Chapters. 11,12,13 INTERNATIONAL FINANCIAL INSTITUTIONS AND MARKETSChapters. 11,12,13 INTERNATIONAL FINANCIAL INSTITUTIONS AND MARKETS* INTERNATIONAL BUSINESS AGENCIES - IMF: Central bank of the world, involved in international economic policy issues, issues SDRs - The World Bank Group comprised of IBRD/IFC/IDA, international public commercial banks making loans to public projects - WTO (World Trade Organization), FTA~bilateral like NAFTA, Korea and the US,etc - BIS (Bank for Int’l Settlements): Clears international transactions between central banks and works as a facilitator in reaching international banking agreements. One of the major issues is determining minimum bank capital adequacy. - REGIONAL AGENCIES ~ ADB, ECB, - - , NAFTA, - International Money and Capital Markets: o Money markets: short-term debt securities are tradedo Capital markets: long-term debt and equity securities are traded· What are required for business development?· Int’l Banking Services*Types of services- trade financing – L/C (letter of credit) provides payment assurance to the seller- currency exchange transactions- hedging transactions (A/R or A/P denominated in FC using derivatives)- consulting services on international business/finance* Access to international financial markets* Merchant banks – both commercial and investment banking (Glass-Steagall Act)* Universal banks/full service bank· Why a bank wants to establish multinational operations? 1) not subject to regulations of the country of the currency, 2) very competitive· Capital Adequacy Standards: How much equity and other “reserve” securities need to be held against risky assets. Why? To reduce the bank risk. Tier I: equity + retained earnings, Tier II: supplemental capital, etc. Larger reserves -> safer bank!· International Money Markets- Eurocurrency – time deposit (CD) in a currency, outside of the country of the currency. E.g., Eurodollar: $ deposit in a bank outside of the US.· International Capital Markets- Eurocredit (Euronotes) – medium-term funds Note: Eurobanks control interest rate risk using floating rate Eurocredit loans or Forward Rate Agreement (FRA, an interbank contract allowing the Eurobank to hedge the interest rate risk in mismatched (maturity) deposits and loans by the forward rate). - Eurobonds – long-term cf) foreign bonds: issued by a foreign investor. Primary vs. secondary markets* International Stock Markets- Developed vs. Developing countries, Emerging markets- Trading in international equities1) Convert to a local currency and buy at the local exchange2) Cross-listing: listed on multiple exchanges2) ADRs: receipts issued by a financial institution which holds a block offoreign stock shares. This receipt represents a number of foreign shares, still exposed to exchange rate risks3) Mutual funds (open ended)4) Closed-ended funds* Valuation of Foreign Stocks - Exchange rate risks in international
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