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INTERNATIONAL FINANCE

Transcript: INTERNATIONAL FINANCE 1. Fixed Exchange Rates. fixed, or pegged, rate is a rate the government (central bank) sets and maintains as the official exchange rate. A set price will be determined against a major world currency In order to maintain the local exchange rate, the central bank buys and sells its own currency on the foreign exchange market in return for the currency to which it is pegged. i.e 1$ = P40 finance examines the dynamics of the global financial system, international monetary systems, balance of payments, exchange rates, foreign direct investment, and how these topics relate to international trade Scope and Methodology Markets in financial assets tend to be more volatile than markets in goods and services because decisions are more often revised and more rapidly put into effect. international finance tends to involve greater uncertainties and risks because the assets that are traded are claims to flows of returns that often extend many years into the future. The economics of international finance do not differ in principle from the economics of international trade. Differences include; is the branch of financial economics broadly concerned with monetary and macroeconomic interrelations between two or more countries •Foreign Direct Investment (FDI) – e.g. Nissan building factor in England •Portfolio Flows – short term capital, e.g. taking advantage of different interest rates •Bank transfers. 2.Floating Exchange Rates is determined by the private market through supply and demand. A floating rate is often termed "self-correcting," as any differences in supply and demand will automatically be corrected in the market. EXCHANGE RATES CAPITAL MOBILITY Ability of the private funds to move across national boundaries in pursuit of higher returns. This mobility depends on the absence of currency restriction on the inflows and outflows of capital. is the rate at which one currency can be exchanged for another. the value of another country's currency compared to that of your own

International Finance

Transcript: KPMG-FTSE - Chinas Capital Markets Deutsche Bank - Chinas Financial Markets Since 2006, state owned banks like Industrial and Commercial Bank of China (ICBC), Bank of China and China Development Bank (CDB) have accounted for more than 50% of the total disclosed deal value. By the end of 2007, Chinese banks had opened a total of 60 branches and subsidiaries in 29 countries around the globe with combined assets of USD 267.4 bn. Source : The banker “top 10000 world banks” In view of the increasing scale of the credit market however, china is still in it´s infancy in terms of credit derivatives. On 5 novembre 2010 china´s first bach of credit risk mitigation instruments was formally launched. A instit made the first 20 deals in respect of credit risk mitigation agreements, with nominal value totalling rmb 184 billions China’s Financial Markets China has had many reforms on the regulation of financial markets with the purpose of improve efficiency, transparency and strengthen the market. China will continue the reform process gradually to achieve a good basis for sustainable development in the future. China Investment Corporation (CIC) China Development Bank (CDB) People’s Bank of China (PBC) State Administration of Foreign Exchange (SAFE) Chinese stock market The Chinese state has used various public vehicles to pursue international investments in the past : Development of the credit rating industry in China And one more thing... Bond markets, securities, banks Thank you for your attention! China’s State Council has declared its intention to develop Shanghai into an international financial center for 2020 to compete directly with locations such as London and New York. However, Shanghai’s prospects over the remainder of the decade will clearly be shaped by several factors : The roll out of the International Board Currency liberalisation Talent Tax competitiveness Why invest abroad? Conclusion 1978-1992: Capital markets emerged, economic reforms took place. 1993-1998: Strengthening of the capital markets, the Chinese Securities Regulatory Commission (CSRC) it is crated. 1999-2007: Formalization and strengthening of the legal status of the capital markets. If we compared industrial countries with China’s financial markets we can see that this one is shallow but in the BRIC China markets leads. Typically in developing capital markets the institutional investors are more than the retail investor but in China the institutional investors accounted for only 30% and retail investors for more than 50% in 2007. Bibliography Shanghai: There are some share dealing tracked to 1860’s, the Shanghai Stock Exchange was created in 1904 and in 1909 was created Shanghai Sharebrokers finally in 1929 the two of then were unified. Shenzhen: 1986 at this time some companies began to operated, in 1990 the Shenzhen stock Exchange was open. Hong Kong: Dates back to 1866 but the first stock market was established in 1891, in 1921 a second exchange “Hong Kong Stockbrokers association” was incorporated by 1980 three more were consolidated to the Hong Kong Stock Exchange. While China bond markets are becoming more open, restrictions still exsist in same key areas. On 11 May 2009 China National Petroleum Corporation issued a USD 1 Billon 3-year term note in the inter-bank bond market to support the financing of its overseas projects. It was the first foreing currency bond issued domestically by a Chinese non financial institution The government has adopted policies to promote the issuance of US dollar bonds in the domestic inter-bank bond market to replace the foreign debts — which are costly to service – of relevant large and mid-sized state-owned enterprises. The market maker system was stablished for China Bonds in 2007. On the one hand, the composition of bond issuers is uneven. More than 80 percent of the depository balance comprises government bonds, central bank notes and financial bonds and there has been a comparatively slow development of credit bonds. On the other hand, the approval and regulatory organizations are still not unified and a market-oriented issuance system has yet to be realized. THE CHINESE STATE – A GLOBAL INVESTOR China’s banks have the money to expand abroad. Strong foreign interest in Chinese banks has led to huge sums in IPOs, and most of the larger Chinese banks successfully attracted one or more strategic foreign investors. In addition international M&A activity of Chinese FIs can be broadly separated into two categories: 1) Financial investments 2) More strategically motivated ones Outlook for the next decade Source : The banker “top 10000 world banks” Recent Innovations China it is a country that have a high level of bureaucracy and that it is involve largely in the financial sector in order to regulated and diversify their massive reserves and generate strong returns via long term investment. Holding With acumulated experience, increased competition and stronger supervision, China´s credit rating agencies

