Global Business Management - PUC's Students need it.

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International Financial Markets
and Monetary System
DY Chhunsong
Lecture 6
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Fundamentals of Global Business Management
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International Financial Markets

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Key Terms
Capital Market: System that allocates financial resources in the
form of debt and equity according to their most efficient uses.
Debt: Loans in which the borrower promises to repay the borrowed
amount (the principle) plus a predetermined rate of interest.
Bond: Debt instrument that specifies the timing of principle and
interest payments.
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Key Terms (1)
Stock: Shares of ownership in a company’s assets that give
shareholders a claim on the company’s future cash flows.
Equity: Part ownership of a firm in which the equity holder partici-
pates with other part owners in the firm’s financial gains and losses.

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National Capital Markets
Although borrowers could look for various parties who are willing
to lend or invest, this would be a time-consuming process.
Commercial banks and investment banks are the most common
intermediaries to facilitate the financial exchanges.
National capital markets help individuals and institutions borrow
the money that other individuals and institutions want to lend.
Companies can obtain external funding via Debt and Equity.
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International Capital Markets
Large international banks play a central role in the international
capital market (gather the excess of cash from investors and savers
around the world and channel the cash to borrowers elsewhere).
Network of individuals, companies, financial institutions, and
governments that invest and borrow across national boundaries.

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International Capital Markets (1)
• Expand the money supply for borrowers as some nations’
capital markets are small and competitive.
• Reduces the cost of money for borrowers if money supply
increases (supply and demand determine the rate of the interest).
International capital markets can provide 3 main benefits to
borrowers globally:
• Reduces risk for lenders because the money is loaned to a
number of people or firms (not all loans are default).
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Forces Expanding the
International Capital Markets
Deregulation: Increase competition, lower the financial transaction
costs, and integrate national markets to global markets.
Financial Instruments: Securitization, one of the instruments, is
invented to “unbound and repackage of hard-to-trade financial assets
into more liquid, negotiable, and marketable financial instruments.”
InformationTechnology: Better communication between investors
and borrowers, especially with electronic trading.

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Main Components of the
International Capital Markets
International Bond Market: Market consisting of all bonds sold
by issuing companies, governments, or other organizations outside
their own countries.
International Equity Market: Market consisting of all stocks
bought and sold outside the issuer’s home country.
Eurocurrency Market: Market consisting of all the world’s
currencies that are banked outside their countries of origin.
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Foreign Exchange Market
Market in which currencies are bought and sold and their prices
determined. It involves two or more nations.
One currency is converted to another at a specific exchange rate,
the rate at which one currency exchanged for another.
The exchange rates depend on the size of the transaction, economic
conditions, and sometimes government mandates and interventions.

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International Monetary System
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How Exchange Rates
Influence Business Activities?
Weak currency, devaluation, strong currency, and revaluation can
affect both domestic and international companies.
Weak Currency: Value of a currency is low relative to others.
Strong Currency: Value of a currency is high relative to others.
Devaluation: Intentional lowering of the value of a nation’s
currency (by the government: China).
Revaluation: Intentional raising of the value of a nation’s currency
(by the government: China).

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How Exchange Rates
Influence Business Activities (1)?
Weak currency and devaluation are similar. They make the price of
a nation’s exports decline and the price of imports increase.
Strong currency and revaluation are similar. They help countries
with strong currency to gain more profits when paying workers in a
country with a weak currency.
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Forecasting Exchange Rates Techniques
Fundamental Analysis: Technique using statistical methods based
on fundamental economic indicators to forecast exchange rates.
Indicators include inflation, interest rates, money supply, tax rates,
and government spending.
Technical Analysis: Technique using charts of past trends in
currency prices and other factors to forecast exchange rates.

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Difficulties of Forecasting Exchange Rate
Although many methods were created to forecast exchange rate,
still difficulties remain. It is not a pure science and not 100 accurate.
Many unexpected events occur and affect the forecasting of
exchange rate.
Human errors also involve in making the forecasting inaccurate as
some new available information may not have been involved..
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Questions!!??