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Foreign Exchange and International Financial Markets

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§Chapter 8:
Foreign Exchange and International Financial Markets
§International Business, 4th Edition
§Griffin & Pustay
§Chapter Objectives_1
§Describe how demand and supply determine the price of foreign exchange
§Discuss the role of international banks in the foreign-exchange market
§Summarize the role of arbitrage in the foreign-exchange market
§Chapter Objectives_2
§Assess the different ways firms can use the spot and forward markets to settle international transactions
§Discuss the important aspects of the international capital market
§Foreign Exchange
§Figure 8.1

Demand for Japanese Yen is Derived from Foreigner’s Demand for Japanese Products

§Figure 8.2

Supply for Japanese Yen is Derived from Japanese Demand for Foreign Products

§Figure 8.3 The Market for Yen
§Foreign Exchange Rates
§Direct exchange rate
–Direct quote
–Price of the foreign currency in terms of home currency
§Indirect exchange rate
–Indirect quote
–Price of the home country in terms of the foreign currency
§Figure 8.4 Direct and Indirect Exchange Rates
§The Role of Banks
§Wholesale market for foreign exchange
§Retail market for foreign exchange
§Clients
–Commercial customers
–Speculators
–Arbitrageurs
§Map 8.1 A Day of Foreign-Exchange Trading
§Figure 8.5 Currencies Involved in Foreign-Exchange Market Transactions
§Tokyo is the third largest center for foreign-exchange trading, trailing only London and New York
§Spot and Forward Markets
§Lending and Purchasing on credit
§Spot market: foreign-exchange transactions that are to be consummated immediately
§Forward market: foreign exchange transactions that are to occur at some time in the future
§Swap transaction: same currency is bought and sold simultaneously with delivery at different points in time
§Mechanisms for Future Foreign Exchanges
§Currency future
§Currency option
–Call option
–Put option
§Figure 8.6
Foreign-Exchange Options
on the
Chicago
Mercantile
Exchange
§Arbitrage and the Currency Market
§Arbitrage: the riskless purchase of a product in one market for immediate resale in a second market in order to profit from a price discrepancy
–Arbitrage of goods
–Arbitrage of money
§Theory of Purchasing Power Parity (PPP)
§The prices of tradable goods, when expressed in a common currency, will tend to equalize across countries as a result of exchange rate changes
§Occurs because process of buying goods in a cheap market and reselling them in expensive market affects demand for (and price of) the foreign currency and the market price of the good in the two product markets in question
§The prices these Mexican shoppers pay for foreign-made goods are affected by fluctuations in the value of the peso in the foreign-exchange market
§Arbitrage of Money
§Two-point (geographic arbitrage)
§Three-point
§Covered interest
§Figure 8.7 Three-Point Arbitrage
§Importance of Arbitrage Activities
§Constitutes a major portion of $1.2 trillion currencies traded globally each working day
§Ties together the foreign-exchange markets
§Overcomes differences in geography, currency type, time
§
§Table 8.1 The World’s 10 Largest Banks
§Establishment of
Overseas Banking Operation
§Subsidiary bank
§Branch bank
§Affiliated bank
§The Eurocurrency Market
§Originated in the early 1950s
§Eurodollars – U.S. dollars deposited in European bank accounts
–Euroyen
–Europounds
§Eurocurrency – currency on deposit outside in banks worldwide
§Euroloans quoted on basis of LIBOR
§The International Bond Market
§Major source of debt financing for
–World’s governments
–International organizations
–Larger firms
§2 types of bonds
–Foreign bonds
–Eurobonds
§Figure 8.8 International Bond Issues,
2001, by Currency (in billions of U.S. dollars)
§Hong Kong residents seeking to buy shares in the Web portal firm tom.com
§Global Equity Markets
§Start-up companies are no longer restricted to raising new equity only from domestic sources
§Development of country funds
–Mutual fund specializing in a given country’s funds
§Offshore Financial Centers
§Focus on offering banking and other financial services to non-resident customers
§Locations
–Bahamas, Bahrain, the Cayman Islands, Bermuda, the Netherlands Antilles, Singapore, Luxembourg, Switzerland
§
 
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Ditulis oleh pada 24/08/2012 in Akutansi International

 

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