INTERNATIONAL FINANCE

Transcript: = Through acquired shares, mergers or joined ventures, investing firms seek to grasp significant control & influence over foreign organizations. Long-Term investments (value investing) Capital - Foreign Companies invest abroad - Foreign governments loan to other nations - Venture capitalists invest in foreign companies By: Christian, Anoja & Zubi one party delivers an agreed-upon currency amount to the counter party and receives a specified amount of another currency at the agreed-upon exchange rate value. After a position is closed, the settlement is in cash. Global success fuels more success, more investment, more growth, more jobs and more consumer spending around the world. = FOREIGN INVESTING Jobs Taxes INTERNATIONAL FINANCE Purchase of stocks, bonds and other financial instruments from a foreign stock exchange Invest in foreign growth companies or countries for the short term 2. Futures Market Jobs New foreign capital creates more jobs, governments can build new infrastructure and businesses expand. = = THE FOREX MARKET Loans = = The foreign exchange market or the currency market is a "place" where currencies are traded. Salaries Futures are financial contracts obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price. = 1. Spot Market New Firms THE RELATIONSHIP: FINANCE & BUSINESS Capital Projects Foreign Direct Investment (FDI) GLOBALIZATION OF FINANCING Portfolio Investments Spending = Jobs Saving

International Finance

Transcript: Currency System Commodity Standards Foreign exchange rate Foreign exchange market What is the foreign exchange rate? OPTION FORWAD OTC market Balance of payment Introduction International credit SPOT FUTURE Exchange market Gold Standard SWAP How to calculate the foreign exchange rate?

