INTERNATIONAL BUSINESS
CHAPTER IX
INTERNATIONAL FINANCIAL MARKETS
The International Financial System
1
Learning Objectives
Discuss the purposes, development, and financial centers
of the international capital market.
Describe the international bond, international equity, and
Eurocurrency markets.
Discuss the four primary functions of the foreign exchange
market
Explain how currencies are quoted and the different rates
given
Identify the main instruments and institutions of the foreign
exchange market
Explain why and how government restrict currency
convertibility
2
INTERNATIONAL CAPITAL
MARKET
Capital Market
System that allocates financial resources
in the form of debt and equity according
to their most efficient uses.
3
INTERNATIONAL CAPITAL
MARKET
Purposes of National Capital Markets
Purpose of the International Capital Market
Forces Expanding the International Capital
Market
World Financial Centers
4
Purposes of National Capital Markets
National Capital Markets help individuals and
institutions borrow the money that other
individuals and institutions want to lend.
5
Purposes of National Capital Markets
The most common Capital-Market Intermediaries:
 Commercial
Banks Lend borrowers their
investors’ deposits at a specific rate of interest
 Investment
Banks Help clients to invest
excess capital and to borrow need capital.
6
Purposes of National Capital Markets
Role of Debt
Role of Equity
7
Role of Debt
Debt: Loans in which the borrowers
promises to repay the borrowed amount plus
a predetermined rate of interest.
Bond: Debt instrument that specifies the
timing of principal and interest payments.
8
Role of Equity
Equity: Part-ownership of a company in
which the equity holder participates with
other part owners in the company’s
financial gains and losses
Stock: Shares of ownership in a
company’s assets that give shareholders a
claim on the company’s future cash flows
9
Role of Equity
Liquidity: Ease with which bondholders
and shareholders may convert their
investments into cash.
10
Purposes of National Capital Markets
Equity
Share
Bond
Company
Assets
Stock
Debt
11
Purposes of the International Capital
Markets
International Capital Market :
Network of individuals, companies financial
institutions, and governments that invest
and borrow across national boundaries.
12
Purposes of the International Capital
Markets
Expanding the Money Supply for Borrowers
Reducing the Cost of Money for Borrowers
Reducing Risk for Lenders
13
Reducing Risk for Lenders
Two Ways:
Investors enjoy a greater set of opportunities from
which to choose.
Investing in international securities benefits
investors because some economies are growing
while others are in decline.
14
Forces Expanding the International
Capital Market
Information Technology
Deregulation
Financial Instruments.
15
Forces Expanding the International
Capital Market
Securitization : Unbundling and
repacking of hard-to-trade financial
assets into more liquid, negotiable,
and marketable financial instruments(
or securities)
16
World Financial Centers
17
World Financial Centers
Offshore financial center: Country or
territory whose financial sector features
very few regulations and few, if any,
taxes.
18
MAIN COMPONENTS OF THE
INTERNATIONAL CAPITAL MARKET
International Bond Market
International Equity Market
Eurocurrency Market
19
International Bond Market
International Bond Market
Market consisting of all bonds sold by issuing
companies, government, or other
organizations outside their own countries .
20
International Bond Market
Types of International Bonds
Interest Rates
21
Types of International Bonds
Eurobond
Foreign Bond.
22
Eurobond
Eurobond
Bond issued outside the country in whose
currency it is denominated.
23
Foreign bond
Foreign bond
Bond sold outside the borrower’s country
and denominated in the currency of the
country in which it is sold .
24
Interest Rates
A Driving Force
How can investors who are seeking higher returns and
borrowers who are seeking to pay lower interest rates
both come out ahead?

By using bonds in the international bond market,
borrowers from newly industrialized and developing
countries can borrow money from other nations where
interest rates are lower.

Investors in developed countries buy bonds in newly
industrialized and developing nations in order to obtain
higher returns on their investments.
25
International Equity Market
International equity market
Market consisting of all stocks bought and
sold outside the issuer’s home country.
26
International Equity Market
Spread of Privatization
Economic Growth in Developing Countries.
Activity of Investment Banks
Advent of Cybermarkets
27
Eurocurrency Market
Eurocurrency market
Market consisting of all the world’s
currencies ( referred to as “Eurocurrency” )
that are banked outside their countries of
origin.
28
Eurocurrency Market
Deposits Originate Primarily from Four Sources:
• Governments with excess funds generated by a prolonged
trade surplus
• Commercial Banks with large deposits of excess currency
• International companies with large amounts of excess
cash
• Extremely wealthy individuals.
