Transcript: “In all modern societies, control over the issuing and management of money and credit has been a key source of power, and the subject of intense political struggles” Financial Markets 1987: Stock Market Crash 1973 & 1979: Energy Crisis 2007-2008: Global Financial Crisis Foreign Exchange 1929: Wall Street Crash Financial Crisis International Finance - Inflation - Interests rates - Current-Account deficits - Public Debt - Terms of Trade - Political Stability and Economic Performance
Transcript: Continued... Aims of Assignment The importance of foreign exchange markets for the conduct of international business activities. The phenomenon of financial market integration and globalization The effect of national and international policies and events on the performance of international financial markets. International Finance issues related to Emerging markets There are many effects of the policies applied and events occurring on the performance of international financial markets. They can have positive or negative impacts globally, or on the economy as a part. Continued... The effect of national and international policies and events on the performance of international financial markets. Thank you Continued... The importance of foreign exchange markets for the conduct of international business activities Foreign exchange market provides international business with four key uses Currency conversion currency hedging currency arbitrage and currency speculation. International Finance issues related to Emerging markets 1. Currency conversion; currency conversion is one of the most important function of the foreign exchange market. Companies need to be able to pay their suppliers in different country in their own currency . 2. Currency Arbitrage; Buying and selling currencies in a very short time almost instantly for a profit. The idea is simple, investors try to buy when the currency rate is low and sells when it fluctuate to a higher rate. 3. Currency Speculation; Same idea as currency arbitrage, but it’s for longer terms, for example a company may buy euros because they speculate that the euro will appreciate against the US Dollars in few months. 4.Currency hedging ;since the currency rate fluctuate and due to time gap between transactions &paying or receiving money ,there is a potential gain or loss to the company . Currency hedging protect a company from severe loss due to exchange rates. Continued... - As the financial crisis became more intense, there was a counter effect in the market for emerging economies like: 1) The exchange rate markets turned more unstable 2) Equity markets plummeted 3) A sharp increase in country risk spreads 4) The halt or decrease in the stock of international reserves and slow credit growth What is a integrated financial market? - By definition, it’s “an open market economy between countries facilitated by a common currency and the elimination of technical, regulatory and tax differences to encourage the free flow of capital and investment across borders.” For ex., if there are any tax restrictions or regulations in a specific country, w/in the integrated financial market this will have no effect. As per the rules, there isn’t any conditions where a trader’s return should decrease due to a country’s rules and regulations. - Another aspect of this market is that domestic investors can buy foreign assets and vice versa. - In addition, investments of the same risk always have exactly the same expected return b/c assets have to be traded according to the law of price levels regardless of geographic location. Mahinour Dobiea 1035495 Mariam Nabulsi 1037839 Maha Ghoneim 1036956 International Finance - Due to the financial crisis of 2007-08, the market plummeted drastically in many aspects, especially financially. The crisis resulted in the slow growth of emerging markets, causing a downturn in the financial market Emerging markets faced many challenges due to the crisis, a few include: 1) Tightening of external financial conditions, 2) Declining commodity prices, 3) Weak and weakening external demand, and 4) Countries capacity to finance counter-cyclical policies International Financial Management - Globalization is the means of integrating culture, views, practices and products of various countries and making them available anywhere worldwide. Most anything can be globalized nowadays, even financial markets. Trading between countries has increased dramatically over time and continues to progress which is why the integrated financial market is considered to be globalized. The steady improvement and globalization of technology is another impact towards globalization of the financial market b/c the processes required of trading in the financial market are much easier For ex., information systems are able to compute and store more data faster while telecom networks have progressed transactions in a number of ways. Due to the globalization of technological improvements, further globalizing the financial market, deals made across borders have become safer, more secure, and easier. The phenomenon of financial market integration and globalization Monetary Policy: Applies strategies that are employed nationally by the Central Bank, with regard to the amount of money circulating in the economy and the worth of it Quantitative ease (QE) policy: An unusual monetary policy used nationally by the Central Bank to help stimulate the economy. This policy is applied when the standard monetary
Transcript: We still remain susceptible to European Events but the market still appears to be happy to buy Canadian Dollars despite any weaknesses From a technical analysis point of view against the USD, a move above 1.0085 is needed to snap the tendency, while below 0.9945 will open the doors for a retest of the lower levels Saturday night the reached it's highest levels of the week against the loonie, only to retrace its gains though. 325 Million EURO in cuts were required to pass the purposed plan This resulted in a weakening of the EURO to 1.3211 level against the loonie In the past days the market has responded positively to the approval of the purposed austerity measures This Friday We will have the release of the inflation date that will most likely confirm that the Bank of Canada will not be raising their interest rates any time soon. They will continue monetary stimulus through low interest rates as the Canadian economy shows signs of decelerating growth. Last week (Feb.7th) the rate against the USD was 1.0037 On Friday the dollar slumped down against the USD after a bailout deal for Greece faced opposition As of Yesterday (Feb.13th), the CAD FX rate against the USD weakened to 0.9986 (Support zone) However this rate strengthed over night and was at 1.0013 as of 8:00 p.m last night Thank you for listening to my Market Update! CAD / USD FX Conclusion Canadian Foreign Exchange CAD / EURO FX What now?
