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International financial markets

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Jurate Gemskyte

on 31 January 2014

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Transcript of International financial markets

International Financial Markets
International financial markets
Main Components of the International Capital Market
Currency Convertibility
International capital market
Foreign exchange market
Efficient mechanism

Participants:

Individuals
Companies
Governments
Mutual funds
Pension funds
Non-profits
External financing:
Debt

Loan, borrower promises to pay back + interest
Equity

Part ownership of the company
Intermediaries
Commercial banks
Investment banks (agents)
International Capital market (ICM)
Individuals
Companies
Financial institutions
Governments
Invest
Borrow
Formal exchanges
Electronic networks
Benefits
Borrowing abroad
-small/developing home markets
Expanded money supply
-reduces the cost of borrowing
Reduced risk
-greater set of opportunities

-the prices of international securities move independently

Forces behind the ICM
I.T.
Information about opportunities and risks
reduced communication costs
quick response
Deregulation
Increased competition

Lowered costs of financial transactions

Opened national markets to global investing/borrowing
Financial instruments
Securitization
combining financial assets into a more liquid financial
instruments
Crash
World financial centers
London NYC Tokyo
Offshore financial centres
Country
Territory
Few regulations
Low taxes
Economic & political stability
Access to ICM
Two types
Operational Centres
-
financial activity
London
(currency trading)
Switzerland
(supplies investment capital)
Booking Centres
Favourable taxes
Secrecy laws
Little financial activity
There are 3 main components of the ICM
International Bond Market
International Equity Market
Eurocurrency Markets
International Bond Market
"consists of all bonds sold by issuing companies, governments, or other organizations
outside their own countries
" Wild, Wild & Han (2010)

2 types of International Bond
Eurobond
"Capital Markets are an essential mechanism to transfer funds for those who have them to those who need them, fuelling growth in the real economy" (ICMA)
Foreign Bond
International Equity Market
What is the International Equity Market?
What factors have contributed to growth in the IEM?
PRIVATISATION

ECONOMIC GROWTH IN DEVELOPING COUNTRIES

ACTIVITY OF INVESTMENT BANKS

CYBERMARKETS
Eurocurrency Market
Where does the capital come from in this market?
Governments with excess funds

Commercial banks with large deposits of excess currency

International companies with large amounts of excess capital

Wealthy individuals
Foreign Exchange Market
What is the Foreign Exchange Market?
Functions of the Foreign Exchange Market
1. Currency Conversion
2. Currency Hedging
3. Currency Arbitrage
4. Currency Speculation
"Market in which shares in public companies and other securities are traded" (Morrison, 2011)
Main Stock Exchanges:
NYSE + NASDAQ (New York)
London
Hong Kong
Foreign Exchange Market
"Market in which currencies are bought and sold, and their prices determined" (Wild & Wild, 2012)
Volatile (Rugman, 2009)
Supply & Demand
Bid/Ask Prices
Bonds issued outside the country in whose currency it is denominated

eg. a bond issued by a Venezuelan company, denominated in US dollars, and sold in Britain, Japan and Australia but not in the USA is a
EUROBOND.
Eurobonds account for around 75% of international bonds.


Popular because they allow issuers to exploit advantageous regulatory and lending conditions in other countries.


Usually not subject to taxes or rules of any particular government, thus often making it cost effective BUT also risky.
A bond that is issued in a domestic market by a foreign entity, in the domestic market's currency.
eg. Bond types such as...
Bulldog

Samurai

Yankee

Dragon
"Consists of all the world's currencies that are banked outside their country of origin"
Large transactions
Worth $6 trillion

Not all currencies can be freely converted
Only those currently holding a strong financial postion & enough foreign currency reserves will allow free convertibility.
Many newly industrialized and developing countries do not meet these targets which leads them to impose restrictions on convertibility.
ISSUES SURROUNDING FREE CONVERSION
Working as a Trader
Famous Success Stories
John W. Henry
Jesse Livermore
Impact of Technology
-Digital Technology has had a massive impact on the Foreign Exchange Market.
-Millions of dollars spent annually on high speed communications.
Trading Centres
Three main trading centres dominate the Foreign Exchange Market
The Foreign Exchange Market Today
The Forex Market Everyday
The Three Main Components of The Foreign Exchange Market
The Interbank Market
Where the major banks exchange currencies at spot and forward rates.
The Interbank will locate and exchange currencies for their clients and offer trading and risk management advice.
Securities Exchanges
Specialize in currency futures and options transactions.
Currency exchanges are much smaller than the Interbank.
Over-the-Counter Market
A global computer network that allows traders to conduct foreign exchange trading from a decentralized network.
Both came from farming families and made millions on the Foreign Exchange Market.
The 2008-2009 recession had a massive impact on the Foreign Exchange Market
How the Foreign Exchange Market works
How exchange rates are quoted : Direct/Indirect, Cross Rate

