International Financial MarketsInternational Financial Markets 33

(1)

International Financial Markets International Financial Markets

3 3

ChapterChapter

(2)

•

To describe the background and corporate use of the following international financial markets:

¤

foreign exchange market( 外匯市場 ),

¤

Eurocurrency market( 歐洲通貨市場 ),

¤

Eurocredit market( 歐洲信用市場 ),

¤

Eurobond market( 歐洲債券市場 ),

¤

international stock markets( 國際股票市場 ).

Chapter Objectives

(3)

Motives for Using

International Financial Markets ( 國際金融市場存在的動機 )

• ^市場障礙 :The markets for real or

financial assets are prevented from

complete integration by barriers such as tax differentials, tariffs, quotas,

labor immobility, communication

costs, cultural differences, and

financial reporting differences.

(4)

Motives for Using

International Financial Markets

• ^市場機會 : These barriers can also create unique opportunities for

specific geographic markets that will

attract foreign investors.

(5)

• Investors invest in foreign markets:

¤ to take advantage of favorable economic conditions(

利用有利的經濟條件

);

¤ when they expect foreign currencies to appreciate against their own(

貨幣升值

);

¤ to reap the benefits of international

diversification(

獲取國際風險分散的利益

).

Motives for Using

International Financial Markets

(6)

•

Creditors( 債權人 ) provide credit in foreign markets:

¤ to capitalize on higher foreign interest rates(

國外較高利率的資本化 );

¤ when they expect foreign currencies to

appreciate against their own( ^{外幣升值利益} );

¤ to reap the benefits of international

diversification

( 獲取國際風險分散利益 ).

Motives for Using

International Financial Markets

(7)

• Borrowers( 貸款者 ) borrow in foreign markets:

¤ to capitalize on lower foreign interest rates ( 國外較低利率的利益 );

¤ when they expect foreign currencies to

depreciate against their own( 貨幣貶值的利益 ).

Motives for Using

International Financial Markets

(8)

Foreign Exchange Market ( 外匯市場 )

•

The foreign exchange market allows currencies to be exchanged in order to facilitate international trade or financial transactions( 方便國際貿易與財務交易 ).

•

The system for establishing exchange rates has evolved over time.

¤ From 1876 to 1913, each currency was

convertible into gold at a specified rate, as dictated by the gold standard( 金本位制 _).

(9)

Foreign Exchange Market

¤ The 1944 Bretton Woods Agreement ( 布里

敦森林制度 )called for fixed currency

exchange rates( 固定匯率制度 ).

¤ By 1971, the U.S. dollar appeared to be

overvalued( 美元幣值高估 ). The

Smithsonian Agreement devalued the U.S.

dollar and widened the boundaries for exchange rate fluctuations from ±1% to

±2%( 美元貶值並擴大匯率波動幅度 ).

(10)

Foreign Exchange Market

¤ Even then, governments still had difficulties maintaining exchange rates within the

stated boundaries. In 1973, the official boundaries for the more widely traded

currencies were eliminated and the floating exchange rate system(

浮動匯率制度

₎

came into effect.

(11)

Foreign Exchange

Transactions( 外匯交易 )

•

There is no specific building or location

where traders exchange currencies. Trading also occurs around the clock.

•

The market for immediate exchange is known as the spot market( 即期市場 _).

•

The forward market ( 遠期市場 )enables an MNC to lock in the exchange rate at which it will buy or sell a certain quantity of currency

(12)

•

Hundreds of banks facilitate foreign

exchange transactions, though the top 20 handle about 50% of the transactions.

•

At any point in time, arbitrage ensures that exchange rates are similar across banks.

•

Trading between banks occurs in the

interbank market. Within this market, foreign exchange brokerage firms sometimes act as middlemen.

Foreign Exchange

Transactions

(13)

•

The following attributes of banks are

important to foreign exchange customers:

¤ competitiveness of quote

¤ special relationship between the bank and its customer

¤ speed of execution

¤ advice about current market conditions

¤ forecasting advice

Foreign Exchange

Transactions

(14)

• Banks provide foreign exchange services for a fee: the bank’s bid (buy) quote for a foreign

currency will be less than its ask (sell) quote.