Transcript: Fixed Exchange Rates help eliminate fluctuations in exchange rates. Under the gold standard each country declares that its currency is worth so much gold. Flexible Exchange rates help make sure that the foreign exchange demanded always equals the quantity supplied. Exchange Rate - Relative income changes. - Relative price changes. - Changes in product availability - Relative interest rate changes. - Speculation Total Revenue = Price X Quantity sold Refers to the price of one currency in terms of another. Most rates are determined by foreign exchange markets and is subject to the same influences such as supply and demand. Thoughts and Questions International Finance With currency varying by different countries, is there a way to bring it all together to eliminate this seemingly unnecessary headache? Would unifying all currency create more problems than it would solve? Exchange Rate Intervention. Macroeconomics Factors of the value - The foreign countries price of a product. - The exchange rate. For example buying a BMW Dollar price of BMW = Euro price X Dollar price of the euro A higher dollar price will raise the dollar costs of the European good. Supply and Demand for dollars Exchange Rate Market Forces The demand for US dollars originates in... - Foreign demand for American exports (Tourism) - Foreign demand for American investments. - Speculation The Supply of Dollars results from the demand in for foreign currency. - American demand for imports. - American investments in foreign countries. - Speculation Trade Balance is the difference between exports and imports of goods and services. Trade Deficit represents a net outflow of dollars to the rest of the world Current account balance is the balance of private transfers such as wages sent home by a foreign citizen working in the US Capital Account Balance is the surplus of assets bought and sold across international borders. This must equal the current account deficit. The Value of the Dollar Trade Balance
Transcript: What is the operation with the less risk? Editorial Siglo XXI Who has to bear the payment default, Editorial Siglo XXI or Banco del Parque? BANCO DEL PARQUE More Risk using Against Acceptance since the importer could take the goods and not pay after the stipulated period ----> IMPORTER GETTING FUNDS FROM THE EXPORTER A Possible scenario for exports No, in the three options the best choice is insure the operation. 4. Colombia Owr: Applicant Paid Ben: Beneficiary Paid Sha: Both Parties Paid Gives the buyer the right to buy or sell within a certain amount of currency at a fixed and predetermined change. It is a right and not an obligation . The option allows to undo insurance change in the case where the spot rate on the date of settlement is more favorable to us . Does an exporter run the same risk when the consignment is “at payment” than when it is 1. Payment Risk Analysis of the export' scenario Would it have better do not insure the operation? International Finance Case Study Emission Cost How do you calculate the total amount to be charged in euros within the agreed period, both with the exchange insurance or the other option? Who takes the initiative of opening the documentary credit? The client Rosada Castaga Are there any inconsistency on what have to be agreed between buyer and seller in the commercial contract? Administers and enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other threats to the national security This mean of payment implies an: Weighting carried out by sections of the commercial offer Less weight, represents more risk + Points: - Risk - Points: + Risk Group Members How we would have proceeded to maturity if used a foreign exchange option? Small private publishing Spanish SME specialized in publishing books on the development of human knowledge Good reputation in this niche market in Spain Breaking through in Spanish-Speaking countries where short stories are appreciated Are the goods included on the documentary credit correctly described? Risk Mexico 1. Attractive market 2. Volume of the offer 3. Synergies in second sales 4. Proximity to potential markets 5. Substantiality of the market 6. Importer Profile Has developed a series of recommendations that are recognized as the international standard for combating of money laundering and the financing of terrorism and proliferation of weapons of mass destruction. 