International Finance

Transcript: Barings Bank (1762 to 1995) was the oldest merchant bank in London, founded and owned by the German-origined Baring family. The bank collapsed in 1995 after one of the bank's employees, Nick Leeson, lost £827 million ($1.3 billion) due to speculative investing, primarily in futures contracts, at the bank's Singapore office. The $1.3 billion loss incurred by Nick Leeson exceeded Barings Bank's capital, while the much larger losses incurred at JPMorgan only dented that bank's "fortress." Barings was brought down in 1995 due to unauthorized trading by its head derivatives trader in Singapore, Nick Leeson. At the time of the massive trading loss, Leeson was supposed to be arbitraging, seeking to profit from differences in the prices of Nikkei 225 futures contracts listed on the Osaka Securities Exchange in Japan and the Singapore International Monetary Exchange. Instead of buying on one market and immediately selling on another market for a small profit, the strategy approved by his superiors, Leeson bought on one market then held on to the contract, gambling on the future direction of the Japanese markets. since 1990, there have been 16 instances when traders lost at least $1 billion - shareholders suffer losses - counter parties are exposed to potential settlement failure in over-the-counter markets - bank regulators face the prospect of individual insolvencies - systemic problems in the financial market - public is always in difficult situation ... Trading losses ... by Sameh Zoabi Sameh Zoabi The 15 trading losses total nearly $60 billion and range from a low of $1.1 billion on ill-fated foreign exchange derivatives at a Japanese Shell Oil subsidiary to a high of $9 billion on credit default swaps at Morgan Stanley Four of the firms are banks: Société Générale, JPMorgan Chase, UBS, and Deutsche Bank; Two are investment banks: Morgan Stanley, which became a bank the year after the loss,and Barings Bank; To are hedge funds: Amaranth Advisors and Long Term Capital Management; One is local government: Orange County; Six are manufacturing or petrochemical firms. Thank you Barings bank Despite popular perception, trading losses are not unique to the banking industry. In fact, the majority of large trading losses of the past 20 years have occurred at non-banks. Trading losses may also be more problematic for non-banks than for banks. None of the banks that experienced sizeable losses had their solvency seriously jeopardized, and just Société Générale was required to raise outside capital, which it did without difficulty. In contrast, four of the nonbanks were made insolvent (Amaranth Advisors, Barings Bank, LTCM, and Orange County), and two were forced to accept takeover bids from other firms (Aracruz Celulose and CITIC Pacific). Template by Missing Link Images from Shutterstock.com ... In terms of financial instruments: -$19 billion of losses are due to credit derivatives -$12 billion are due to commodity derivatives -$11.9 billion of losses were due to equity derivative trading -$8 billion are due to fixed income derivatives ; - $8 billion were due to foreign exchange trades

International Finance

Transcript: Photo based on: 'horizon' by pierreyves @ flickr Matt Reikowsky Barry Runnels Allen Ramsey Chapter 10 Our demand for business could decrease if we changed our invoice policy. The depreciation of the peso would lessen it purchasing power towards the American dollar. If we changed our invoice to US dollars, it would cause our services to become more expensive to customers paying in pesos thus, causing us to lose business to our competitors who kept their invoices in the Mexican peso. So basically exposure to the local currency’s appreciation and depreciation would affect the demand for our business if we changed our invoice policy. Why might the demand for your business change if you change your invoice policy? What are the implications for your economic exposure? You are already aware that a decline in the value of the peso could reduce your dollar cash flows. Yet, according to purchasing power parity, a weak peso should occur only in response to a high level of Mexican inflation, and such high inflation should increase your profits. If this theory holds precisely, your cash flows would not really be exposed. Should you be conerned about your exposure, or not? Explain. If you change your policy and invoice only in dollars, how will your transaction exposure be affected? The company will still have transaction exposure, the type of exposure will have just changed. - Since the US dollar is more stable than the Mexican Peso, the currency volatility will have decreased because the majority of cash flows will be in US dollars. - Because of the change in currencys being invoiced, the exchange rate movements will now move in the opposite direction. - Because the company is invoicing in dollars, if the Mexican Peso appreciates the language instruction courses will become more expensive to the Mexicans, whereas before the change in the invoice currency if the Peso appreciated the class would become cheaper. Answer: Yes. You can not assume the inflation rate will perfectly offset the depreciation of the peso. Even if the inflation does perfectly offset that does not mean you will achieve profits large enough to match the country's rate of inflation You may not be able to increase the price due to competiton