This is the bid/ask spread.

• bid/ask % spread = ask rate – bid rate ask rate

• Example: Suppose bid price for £ = $1.52, ask price = $1.60.

bid/ask % spread = (1.60–1.52)/1.60 = 5%

Foreign Exchange

Transactions

(15)

• The bid/ask spread is normally larger for those currencies that are less frequently

traded.

• The spread is also larger for “retail”

transactions than for “wholesale”

transactions between banks or large corporations.

Foreign Exchange

Transactions

(16)

Interpreting

Foreign Exchange Quotations

• Exchange rate quotations for widely

traded currencies are frequently listed in the news media on a daily basis. Forward rates may be quoted too.

•

The quotations normally reflect the ask prices for large transactions.

(17)

• Direct quotations( 直接報價 ₎

represent the value of a foreign currency in dollars,

while indirect quotations

( 間接報價 ) represent the number of units of a foreign currency per dollar.

Interpreting

Foreign Exchange Quotations

(18)

• ^A cross exchange rate( 交叉匯率 ) reflects the amount of one foreign currency per unit of another foreign currency.

•

Value of 1 unit of currency A in units of currency B = value of currency A in $

value of currency B in $

Interpreting

Foreign Exchange Quotations

(19)

Currency Futures and Options Market

• A currency futures contract ( 外幣期貨

契約 )specifies a standard volume( 標

準數量 ) of a particular currency to be

exchanged on a specific settlement

date( 特定交割日期 ). Unlike forward

contracts however, futures contracts

are sold on exchanges( 交易所 ).

(20)

Currency Futures and Options Market

• Currency options contracts( 外幣選擇

權契約 ) give the right to buy or sell a

specific currency at a specific price

within a specific period of time. They

are sold on exchanges too.

(21)

$ $

Eurocurrency Market

•

U.S. dollar deposits placed in banks in Europe and other continents are called Eurodollars( 歐洲美元 _).

•

In the 1960s and 70s, the Eurodollar market, or what is now referred to as the

Eurocurrency market, grew to accommodate increasing international business and to

bypass stricter U.S. regulations on banks in

(22)

$ $

Eurocurrency Market

• The Eurocurrency market is made up of several large banks called Eurobanks that accept deposits and provide loans in

various currencies.

• For example, the Eurocurrency market has historically recycled the oil revenues

(petrodollars) from oil-exporting (OPEC)

countries to other countries.

(23)

•

Although the Eurocurrency market focuses on large-volume transactions, there are times

when no single bank is willing to lend the needed amount.

•

A syndicate( 銀行聯貸 ) of Eurobanks may then be composed to underwrite the loans. Front- end management ( 管理費 )and commitment fees( 承諾費 ) are usually charged for such

$ $

Eurocurrency Market

(24)

•

The recent standardization of regulations around the world has promoted the

globalization of the banking industry.

•

In particular, the Single European Act has opened up the European banking industry.

•

The 1988 Basel Accord signed by G-10 central banks outlined common capital standards, such as the structure of risk weights, for their banking industries.

$ $

Eurocurrency Market

(25)

$ $

• The Eurocurrency market in Asia is

sometimes referred to separately as the Asian dollar market( 亞洲美元市場 _).

• The primary function of banks in the Asian dollar market is to channel funds from

depositors to borrowers.

• Another function is interbank lending and

Eurocurrency Market

(26)

LOANS

LOANS

Eurocredit Market

•

Loans of one year or longer are extended by Eurobanks to MNCs or government

agencies in the Eurocredit market. These loans are known as Eurocredit loans.

•

Floating rates are commonly used, since

the banks’ asset and liability maturities may not match - Eurobanks accept short-term

deposits but sometimes provide longer term loans.

(27)

Eurobond Market

There are two types of international bonds.



Bonds denominated in the currency of the country where they are placed but issued by borrowers foreign to the country are called foreign bonds or parallel bonds.



Bonds that are sold in countries other than the country represented by the currency

denominating them are called Eurobonds.

BONDS

BONDS

(28)

•

The emergence of the Eurobond market is partially due to the 1963 Interest

Equalization Tax imposed in the U.S.

