6 = 5%
? Charlotte bank : (0.0074 – 0.0070 )/ 0.0074 = 5.4%
? Thus though spread seems lower , in % terms higher &
thus more differential
Cross exchange rate
? A cross exchange rate reflects the amount of
one foreign currency per unit of another
foreign currency.
? Value of 1 unit of currency A in units of
currency B = value of currency A in
$
value of currency B in $
? Suppose that S($/DM) = .50
? i.e. $1 = 2 DM
? and that S(¥/DM) = 50
? i.e. DM1 = ¥50
? What must the $/¥ cross rate be?
¥100 $1 or .01 ¥) / ($
¥100
1 $
¥50
1
2
1 $
,
¥
$
¥
$
since
= = ¬ = ×
× =
S
DM
DM
DM
DM
Example :Cross exchange rate
? Suppose that peso worth $0.07, canadian dollar
worth $0.70
? What must the cross rate be?
? 0.07/0.7= C$0.10/peso
Example :Cross exchange rate
Foreign Exchange
Transactions
? The following attributes of banks are important
to foreign exchange customers:
? competitiveness of quote
? special relationship between the bank and its
customer
? speed of execution
? advice about current market conditions
? forecasting advice
Currency Futures and Options
Market
? A currency futures contract specifies a
standard volume of a particular currency to be
exchanged on a specific settlement date.
Unlike forward contracts however, futures
contracts are sold on exchanges.
? Currency options contracts give the right to
buy or sell a specific currency at a specific
price within a specific period of time. They are
sold on exchanges too.
Examples : Futures
? Mexican company Memphis orders supplies
from European country (Euro)
? Expects Euro to rise against meso in future
? Buy future contract to lock in price that will pay
in future
? Alternatively if receivables from , sell futures
Eurocurrency Market
? U.S. dollar deposits placed in banks in Europe
and other continents are called Eurodollars.
? In the 1960s and 70s, the Eurodollar market,
or what is now referred to as the Eurocurrency
market, grew to accommodate increasing
international business and to bypass stricter
U.S. regulations on banks in the U.S.
$
Eurocurrency Market
? The Eurocurrency market is made up of
several large banks called Eurobanks that
accept deposits and provide loans in various
currencies.
? For example, the Eurocurrency market has
historically recycled the oil revenues
(petrodollars) from oil-exporting (OPEC)
countries to other countries.
Eurocurrency Market
?Although the Eurocurrency market focuses on
large-volume transactions, there are times
when no single bank is willing to lend the
needed amount.
?A syndicate of Eurobanks may then be
composed to underwrite the loans. Front-end
management and commitment fees are usually
charged for such syndicated Eurocurrency
loans.
$
Eurocurrency Market
? The recent standardization of regulations
around the world has promoted the
globalization of the banking industry.
? In particular, the Single European Act has
opened up the European banking industry.
? The 1988 Basel Accord signed by G-10 central
banks outlined common capital standards,
such as the structure of risk weights, for their
banking industries.
$
$
Eurocurrency Market
? The Eurocurrency market in Asia is sometimes
referred to separately as the Asian dollar
market.
? The primary function of banks in the Asian
dollar market is to channel funds from
depositors to borrowers.
? Another function is interbank lending and
borrowing.
LOANS
Eurocredit Market
? Loans of one year or longer are extended by
Eurobanks to MNCs or government agencies
in the Eurocredit market. These loans are
known as Eurocredit loans.
? Floating rates are commonly used, since the
banks’ asset and liability maturities may not
match - Eurobanks accept short-term deposits
but sometimes provide longer term loans.
Eurobond Market
There are two types of international bonds.
?Bonds denominated in the currency of the
country where they are placed but issued by
borrowers foreign to the country are called
foreign bonds or parallel bonds.
?Bonds that are sold in countries other than the
country represented by the currency
denominating them are called Eurobonds.
BONDS
Eurobond Market
? The emergence of the Eurobond market is
partially due to the 1963 Interest
Equalization Tax imposed in the U.S.
? The tax discouraged U.S. investors from
investing in foreign securities, so non-U.S.
borrowers looked elsewhere for funds.
? Then in 1984, U.S. corporations were
allowed to issue bearer bonds directly to
non-U.S. investors, and the withholding tax
on bond purchases was abolished.
BONDS
Eurobond Market
? Eurobonds are underwritten by a multi-national
syndicate of investment banks and
simultaneously placed in many countries
through second-stage, and in many cases,
third-stage, underwriters.
? Eurobonds are usually issued in bearer form,
pay annual coupons, may be convertible, may
have variable rates, and typically have few
protective covenants.
BONDS
Eurobond Market
? Interest rates for each currency and credit
conditions in the Eurobond market change
constantly, causing the popularity of the
market to vary among currencies.
? About 70% of the Eurobonds are denominated
in the U.S. dollar.
? In the secondary market, the market makers
are often the same underwriters who sell the
primary issues.
BONDS
Comparing Interest Rates
Among Currencies
? Interest rates vary substantially for different
countries, ranging from about 1% in Japan to
about 60% in Russia.
? Interest rates are crucial because they affect
the MNC’s cost of financing.
? The interest rate for a specific currency is
determined by the demand for and supply of
funds in that currency.
Quantity of $
Interest
Rate
for $
S
D
Quantity of Real
Interest
Rate
for Real
S
D
Why U.S. Dollar Interest Rates Differ from
Brazilian Real Interest Rates
? The curves are further to the right for the dollar
because the U.S. economy is larger.
? The curves are higher for the Brazilian Real
because of the higher inflation in Brazil.
