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International financial management
- 1. Prepared and design by MaiwandWaziri International Financial Management
- 2.
- 3. Due togrowth in international business over the last 30 years, various international financial markets have been developed. Financial managers of MNCs must understand the various international financial markets that are available so that they can use those markets to facilitate their international business transactions. The basic objective is To describe the background and corporate use of the following international financial markets: 1. Foreign exchange market, 2. Eurocurrency market, 3. Euro credit market, 4. Eurobond market, and 5. International stock markets. Chapter Objectives
- 4. Introduction to International FinancialMarkets and Motives for Using them
- 5. The InternationalFinancial Markets are financial markets where individuals buy and sell foreign assets such as stock, Bonds, currencies. The foreign exchange market is The market in which participants are able to buy, sell, exchange and speculate on currencies. Foreign exchange markets are made up of banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors. Definitions IFMs
- 6. Eurocurrency marketis The money market in which Eurocurrency is borrowed and lent by banks in Europe. The currency is held in banks outside of the country where it is legal tender. It is utilized by large firms and extremely wealthy individuals who wish to circumvent regulatory requirements, tax laws etc… Euro credit market is The market where financial banking institutions provide banking services(accept deposits and provide loans) denominated in foreign currencies. The banks that constitute this market are the same banks that constitute the Eurocurrency market; the difference is that Euro credit loans are longer-term than so-called Eurocurrency loans. Definitions IFMs
- 7. Eurobond marketis A market in which bonds are issued in the capital market of one country to a non-resident borrower from another country. The Eurobond market is made up of investors, banks, borrowers, and trading agents that buy, sell, and transfer Eurobonds. Eurobonds are a special kind of bond issued by European governments and companies, but often denominated in non-European currencies such as dollars and yen. They are also issued by international bodies such as the World Bank. A Eurobond is an international bond that is denominated in a currency not native to the country where it is issued. Definitions IFMs
- 8. International stockmarket is the market in which shares of MNCs are issued and traded . Also known as the equity market, it is one of the most vital areas of a market economy as it provides companies with access to capital and investors with a slice of ownership in the company and the potential of gains based on the company's future performance. This market can be split into two main sections: the primary and secondary market. The primary market is where new issues are first offered, with any subsequent trading going on in the secondary market. Definitions IFMs
- 9. The marketsfor real or financial assets are prevented from complete integration by barriers such as tax differentials, tariffs, quotas, labor immobility, 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
- 10. Agents ofInternational Financial Markets: 1. Borrowers 2. Investors 3. Creditors Borrowers borrow in foreign markets: to capitalize on lower foreign interest rates; and when they expect foreign currencies to depreciate against their own. Motives for Using International Financial Markets
- 11. Investors investin 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. 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
- 12. Foreign Exchange Market & InternationalMoney Market Eurocurrency Market
- 13. The foreignexchange market allows currencies to be exchanged in order to facilitate international trade or financial transactions. In this market a currency is traded to another at a rate called exchange rate. Exchange rate specifies the rate at which one currency can be exchanged for another. The system for establishing exchange rates has evolved over time. It has passed to 3 stages until now. Foreign Exchange Market
- 14. 1. Gold Standard(1876 – 1913) Each currency was convertible into gold at a specified rate. When World War I began in 1914, the gold standard was suspended. 1. Agreements on Fixed Exchange Rates a.Bretton Woods Agreement 1944 - 1971 b.Smithsonian Agreement 1971 - 1973 2. Floating Exchange Rate System In 1973, the official boundaries for the more widely traded currencies were eliminated and the floating exchange rate system came into effect because governments had difficulties maintaining exchange rates within the stated boundaries. History of Foreign Exchange Market
- 15. There isno 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. Trading between banks occurs in the interbank market. Within this market, foreign exchange brokerage firms sometimes act as middlemen. Hundreds of banks facilitate foreign exchange transactions, though the top 20 handle about 50% of the transactions. Foreign Exchange Transactions
- 16. Banks provideforeign 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. bid/ask%spread = ask rate – bid rate ask rate 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. Foreign Exchange Transactions
- 17. Exchange ratequotations for widely traded currencies are frequently listed in the news media on a daily basis. The quotations normally reflect the ask prices for large transactions. 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. 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 $ Interpreting Foreign Exchange Quotations