INTERNATIONAL FINANCE

Transcript: Option values increase with the length of time to maturity. The expected change in the option premium from a small change in the time to expiration is termed theta: Theta = (D Premium) /(D Time) The foreign exchange options market is the deepest, largest and most liquid market for options of any kind The Currency options are one of the best tool available to hedge foreign exchange exposures in various foreign exchange market conditions, like volatile, stagnant, bullish, bearish, etc http://en.wikipedia.org/wiki/Foreign-exchange_option https://www.google.co.in/search http://icai.org/resource_file/9901773-778.pdf Holder Writer Call Put Strike Price Premium Spot Rate Sensitivity (Delta): Conclusion Group Members Tailored to the specific needs of the firm For example, a firm that faces a future outflow of CAD might buy a call option on CAD at strike price X. The ensuing right to buy CAD at X means that this firm will pay no more than X per CAD. Similarly, buying a put is like buying an insurance contract against the risk of low exchange rates. For example, a firm that faces a future inflow of CAD might buy a put option on CAD at strike price X. The ensuing right to sell CAD at X means that this firm will get no less than X per CAD. Options Premiums and Option Writing Time to Maturity Sensitivity (Theta): Volatility Sensitivity (Lambda): Options Premiums Option volatility is defined as the standard deviation of daily percentage changes in the underlying exchange rate. The expected change in the option premium for a small change in volatility is termed lambda Lambda = (D Premium)/(D Volatility) Option Pricing and Valuation Foreign Currency Options It occurs when the speculator believes the spot price at some future date will differ from today's forward price for that same date. Spot CAD/INR 29.9280/29.9330 (+)1 month FM 00.0200-00.0250 1month FR 29.9480-29.9580 A foreign currency option is a contract giving the option purchaser (the buyer) the right to buy or sell a fixed amount of foreign exchange at a fixed price per unit for a specified time period. American Option European Option At-the-Money (ATM) In-the-Money (ITM) Out-of-the-Money (OTM) Exchange-Traded Options Foreign Currency Speculation Options Vocabulary Over-the-Counter (OTC) Market: Time value Another idea that options exchanges have borrowed from futures markets is Standardization. FOREIGN CURRENCY OPTIONS Finally, options that are in-the-money are more valuable than options that are out-of-the money. Thus, an increase in the strike price reduces the option premium for call options and increases it for put options. Webliography Speculating on the Option Markets The price that is quoted for immediate settlement on a commodity, a security or a currency. Suppose the exchange rate today is Rs.40/USD. The speculator anticipates this rate to become 41/USD within few days. Under these circumstances , he will buy USD $1,000 for Rs 40000 and hold this amount for some days , when the target exchange rate is reached , he will sell USD $1000 at the new exchange rate , that is at Rs.41 per dollar and earn a profit of Rs. 41000- 40000 =Rs.1000 Time value is known as the amount an investor is willing to pay for an option above its intrinsic value, in the hope that at some time prior to expiration its value will increase because of a favorable change in the price of the underlying asset The pricing of a currency option combines 6 elements. The premium is based on 1. The forward rate 2. The current spot rate 3. The time to maturity 4. The volatility of the underlying asset 5. The home and foreign interest rates 6. The strike price 2. Exchange Trade Options Options writing is any option trading strategy that involves selling options. The primary objective in options writing is to earn the premium paid by the option buyer. Option writing does not involve any actual writing of a contract. The value of an option is the sum of two components: Option value = Intrinsic value + Time value Call Option: The buyer of a call option purchases it in the hope that the price of the underlying instrument will rise in the future. The seller of the option either expects that it will not Put Option: An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time Foreign Currency Options Options Vocabulary Options Market Options premium & writing Foreign Currency Speculation Option Pricing & Valuation Conclusion Speculating on the Spot Market The amount per share that an option buyer pays to the seller is Option premium. Factors such as interest rates, market conditions, and the dividend rate of the underlying stock affect the premium option. Standard foreign currency options are priced around the forward rate because the current spot rate and both the domestic and foreign interest rates are included in the option premium calculation Regardless of the specific strike rate, the forward