Comparing Interest Rates
Among Currencies
? As the demand and supply schedules change
over time for a specific currency, the
equilibrium interest rate for that currency will
also change.
? Note that the freedom to transfer funds across
countries causes the demand and supply
conditions for funds to be somewhat
integrated, such that interest rate movements
become integrated too.
International Stock
Markets
? In addition to issuing stock locally, MNCs can
also obtain funds by issuing stock in
international markets.
? This will enhance the firm’s image and name
recognition, and diversify the shareholder
base. The stocks may also be more easily
digested.
? Note that market competition should increase
the efficiency of new issues.
International Stock
Markets
? The locations of the MNC’s operations can
influence the decision about where to place
stock, in view of the cash flows needed to
cover dividend payments.
? Market characteristics are important too. Stock
markets may differ in size, trading activity
level, regulatory requirements, taxation rate,
and proportion of individual versus institutional
share ownership.
Market Structure,
Trading Practices, and Costs
? Dealer Market
? The stock is sold by dealers, who stand ready to buy
and sell the security for their own account.
? In the U.S., the OTC market is a dealer market.
? Auction Market
? Organized exchanges have specialists who match
buy and sell orders. Buy and sell orders may get
matched without the specialist buying and selling as a
dealer.
? Automated Exchanges
? Computers match buy and sell orders.
International Equity Market
Benchmarks
? North America
? Europe
? Asia/Pacific Rim
North American Equity Market
Benchmarks
Name
Symbol
Dow Jones Industrial Average DJIA
NASDAQ Combined Composite CCMP
S&P 500 SPX
TSE 300 TS300
Mexico BOLSA Index MEXBOL
European Equity Market
Benchmarks
Name
Symbol
FT-SE 100
UKX
CAC 40
CAC
Frankfurt DAX Index
DAX
IBEX Index
IBEX
Milan MIB30
MIB30
BEL20 Index
BEL20
Asia/ Pacific Rim Equity Market
Benchmarks
Name
Symbol
NIKKEI 225 Index NKY
Hang Seng Index HSI
Sing Straits Times Index STI
ASX All Ordinaries Index AS300
Cross-Listing of Shares
? Cross-Listing refers to a firm having its equity
shares listed on one or more foreign
exchanges.
? The number of firms doing this has exploded
in recent years.
Advantages of Cross-Listing
? It expands the investor base for a firm.
? Establishes name recognition for the firm in
new capital markets, paving the way for new
issues.
? May offer marketing advantages.
? May mitigate possibility of hostile takeovers.
Yankee Stock Offerings
? The direct sale of new equity capital to U.S.
public investors by foreign firms.
? Privatization in South America and Eastern
Europe
? Equity sales by Mexican firms trying to cash in on
NAFTA
The European Stock Market
? EASDAQ is a sort of a European NASDAQ
that binds together national exchanges.
? UK, Germany, France, Switzerland, Austria,
Italy, Belgium, Denmark, Portugal, Finland,
Greece, Luxembourg, and the Netherlands.
? All trading is denominated in the euro.
American Depository Receipts
? Foreign stocks often trade on U.S. exchanges
as ADRs.
? It is a receipt that represents the number of
foreign shares that are deposited at a U.S.
bank.
? The bank serves as a transfer agent for the
ADRs
American Depository Receipts
? There are many advantages to trading ADRs
as opposed to direct investment in the
company’s shares:
? ADRs are denominated in U.S. dollars, trade on
U.S. exchanges and can be bought through any
broker.
? Dividends are paid in U.S. dollars.
? Most underlying stocks are bearer securities, the
ADRs are registered.
Example : ADR
? If 1share of ADR for French firs “ Pari”= 1
share of stock
? 1 share = 20 euros wh closeden european
markets
? When US stock market opens, 1 Euro = $
1.05
? Thus price of 1 ADR = 1 X 20 X 1.05 = $ 21
? If pari ADR convertible to 2 shares of stock ,
Price of ADR = 2 X 20 X 1.05 = $ 42
Electronic communications
networks
? Electronic communications networks (ECNs)
have been created to match orders between
buyers and sellers in recent years.
? As ECNs become more popular over time,
they may ultimately be merged with one
another or with other exchanges to create a
single global stock exchange.
Comparison of
International Financial Markets
? The foreign cash flow movements of a typical
MNC can be classified into four corporate
functions, all of which generally require the
use of the foreign exchange markets.
?Foreign trade. Exports generate foreign cash
inflows while imports require cash outflows.
Comparison of
International Financial Markets
?Direct foreign investment (DFI). Cash outflows
to acquire foreign assets generate future
inflows.
?Short-term investment or financing in foreign
securities, usually in the Eurocurrency market.
?Longer-term financing in the Eurocredit,
Eurobond, or international stock markets.
Foreign Cash Flow Chart of an MNC
MNC Parent
Foreign
Subsidiaries
Foreign
Business
Clients
Eurocurrency
Market
Eurocredit &
Eurobond
Markets
International
Stock Markets
Foreign
Exchange
Markets
Export/Import
Export/Import
Short-Term
Investment
& Financing
Long-Term
Financing
Foreign
Exchange
Transactions
Medium- &
Long-Term
Financing
Dividend
Remittance
& Financing
Long-Term Financing
Medium- & Long-Term Financing
Short-Term
Investment & Financing
Impact of Global Financial Markets
on an MNC’s Value
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converted to dollars at the end of period t
k = weighted average cost of capital of the parent
Cost of parent’s funds
borrowed in global
markets
Cost of borrowing
funds in global markets
Improved global image from
issuing stock in global
markets
Cost of parent’s equity
in global markets
Thank you
doc_353229265.pptx