•

The tax discouraged U.S. investors from investing in foreign securities

( 稅法使投資人不再投資外國證券 ), so non- U.S. borrowers looked elsewhere for

funds.

Eurobond Market

^BONDS

^BONDS

(29)

Eurobond Market

• Then in 1984, U.S. corporations were allowed to issue bearer bonds( 無記名債券 ) directly to non-U.S.

investors, and the withholding tax on

bond purchases was abolished.

(30)

Eurobond Market

• Eurobonds are underwritten by a multi-national syndicate ( 多國籍集

團 )

of investment banks and

simultaneously placed in many

countries through second-stage, and in many cases, third-stage,

underwriters.

BONDS

BONDS

(31)

Eurobond Market

• Eurobonds are usually issued in bearer form, pay annual coupons, may be convertible( 可轉換 ), may have variable rates( 浮動利率 ), and typically have few protective

covenants.

(32)

•

Interest rates for each currency and credit conditions in the Eurobond market change constantly, causing the popularity of the market to vary among currencies.

•

About 70% of the Eurobonds are denominated in the U.S. dollar( 以美元計價 ).

•

In the secondary market, the market makers are often the same underwriters who sell the primary issues.

Eurobond Market

^BONDS

^BONDS

(33)

Comparing Interest Rates Among Currencies

• Interest rates vary substantially for

different countries, ranging from about 1%

in Japan to about 60% in Russia.

• Interest rates are crucial because they affect the MNC’s cost of financing.

•

The interest rate for a specific currency is determined by the demand for and supply

(34)

Quantity of $ Interest

Ratefor $ S

D

Quantity of Real Interest

for RealRate

S

D

Why U.S. Dollar Interest Rates Differ from Brazilian Real Interest Rates

• The curves are further to the right for the dollar because the U.S. economy is larger.

• The curves are higher for the Brazilian Real because of the higher inflation in Brazil.

(35)

Comparing Interest Rates Among Currencies

•

As the demand and supply schedules

change over time for a specific currency, the equilibrium interest rate for that

currency will also change.

•

Note that the freedom to transfer funds across countries causes the demand and

supply conditions for funds to be somewhat integrated, such that interest rate

(36)

International Stock Markets

• In addition to issuing stock locally, MNCs can also obtain funds by

issuing stock in international

markets( 跨國企業可到國外發行股票 ).

(37)

International Stock Markets

•

This will enhance the firm’s image and name recognition( 加強企業形象與認

同 ), and diversify the shareholder

base( 股權分散 ). The stocks may also be more easily digested.

•

Note that market competition should increase the efficiency of new issues.

(38)

•

Stock issued in the U.S. by non-U.S. firms or governments are called Yankee stock offerings. Many of such recent stock

offerings resulted from privatization

programs in Latin America and Europe.

•

Non-U.S. firms may also issue American depository receipts (ADRs), which are

certificates representing bundles of stock.

ADRs are less strictly regulated.

International Stock Markets

(39)

•

The locations of the MNC’s operations can influence the decision about where to place stock, in view of the cash flows needed to cover dividend payments.

•

Market characteristics are important too.

Stock markets may differ in size, trading activity level, regulatory requirements,

taxation rate, and proportion of individual

International Stock Markets

(40)

Comparison of

International Financial Markets

• The foreign cash flow movements of a typical MNC can be classified into four

corporate functions, all of which generally require the use of the foreign exchange

markets.



Foreign trade( 國際貿易 ). Exports generate

foreign cash inflows while imports require

cash outflows.

(41)

Comparison of

International Financial Markets



Direct foreign investment (DFI). Cash

outflows to acquire foreign assets

generate future inflows.



Short-term investment or financing in foreign securities( 短期投資或融資 ),

usually in the Eurocurrency market.