- 18. Currency futurescontract specifies a standard volume of a particular currency to be exchanged on a specific settlement date. 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 exchange too. Currency forward Contracts are agreements between a foreign exchange dealer and an MNC that specifies the currencies to be exchanged, the exchange rate, and the date at which the transaction will occur. They are not sold on exchange. Currency Futures, Options & Forward Market
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- 20. 1. Corporations orgovernments need short-term funds denominated in a currency different from their home currency. 2. The international money market has grown because firms: a. May need to borrow funds to pay for imports denominated in a foreign currency. b. May choose to borrow in a currency in which the interest rate is lower. c. May choose to borrow in a currency that is expected to depreciate against their home currency 20 International Money Market
- 21. 1. European MoneyMarket: Dollar deposits in banks in Europe and other continents are called Eurodollars or Eurocurrency. Origins of the European money market can be traced to the Eurocurrency market that developed during the 1960s and 1970s. 2. Asian Money Market: Centered in Hong Kong and Singapore. Originated as a market involving mostly dollar- denominated deposits, and was originally known as the Asian dollar market. 21 Origins and Development
- 22. U.S. dollar depositsplaced 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. The Eurocurrency market is made up of several large banks called Euro banks that accept deposits and provide loans in various currencies. Eurocurrency Market $$
- 23. Although theEurocurrency market focuses on large- volume transactions, there are times when no single bank is willing to lend the needed amount. 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
- 24. The Eurocurrencymarket in Asia is sometimes referred to separately as the Asian dollar market. Asian banks that collect deposits and make loans denominated in US dollars. 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. The market located in East Asia used for loans or bank deposits that are denominated in United States dollars. Eurocurrency Market
- 25. International Credit Market (Euro credit Market) International Bond Market (Eurobond Market) International Stock Market
- 26. MNCs sometimesobtain medium-term funds through term loans from local financial institutions or through the issuance of notes (medium-term debt obligations) in their local markets. Loans of 1 year or longer extended by banks to MNCs or government agencies in Europe are commonly called Eurocredits or Eurocredit loans. International Credit market is constituted by the banks who provide long term loans in foreign currency. 26 International Credit Market
- 27. 1. Single EuropeanAct: Capital can flow freely throughout Europe. Banks can offer a wide variety of lending, leasing, and securities activities in the EU. Regulations regarding competition, mergers, and taxes are similar throughout the EU. A bank established in any one of the EU countries has the right to expand into any or all of the other EU countries. 1. Basel Accord - Banks must maintain capital equal to at least 4 percent of their assets. For this purpose, banks’ assets are weighted by risk. 27 Regulations in the Credit Market
- 28. LOANSLOANS Loans ofone 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. Eurocredit Market
- 29. There are twotypes 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. Eurobond MarketBONDSBONDS
- 30. Eurobonds areunderwritten 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. 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. Eurobond Market
- 31. In additionto 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. Stock issued in the U.S. by non-U.S. firms or governments are called Yankee stock offerings. Many of such recent stock offerings resulted from privatization programs in Latin America and Europe. Non-U.S. firms may also issue American depository receipts (ADRs), which are certificates representing bundles of stock. ADRs are less strictly regulated. International Stock Markets
- 32. Market characteristicsare important too. Stock markets may differ in size, trading activity level, regulatory requirements, taxation rate, and proportion of individual versus institutional share ownership. 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. International Stock Markets
- 33. The foreigncash 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. 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. Comparison of International Financial Markets
- 34. Foreign Cash FlowChart 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
- 35. Motives forUsing International Financial Markets Motives for Investing in Foreign Markets Motives for Providing Credit in Foreign Markets Motives for Borrowing in Foreign Markets Foreign Exchange Market History of Foreign Exchange Foreign Exchange Transactions Interpreting Foreign Exchange Quotations Currency Futures and Options Markets Chapter Review
- 36. Eurocurrency Market Development of the Eurocurrency Market Composition of the Eurocurrency Market Standardizing Bank Regulations within the Eurocurrency Market Eurocredit Market Eurobond Market International Stock Markets Issuance of Foreign Stock in the U.S. Issuance of Stock in Foreign Markets Comparison of International Financial Markets Chapter Review
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