2 ways exchange rates are used in terms of payment: Spot Rate, Forward Rate

3 currency instruments used in the Forward Market

Factors which effect the exchange rate of a currency
Plan:
Direct/Indirect
Liquidity is needed to avoid defaulting on a loan.
Argentina fell victim to this in 1997 during the Great Argentine Crisis.
Countries can more easily keep track of inventories with which to finance trade imbalances.
Makes importing goods more difficult due to lack of available foreign currency.
Preserves hard currencies in order to finance trade deficits and pay for imports
Preserves a country's reserves of foreign currency with which to pay debts owed to other nations.
Protects the currency from speculators
Cross rate
Defined as :
‘The currency exchange rate between two currencies, both of which are not the official currencies of the country in which the exchange rate quote is given in

Used as a means of gaining a better deal by using a more favourable exchange rate of another currency
2 ways of using Exchange Rates
Spot Rates
'Benchmark rate'/'Outright rate'
Definition: A straightforward price buyers are expected to pay for a foreign currency
' The Bank of International Settlements as of April 2010 stated the average daily turnover in the global foreign exchange market is estimated at $ 3.98 trillion, a growth of 20% from the daily volume as of April 2007. $1.490 trillion of this is down to spot transactions '
Forward Rate
Definition: the rate at which 2 parties agree to exchange currencies on at a specified future datee
An agreement in the form of a Forward Contract has to be made with the stated date, amount and forward exchange rate
Determinants of Forward Exchange Rate :
Economic Conditions
Social Factors
Political Factors
3 Types of Currency Instruments
Asian Financial Crisis
Factors affectng Exchange Rate
Interest Rates
Foreign Trade
In 1997 Malaysia adopted measures to stem damage caused by the crisis.
Outflow of foreign currency was stemmed, preventing Malaysian investors from exchanging the ringgit into other currencies- essentially freezing their Malaysian holdings.
The Malaysian ringgit was placed on a fixed exchange system.
Overseas trade in ringgit currency and assets was stopped
This effectively cut Malaysia off from investors elsewhere in the world
Official Intervention
Shocks and Speculations
Essentially determined by the demand and supply of the particular currency
Prevents resident businesses from investing in other nations
Currency Swap
' When two parties agree to swap currencies for a certain length of time and reverse transaction at a later date '
Policies restricting free conversion of currencies aim to force investments to remain at home therefore generating rapid economic growth in the home nation.
Unfortunately this is usually only successful in the short term.
Keeping domestic funds in the home country poses no guarantee that they will be invested there.
They may instead be saved or spent on consumption.
2 reasons :

To secure cheaper debt ( to borrow at the best available rate no matter what currency, then swapping to desired currency using back-to-back loans)
Reduce exposure to exchange rate fluctuations
Currency Option
Similar to Forward Rate contracts
' Gives the right/option to exchange a specific amount of currency at a set rate and date '
Beneficial in avoiding negative impact due to exchange rate fluctuations
Futures
All conditions must be fixed and are not adjustable
Why are restrictions imposed?
How are restrictions imposed?

Governments can require that all transactions be authorised by the central bank.
This may be imposed via import licenses
Multiple Exchange Rates
This can be done on the basis of duel exchange rates.
However the market may also be divided up into segments; each with its own exchange rate.
Import Deposit Requirements
A country could require a business to place a percentage of their foreign exchange value into a special account before being granted import rights
Your country is planning on placing a high fixed exchange rate on one of these types of goods. Which one do you choose?
Quantity Restrictions
These limit the amount of foreign currency that residents can take out of the country when travelling as students, medical patients or tourists
COUNTER TRADE
Goods are exchanged for other goods instead of hard currency.
The most common method is
bartering
whereby goods or services are directly exchanged for others of equal value with no cash settlement.
Counter purchase
Overseas seller agrees to buy goods sourced from the buyer's country up to a defined amount.
Offset Arrangement
The seller assists in marketing products manufactured by the buying country or allows part of the assembly process to be carried out by the buying country
The U.S. dollar is the most commonly used 'Vehicle Currency'.
$1 = € 0.7883
Base
Quoted
€0.7883/$
Direct
Indirect
Full transcript