Introduction to International
Business
David J. Boggs, Ph.D.
Currencies and Financial Markets
International Financial Markets
Review of Terms





Debt
Equity
Bond
Stock
International Capital Market
Some questions:




What is a foreign currency?
Have you ever exchanged money?
How much is traded daily?
Who buys and sells currencies?
Who buys and sells?





Multinational companies
Banks, brokers, and financial institutions
Individuals
Speculators, investors, hedge funds
Governments
Foreign Exchange

Why do companies exchange money?
Foreign Exchange

Why do companies exchange money?





Buy products, parts, supplies
Invest abroad
Have been paid in foreign currency
Protect against risk (hedging)
Try to make a profit (speculating)
Top Markets and Currencies




London
New York
Tokyo
Singapore




Dollar
Euro
Yen
British Pound
Direct (American terms) and
Indirect (European terms)



The U.K. pound and Canadian dollar
tend to be quoted in direct terms
(dollars per currency)
Other currencies tend to be quoted in
indirect terms (currency per dollars)
Most publications indicate both direct
and indirect rates
Currencies Rate Regimes




Pegged or fixed
Floating
“Dirty” float
Managed
Currencies and Rates







Eurocurrency
Vehicle
Intervention
Safe Haven
Hard and Soft
Convertible and
Non-Convertible
Strong and Weak


Spot
Forward



discount
premium
Cross rates
Buying and Selling Currencies




Bid price (what a trader offers)
Ask price (what a trader charges)
Spread (the difference in the two; the
trader’s profit)
Example:



Bid – pay 10 pesos for a dollar
Ask – sell dollars for 10.5 pesos
Spread – .5 peso profit
MNC Currency Considerations



Political and Economic Risk
Exchange Controls and Convertibility
Inflation


hyperinflation
Interest Rates


nominal
real (nominal minus inflation)
Hedging (versus Speculation)

Derivatives


Forward contracts (banks and financial institutions)
Futures market





International Monetary Market (Chicago Mercantile
Exchange)
Fixed quantities and delivery dates
Currency options (Philadelphia Stock Exchange)
Credit Hedge
Exposure Netting


Open position in two balancing currencies
Avoids cost of hedging
Arbitrage




1 dollar = 100 yen
100 yen = 10 pesos
9.8 pesos = 1 dollar
Simultaneously trade 1 dollar for 100
yen, 100 yen for 10 pesos, 9.8 pesos
for 1 dollar and you are left with .2
pesos profit
Assignment


For next class bring a plot to class of the
movement of a currency relative to the U.S.
dollar for the past four years. To create the
plot, go to the following url:
 http://fx.sauder.ubc.ca/ or oanda.com or
finance.yahoo.com
Choose a currency likely to strengthen this
semester and one likely to weaken.