2. Venezuela FATF currently has 36 members , 34 member countries and two regional organizations Bank Transfer Cost OFAC (OFFICE OF FOREIGN ASSETS CONTROL) Documents asked: B/L + Packing List + Certificate of Origin + Insurance + Shipment details. Thank you for your attention! N SEPA (Single Euro Payments Area) Possible scenario for exports What is the most interesting operation? What would be the situation if the documentary credit issue were not confirmed? PROBABLY THE COMPANY WILL NOT RECEIVE THE REST OF THE INVOICE Who runs the cost of a bank transfer? "At payment" VS "Against Acceptance" Classification of the countries according to country and political risk 4.Colombia Euro payments made and received under the same conditions, rights and obligations regardless their location When you are working under payment orders, what does SEPA means, how does it work and to which operations apply? What is the operation with the most risk? Lina Ortega Carlos Cruz Stefano D'Anna Raquel Moreno Alicia Martinez 1. Payment Risk Analysis of the export' scenario Issues of the case study Date of Issue: 141215 - (December 15, 2.014) Date of Expiry: 150205 - (February 05, 2015) Latest date of Shipment: 150216 - (February 16, 2015) Delivery position: Port of Valencia, February 25, 2015 Better cross-border bank transfer Handling all euro payments from a single bank account Debit card and cross-border direct debit between two bank accounts anywhere in the EU--->POSSIBLE TO BILL REGULAR CUSTOMERS ABROAD * Panama doesn't Appear (Unemployment: 5.2% - GDP'16: 6%) Venezuela 1. Commercial, political and economic risk 2. Time of payment (120 days) 3. Number of international agreements unfulfilled by country 4. Advantage: Documentary credit is safer than Bank check-Colombia or Payment order-Chile The different dates and deadlines mentioned, are they reasonable for the exporter? 4. Colombia 425.000$ Down payment 15% "against acceptance"? No affecting Editorial Siglo XXI since Venezuela and Mexico are outside the EU Argentina: Paid at side upon delivery Mexico: Paid 60 days after the delivery Operation Risk Analysis: Argentina safer than Mexico FATF (FINANCIAL ACTION TASK FORCE) Editorial Siglo XXI, S.L. Possible scenario for exports 4. Colombia In the opening Swift, it is necessary to specify the irrevocable character of the documentary credit? It would not be necessary Agreed
Transcript: CAP 15. Financial Hedges CAP 7. Parity in Interest Rates International Finance CAP 2. International Monetary System: Exchange Rate Regimes External imbalance Statistical discrepancy Portfolio investment Foreign direct investment Factor and non-factor services Credit and debit transactions Maintenance margin Variation range Initial margin MexDer Open interest Profit taking Chicago Mercantile Exchange CME Leverage Arbitrage between markets Marketability Clearing House Closing a position to future Margin account Staple currency Daily settlement International Competitiveness Workforce Balassa-Samuelson effect Overvaluation Undervaluation Real exchange rate Real interest rate Slope of the regression line Exchange rate volatility Hedging Market diversification Core business Lead / lag strategy CAP 14. Foreign Exchange Exposure and their Management Straddle Implied volatility Protective put Put synthetic Covered call Call option Put option Over the Counter (OTC) Values Adjustment Mechanism Gold Standard exchange Beggar-thy-neighbor policies Exchange regime Game rules Seigniorage Bretton Woods System Policies North American European policies Fixed exchange rate and flexible List Cruzado Union subscriber Coupon rate Floating rate Morgan Stanley Capital Internarional (MSCI) London would exchange rate (Libor) World Equity Benchmark Shares (WEBS) Emerging Market Bond Index Plus (EMBI +) Rated Euro Interbank Offered Rate (Euribor) Risk management Financial engineering Derivative Instruments Forward exchange market Parallel loans (back to gack loans) Forward premium Risk coverage Currency Swap Underlying securities (asset based swap) Market valuation CAP 4. Current Account and Exchange Rate Short hedge Natural hedge Contingent Hedge Cross Hedging Partial Hedge Transaction costs Asymmetric return profile Surplus Deficit Wages Macroeconomic policies Speculative