International Finance

Transcript: The Chinese Trade Surplus Ceteris paribus, a rapidly growing economy should be running a trade deficit, in theory... China has experienced enourmous growth, yet holds a trade surplus with the U.S. What are the causes of the contradicting theory in trade between the U.S. and China? China's trade balance with the U.S. as of January 2012 Exports: $ 34.394 Billion Imports: $ 8.372 Billion Balance: $ 26.022 Billion China's Top Exports, 2010 ($ billion) Commodity Description Volume %change since 2009 Electrical Machinery and Equipment 388.8 29.1 Power generation and Equipment 309.8 31.4 Apparel 121.1 20.5 Iron and Steel 68.1 44.1 Optics and Medical Equipment 52.1 34.0 Furniture 50.6 30.0 Inorganic and Organic Chemicals 43.2 34.9 Ships and Boats 40.3 42.1 Vehicles, excluding Rail 38.4 37.5 Footwear 35.6 27.1 Interest rate (r) If you borrow $1 now, you pay (1+r) "$1 + interest payment" in future. Price of future consumption relative to current consumption is (1/1+r). Hypothetically Interest in the Foreign country "China" should be greater than in the Home country "U.S." [ r* > r ] In Autarky the Foreign country has a comparative advantage in future consumption, and in the Home country there is a comparative advantage in current consumption. Home exports current consumption and imports future consumption, while foreign exports future consumption for current consumption. In theory due to the fact that: The Home country has a comparative advantage in current consumption & The Foreign country has a comparative advantage in future consumption Exporting current consumption for futre consumption leaves the Home country with a trade surplus. Exporting future consumption for current consumption leaves the Foreign country with a trade deficit. China held a (9.3%) GDP growth rate in 2009 The average GDP growth rate for the rest of the world was only about (3.3%) on average during in 2009. In the 1970's China began to reform its economy from a closed economy into a open trade economy reducing restrictions on trade. A major component of China's rapid economic growth is thier export growth. China's low debt and high savings rate China's household debt is the third lowest in the world. China's savings rate on the other hand is the highest in the world to compared to relative countries. Traditionally the Chinese people have saved a large portion of their household income for the future because things such as social security and other social programs do not exsist in China. A high savings rate is good for China in the long-run, although in the short run domestic consumption remains weak as consumers save more money instead of spending. Due to the high savings rate, there is a challenge for the Chinese government to convert the export-driven economy to domestic consumption based economy. On the other hand the U.S. personal savings rate as a percentage of disposable income stood at about 4% at the end of 2009. The last time the savings rate exceeded 10% was in 1984. Compared to most other countries, the US has the lowest personal savings rate in the world. On July 21, 2005, the peg of the Yuan to the U.S. Dollar was lifted, China has agreeded to a more flexible exchange rate policy with the U.S. which has resulted in a slow appreciation of the Yuan. The slow moving appreciation is a result of China's efforts to minipulate its currency to ensure its export market is not hurt by a rapid appreciation. China has been interested in keeping the Yuan undervalued relative to the US Dollar. The easiest way China can do this is to keep the Dollar price high, and the Yuan low by purchasing U.S. Dollars on the open market. China runs a substantial trade surplus allowing them the ability to afford to buy U.S. Dollars in the open market to keep the demand for dollars high, and push the dollar price upwards relative to the Yuan which keeps the Yuan undervalued. By selling its own currency and buying up foreign reserves like the U.S. dollar, China has essentially pegged the yuan's value to the dollar instead of allowing it to move freely in foreign exchange markets. A weak currency cheapens the price of a country's exports, making them more attractive to international buyers by undercutting competitors. While the Chinese government agreed to loosen that chokehold in June 2010, and allow the yuan to have more "flexibility" to appreciate, the currency hasn't appreciated much since then, maybe only about 4%, China doesn't want a fast appreciation of their currency because they also want to protect employment which is heavily invested in the export market. China is now taking the Dollar assests they own and purchasing U.S. Bonds. The following effects occur: References 1)"China Market Research - Market Entry Strategy." China Market Research. Web. 09 Apr. 2012. <http://www.starmass.com/>. 2)Lum, Thomas, and Dick K. Nanto. "China’s Trade with the and the World." Congressional Research Service (CRS), 4 Jan. 2012. Web. 9 Apr. 2012.

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