FINC3240 International Finance Chapter 3 International Financial Markets 1 Markets A Foreign Exchange Market B International Money Markets C International Credit Market D International Bond Market E International Stock Markets 2 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 3 Foreign Exchange Market c Forward Markets and forward rate d Futures Markets e Options Markets 4 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 5 Exhibit 3 2 Direct and Indirect Exchange Rate Quotations 6 Cross Exchange Rates Exchange rate between two non dollar currencies can be calculated based on their respective quotations relative to the US dollar 1 British Pound GBP 1 6421 USD 1 Euro EUR 1 3527 USD GBP USD EUR USD GBP EUR 1 6421 1 3527 1 6421 1 1 2139 1 1 1 1 3527 1 7 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 Ask Bid Ask 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 17 Source World Development Indicators World Bank 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 21