bubbles Family budget Appreciation Central bank Interdependence coefficient International Competitiveness Foreign demand External imbalance Capital Flight Portfolio investment Offer Currency Tax havens Competitive Import Substitution Exchange Rate Competitive and Balance Elasticity of demand and supply of foreign currency Covered Call Black and Scholes model Option At the money Option in the money Option Out the money American option European option Options on futures Exercise price Prime Currency arbitrage Spatial arbitrage Broker CHIPS (Clearing House Interbank Payments System) Operational Efficiency Efficient in the economic sense Value Date Market Maker CAP 1. Globalization and International Finance Intertemporal trade Current account Capital Account Official reserve account Deficit in the balance of payments Aggregate demand Maastricht Agreement Monetary Council Terms coordinating Depreciation Devaluation Competitive devaluations Internal and external balance Destabilizing speculation Sterilization (reset) Import inflation CAP 3. Balance of Payments CAP 8. Purchasing Power Parity -PPP American Depository Receipt (ADR) Convertible bond Zero coupon bond Junk bonds Dual currency bonds Offshore Banking centerr Forward rate Warrant Static approach Dynamic approach Technical forecasts Fundamental forecasts Basis risk Hedging with futures CAP 12. Exchange Rates Forward and Futures CAP 5. Foreign Exchange Two sources: the international economy and corporate finance. Deflation Contagion effects Multinational transactional business Globalization of the economy Foreign direct investment International Markets International Business Neoliberalism Exchange rate risk Third Industrial Revolution Price Volatility CAP 10. Forward and Swaps Markets CAP 6. International Money and Capital Markets CAP 13. Foreign Currency Options Real-time gross settlement Periodic net settlement Spot market Foreign exchange market Global market Interbank market Currency vehicular Short Position or Long SWIFT (Society for Worldwide Internacional Financial Telecomuncations) Scenario analysis Natural hedge Elastic Demand Contingent exposure Repeated exposure Economic Exposure Neutral inflation CAP 11. Futures in Foreign Currencies CAP 9. General Model of the Exchange Rate in the Long Term Covered interest arbitrage Terms of parity Transaction costs Assets Approach Portfolio balance approach Rational expectations approach Rational expectations hypothesis Interest rate parity (PTI) Risk premium The exchange rate parity and conditions Performance in terms of dollars of investments in pesos Fisher effect Fisher Effect Open International Fisher Effect Nonmonetary factors National Consumer Price Index (INPC) General Price Level Commodities Inflation rates Uncommodities Law of one price Relative purchasing power parity (PPR) Absolute purchasing power parity (PPA) Base Beta of an asset Correlation coefficient Contango Maintenance costs Theoretical Forward Normal backwardation Swap points Arbitrage opportunity Exchange rate Spot Exchange rate Forward Forward and Futures contracts
Transcript: Introduction What is the annualized cost to the Bank of Korea of maintaining $205.5 billion in reserves? Assume that the government of Korea is issuing bonds that yield about 4% annually while buying dollar assets that yield about 3.25%. 1) Government of Korea issue bonds that yield 4% : Amount to be paid: $205.5 billion X (1+0.04) = $213.72 billion 2) Government of Korea buys dollar assets: Amount generated: $205.5 billion X (1+0.0325) = $212.17875 billion Profit = Revenue - cost = $212.17875 bil - $213.72 bil = -$1.54125 billion question 4 what are some pros and cons of the bank of korea diversifying its investment holdings out of dollars and into other currencies, such as euro and yen? pros a) greater exchange market stability b) reduction of volatility c) growth of the export d) reduction cost of maintaining large reserve cons a) trigger violent exchange market adjustment b) adjustment in the currency composition of reserve holdings are not smooth Question 5... How has the almost universal central bank preference for investing reserve assets in US Treasury Bonds affected the cost of financing the US budget deficit? 