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International Financial Markets

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Büşra Bozgaç

on 4 June 2014

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Transcript of International Financial Markets

International Financial Markets
what is foreign exchange?

A financial market is the mechanism that facilitates the transfer of funds from lenders (surplus units) to borrowers (deficit units).
Objectives of International Financial Markets
Foreign exchange markets
international money markets
international bonds markets
international credit and stock markets
-Foreign exchange is the mechanism by which the currency of one country gets convertedinto the currency of another country.The conversion of currency is done by thebanks who deal in foreign exchange. Thesebanks maintain stocks of one currencies in theform of balances with banks.
-Foreign Exchange Market Most countries of the world have their own currencies:
the U.S dollar., the euro in Europe, the Brazilian real, and the Chinese yuan, just to name a few. The trading of currencies and banks deposits is what makes up the foreign exchange market.
 _The foreign exchange market
1. is used to convert the currency of one country into the currency of another
2. provides some insurance against foreign exchange risk - the adverse consequences of unpredictable changes in exchange rates.
 _The exchange rate is the rate at which one currency is converted into another
_ Events in the foreign exchange market affect firm sales, profits, and strategy

The Currency Market :
Where money denominated in one currency is bought and sold with money denominated in another currency.

Two Types of Currency Markets :
A)Spot Market:

(Current Market) Spot market for foreign exchange is that market which handles only spot transaction or current transactions.
Participants by Market:
a. commercial banks
b. Brokers
c. customers of commercial and central banks

Participants by Market:
a. arbitrageurs
b. traders
c. hedgers
d. Speculators

Principles Characteristics:
1) It only caters to forward transaction.
2) It determines forward exchange rate at which forward transactionare to be honored.
International Money Market
Euro currency is a time deposit in an international bank located in a country different than the country that issued the currency.
For example, Eurodollars are U.S. dollar-denominated time deposits in banks located abroad.
Euroyen are yen-denominated time deposits in banks located outside of Japan.
The foreign bank doesn’t have to be located in Europe.
Most Euro currency transactions are interbank transactions in the amount of $1,000,000 and up.

Euro credits
The market where financial banking institutions provide banking services denominated in foreign currencies.

They may accept deposits and provide loans. Loans provided in this market are medium-term loans, unlike loans made in the Eurocurrency market
Eurocommercial paper
International Bond Market
Market of bonds sold by issuing companies, governments,
and others outside their own countries

Foreign Bond
Euro Bond
Domestic Bond
Features of international bonds
It is a debt market

It is a fund raising market

Fixed income instrument

Issued in foreign currency

It channelizing savings
Step 1:-A borrower will contact an investment banker.

Step 2:- The lead manager will invite other banks.

Step 3:-The managing group and banks will serve as underwriters for the underwriter issues.

Step 4:-The various members of the underwriting syndicate receive a portion of the spread.

Step 5:-The lead manager receives the full spread.

Straight Fixed-Rate

Floating-Rate Note

Convertible Bond

Straight Fixed-rate with equity warrants

Zero coupon bond

Dual-Currency bond

Inflation Risk

Interest Rate Risk

Default Risk

Downgrade Risk

Liquidity Risk

Reinvestment Risk

Rip-off Risk

Diversify your portfolio

International fund raising instrument

Fixed income market

Investment avenue(short term as well as long term)

Outperformed by Mutual Funds



Limited Selection

What is the Euro Bond?
A euro bond is a debt contract between a borrower and an investor, which records the borrower's obligation to pay interest and the principal amount of the bond on specified dates.

For example-A firm issuing Yen bonds outside Japan . When a Japanese firm issues yen bonds in the Euro market.

Select a Lead Manager:- The borrower chooses one investment bank to be the lead manager of the bond issue.

Organize a Syndicate:- The lead manager negotiates with other banks to form managing group. This group then negotiates the terms of the bond issue with the borrower.

Selling the Bonds:-Once the syndicate is formed and the terms of the issue are agreed upon, the managing group buys the bonds from the borrower. The managing group then sells the euro bonds to the underwriters.

Principal Paying Agent:-A agent or trustee may also be appointed by the borrower to handle the paperwork and legal aspects of the euro bond issue and act as principal agent.