29
Eurocurrency Market
Interbank Interest Rates
Interest rates that the world’s largest banks
charge one another for loans.
30
FOREIGN EXCHANGE MARKET
Foreign Exchange Market
Market in which currencies are bought
and sold and their prices determined .
31
FOREIGN EXCHANGE MARKET
Exchange rate
Rate at which one currency is exchange
for another .
32
Functions of the Foreign Exchange Market
Currency Conversion
Currency Hedging
Currency Arbitrage
Currency Speculation
33
Functions of the Foreign Exchange Market
Currency Hedging
Practice of insuring against potential losses
that result from adverse changes in
exchange rates .
34
Functions of the Foreign Exchange Market
Currency Arbitrage
Instantaneous purchase and sale of a currency
in different markets for profit.
35
Functions of the Foreign Exchange Market
Interest arbitrage
Profit-motivated purchase and sale of interest-
paying securities denominated in different
currencies.
36
Functions of the Foreign Exchange Market
Currency speculation
Purchase or sale of a currency with the
expectation that its value will change and
generate a profit .
37
HOW THE FOREIGN
EXCHANGE MARKET WORKS
Quoting Currencies
Spot Rates
Forward Rates
Swaps, Options, and Futures.
38
Quoting Currencies
Quoted Currency: In a quoted exchange
rate ,the currency with which another
currency is to be purchased.
Base Currency: In a quoted exchange
rate, the currency that is to be purchased
with another currency.
39
Quoting Currencies
Direct and Indirect Rate Quotes
Calculating Percent Change
Cross Rates
40
Spot Rates
Spot Rate: Exchange rate requiring
delivery of the traded currency within 2
business days.
Spot Market: Market for currency
transactions at spot rates.
41
Forward Rates
Forward Rate: Exchange rate a which
two parties agree to exchange currencies
on a specified future date.
Forward Market: Market for currency
transactions at forward rates .
42
Forward Rates
Forward contract: Contract that requires
the exchange of an agreed-upon amount
of a currency on an agreed-upon date at a
specific exchange rate .
Derivative: Financial instrument whose
value derives from other commodities or
financial instruments
43
Swaps, Options, and Futures
Currency Swap: Simultaneous purchase
and sale of foreign exchange for two
different dates.
Currency Option: Right, or option ,to
exchange a specific amount of a currency
on a specific date at a specific rate.
44
Swaps, Options, and Futures
Currency Futures Contract: Contract
requiring the exchange of a specific
amount of currency on a specific date at a
specific exchange rate, with all conditions
fixed and not adjustable.
45
FOREIGN EXCHANGE MARKET
TODAY
Trading Centers
Important currencies
Institutions of the Foreign Exchange
Market
46
Trading Centers
Most of world’s mayor cities participate in
trading on the foreign exchange market.
Three mayor cities:
• The United Kingdom
• The United States
• Japan
47
Important Currencies
Vehicle currencies: Currency used as an
intermediary to convert funds between two
other currencies.
48
Institutions of the Foreign
Exchange Market
Interbank Market
Securities Exchanges
Over-the-Counter Market
49
Interbank Market
Interbank Market: Market in which the
world’s largest banks exchange currencies
at spot and forward rates.
Clearing: Process of aggregating the
currencies that one bank owes another and
them carrying out the transaction.
50
Securities Exchange
Securities Exchange: Exchange
specializing in currency futures and options
transactions.
51
Over-the- Counter Market
Over-the- counter (OTC) market:
Exchange consisting of a global computer
network of foreign exchange traders and
other market participants.
52
CURRENCY CONVERTIBILITY
Convertible (hard) Currency: Currency
that trades freely in the foreign exchange
market, with its price determined by the
forces of supply and demand.
53
CURRENCY CONVERTIBILITY
Goals of Currency Restriction
Policies for Restricting Currencies
54
Goals of Currency Restriction
To preserve a country reserve of hard
currencies.
To preserve hard currencies to pay for imports
and to finance trade deficits.
To protect a currency from speculators.
55
Policies for Restricting Currencies
Restrict currencies convertibility
Government’s requires:
• Foreign exchange transactions be performed at or
approved by the country’s central banks.
• Import licenses for some or all import transactions.
56
Policies for Restricting Currencies
Countertrade: Practice of selling goods
or services that are paid for , in whole or
part ,with other goods or services.
57
THE END
58