4 When money supply increases, this will lower the interest rate. 1. Before appreciation: $212.2b x W1011 = W214,536b Question 1 In April 2005, the Bank of Korea, South Korea’s central bank, was reviewing its investment policy.It was looking at a range of higher-yielding investment options. Solution -To hold down the value of the won, South Korea's Central Bank will buy dollar and sell won. - Extra supply of won, will drag down the won value and extra demand of dollar will push the dollar value - Consequently it will increase foreign reserves Suppose that during the year the won rose by 8% against the dollar and that the Bank of Korea kept 100% of its reserves in dollars. At a current exchange rate of W1,011/$, what would that do to the won cost of maintaining reserves of $205.5 billion? GROUP MEMBER: Group 6 8 Second Solution: New Cost Currency traders were suspicious that the Bank’s decision to invest more money in nontraditional asset was a cover for plans to diversify its reserves out of US dollars and into euros, yen and other currencies. 2. US paid 3.25%, thus: (1.0325 x $205.5b = $212.2b) 3 These are the problems that has caused the lowering of cost of financing the U.S. budget deficit. 6 2 Spread = 3.25% - 4% = -0.75% Annual cost = $205.5 billion X -0.0075 = - $1.54125 billion 2. After appreciation: W198,622.9b Growing cost of maintaining large reserves stems from the bank of Korea’s policy of sterilizing its currency market interventions. What is the link between South Korea’s currency market interventions and its growing foreign exchange reserves? Historically, the bank of Korea, has focused on safe, short-term investments. First solution : 5 However, this policy is changing as foreign exchange reserves pile up, exceeding the amount needed for policy reasons. Question 3 3. If Won appreciate 8%, thus: new exchange rate = (1/1.08 x W1,011 = w936.1/$) thus: reserves = ($212.2b x W936.1 = W198,622.9b) Megat's It has been selling government bonds and buying Treasury bonds and other dollar denominated assets. 1. Borrow W207,760.5b ($205.5b x w1,011) Payment to investors = ($205.5 x W1,011 x 1.04 = W216,070.9) The Bank of Korea Reassesses Its Reserve Policy 7 1 3. new cost = (W216,070.9b-W214,536b) + (W214,536b -W198,622.9b) = W1,534.9b + W15,913.1b = W17,448b Question 2 NOR NAZIRAH MOHAMED 1015724 ANI ARISHAH MOHD ZIN 1013542 MEGAT TARIQ MEGAT NASIR 0813483 NOORHAZLINA MOHAMED FAROUK 0829692 BENAZIR MOHAMED NAZIR 0835916 End of March 2005, South Korea’s foreign reserves were the fourth largest in the world, at $205.5 billion. The Bank of Korea has been suffering valuation losses as the dollar continues to fall against the won.
Transcript: General Agreement on Tariffs and Trade The European Union (EU) is the economical and political integration of European nations created by the Maastricht Treaty signed in 1992. A few Others these are the primary international trade and finance organizations, other organizations that play a part on the international stage in various ways include the UNITED NATIONS, WORLD BANK and GROUP of SEVEN. International Monetary Funnd GATT launched the modern era of expanded international trade when it was establisehd in 1947. The GATT still technically in force, the Uruguay Round in 1993 effectively created its replacement, the WORLD TRADE ORGANIZATION. European Union: The trading of currency is captured in what is termed the foreign exchage market . When one nation buys goods produced by another it also needs a bit of the currency of the othernation to make the payment. World Trade Organization: The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments. The Global Players Includes Canada, the United States, and Mexico. NAFTA established in 1994 to reduce trade restrictions and promote south, Canada and Mexico. established in 1995 the top list of international organization. The goal is to help producers of goods and services, exporters, and importers conduct their business. (NAFTA) The International Monetary Fund Which includes 180 Countries, is an agency of the United Nations established in 1945 to monitor and stabilize foreign exchage markets. The IMF was created to prevent countries from manipulating exchange rates in such a way that they gained a competitive trading advantage over others World Trade Organization(WTO) INTERNATIONAL FINANCE North American Free Trade Association
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