Characteristics of eurobond
Coupon (The Interest Rate)
Secondary Market
A Eurobond is only for Medium and Long-term
Large amounts

Freedom and Flexibility

Lower cost of issue

Lower interest cost

Longer maturities

There are issue costs to take into account.

If the debt is not matched firm may have to be open to foreign exchange risk

Not a good idea for investors who may need a repayment.

There is always the risk defaulter.


Foreign bonds are regulated by the domestic market authorities and are usually given nicknames that refer to the domestic market in which they are being offered.

A foreign bond allows an investor a measure of international diversification without subjection to the risk of changes in relative currency values.

Domestic Bond
Bonds help acquire orders and, in many cases, are a precondition for successful conclusion of a contract.

For all entrepreneurs planning to enter tenders and conclude contracts for the delivery of goods or services we offer a wide range of domestic contract bonds.

Public Sector Undertaking Bonds
Corporate Bonds
Financial Institutions and Banks
Emerging Bond Markets
Tax-Savings Bonds
The Credit Market
The credit market is a financial market allows people to purchase and sell debt instruments such as bonds. Here are the basics of the credit market and how it works.
The credit market is also sometimes referred to as the bond market, debt market or fixed income market. Regardless of which term you use, you are basically referring to the place where bonds are bought or sold.

International Credit Market
The international credit market is an important institution in an age of globalization. For the most part, the same banks that operate in the US. for domestic loans also operate globally for international business. The market is similar except for one major factor: the interest rates and value of differing currencies, and the risks, as well as rewards, that might bring.

The international credit market operates no differently than any other market: It responds to supply and demand. If the economy in Country X is doing extremely well, banks are overjoyed to extend credit to both domestic and foreign investors in that market. At the same time, however, an economy can become "overheated," which means that the money supply can outstrip the rate of growth, leading to inflation.

The purpose of the international credit market, other than making a profit, is to find the equilibrium between economic growth and an overheated money supply. This is the normal function of the market.
The rewards within the international credit markets are built into the differing interest rates of the globe's currencies. Say, for example, an investor buys the Chinese debt. This debt is substantial, but since the Chinese economy is growing so fast, there's no question as to the state's ability to repay. Buying this debt means that one can count on a fairly steady repayment from the Chinese firms and government. The bet here is on the Chinese economy's steady growth, stability and friendliness to foreign sources of credit.

This strategy can have the opposite effect, however. Buying a country's bonds can destroy one's portfolio if that country's financial system loses too much money

As globalization proceeds, the credit market globally will have greater importance. Countries have the responsibility to control their currency's value to make loans easier to get and, therefore, invest in the local currency. Those countries that are well regulated will have the best shot at loans and financing. Countries who have mismanaged the economy will be seen as credit risks and will either not get funds or will get them at a high interest rate.

The stock market
A stock represents a share of ownership of a corporation or a claim on a firm's earnings/assets.
Stocks are part of wealth and changes in their value affect people's willingness to spend.
Changes in stock prices affect a firm's ability to raise funds and thus their investment.
The stock market is important because it is the most widely followed financial market nowadays.
A rising stock market index due to higher share prices increases people's wealth and as a result may increase their willingness to spend.
When stock prices fall an individual's wealth may decrease and their willingness to spend may decrease.
Changes in stock prices affect firms' decisions to sell stock to finance investment spending.
Fear of a major recession causes stock prices to fall, everything else held constant, which in turn causes consumer spending to decrease.

B) Forward Market:
A market for exchange of currencies in the future. Participants in a forward market enter into a contract to exchange currencies, not today, but at a specified date in the future, typically 30, 60, or 90 days from now, and at a price (forward exchange rate) that is agreed upon today.

When do firms use Foreign Exchange Market
 International companies use the foreign exchange market when
 the payments they receive for exports, the income they receive from foreign investments, or the income they receive from licensing agreements with foreign firms are in foreign currencies
 they must pay a foreign company for its products or services in its country’s currency
 they have spare cash that they wish to invest for short terms in money markets
 they are involved in
currency speculation
- the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates

For example
Say you buy a bond with a face value of $1,000, a coupon of 8%, and a maturity of 10 years. This means you'll receive a total of $80 ($1,000*8%) of interest per year for the next 10 years.

Actually, because most bonds pay interest semi-annually, you'll receive two payments of $40 a year for 10 years. When the bond matures after a decade, you'll get your $1,000 back.
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