Longer-term financing in the Eurocredit,

(42)

Foreign Cash Flow Chart of an MNC

MNC Parent

Foreign Subsidiaries

Foreign Business

Clients

Eurocurrency

Market Eurocredit &

Eurobond Markets

International Stock Markets

Foreign Exchange

Markets Export/Import

Export/Import

Short-Term Investment

& Financing Long-Term

Financing Foreign Exchange Transactions

Medium- &

Long-Term Financing Dividend

Remittance

& Financing

Short-Term

Investment & Financing

(43)

Impact of Global Financial Markets on an MNC’s Value

   

 

 

 





















n 

t t

m j

t j t

j

k

1

=

1

, ,

1

ER E

CF E

= Value

E (CF_j,t) = expected cash flows in currency j to be received by the U.S. parent at the end of period t

E (ER_j,t) = expected exchange rate at

Cost of parent’s funds borrowed in global markets Cost of borrowing funds

in global markets Improved global image from

issuing stock in global markets

Cost of parent’s equity in global markets

(44)

• Motives for Using International Financial Markets

¤ Motives for Investing in Foreign Markets

¤ Motives for Providing Credit in Foreign Markets

¤ Motives for Borrowing in Foreign Markets

Chapter Review

(45)

Chapter Review

• Foreign Exchange Market

¤ History of Foreign Exchange

¤ Foreign Exchange Transactions

¤ Interpreting Foreign Exchange Quotations

¤ Currency Futures and Options Markets

(46)

Chapter Review

• Eurocurrency Market

¤ Development of the Eurocurrency Market

¤ Composition of the Eurocurrency Market

¤ Syndicated Eurocurrency Loans

¤ Standardizing Bank Regulations within the Eurocurrency Market

¤ Asian Dollar Market

• Eurocredit Market

(47)

Chapter Review

• Eurobond Market

¤ Development of the Eurobond Market

¤ Underwriting Process

¤ Features

• Comparing Interest Rates Among Currencies

¤ Global Integration of Interest Rates

(48)

Chapter Review

• International Stock Markets

¤ Issuance of Foreign Stock in the U.S.

¤ Issuance of Stock in Foreign Markets

International Financial MarketsInternational Financial Markets 33

International Financial Markets International Financial Markets

3 3

•

foreign exchange market( 外匯市場 ),

Eurocurrency market( 歐洲通貨市場 ),

Eurocredit market( 歐洲信用市場 ),

Eurobond market( 歐洲債券市場 ),

international stock markets( 國際股票市場 ).

Chapter Objectives

Motives for Using

International Financial Markets ( 國際金融市場存在的動機 )

• 市場障礙 :The markets for real or

financial assets are prevented from

complete integration by barriers such as tax differentials, tariffs, quotas,

labor immobility, communication

costs, cultural differences, and

financial reporting differences.

Motives for Using

International Financial Markets

• 市場機會 : These barriers can also create unique opportunities for

specific geographic markets that will

attract foreign investors.

利用有利的經濟條件

貨幣升值

獲取國際風險分散的利益

Motives for Using

International Financial Markets

•

( 獲取國際風險分散利益 ).

Motives for Using

International Financial Markets

• Borrowers( 貸款者 ) borrow in foreign markets:

Motives for Using

International Financial Markets

Foreign Exchange Market ( 外匯市場 )

•

•

Foreign Exchange Market

敦森林制度 )called for fixed currency

overvalued( 美元幣值高估 ). The

Foreign Exchange Market

浮動匯率制度

Foreign Exchange

Transactions( 外匯交易 )

•

•

•

•

•

•

Foreign Exchange

Transactions

•

Foreign Exchange

Transactions

Foreign Exchange

Transactions

• The bid/ask spread is normally larger for those currencies that are less frequently

• The spread is also larger for “retail”

transactions between banks or large corporations.

Foreign Exchange

Transactions

Interpreting

Foreign Exchange Quotations

• Exchange rate quotations for widely

traded currencies are frequently listed in the news media on a daily basis. Forward rates may be quoted too.

•

• Direct quotations( 直接報價 )

represent the value of a foreign currency in dollars,

while indirect quotations

( 間接報價 ) represent the number of units of a foreign currency per dollar.

Interpreting

Foreign Exchange Quotations

• A cross exchange rate( 交叉匯率 ) reflects the amount of one foreign currency per unit of another foreign currency.

•

Interpreting

Foreign Exchange Quotations

Currency Futures and Options Market

• A currency futures contract ( 外幣期貨

• ^市場障礙 :The markets for real or

• ^市場機會 : These barriers can also create unique opportunities for

• Direct quotations( 直接報價 ₎

• ^A cross exchange rate( 交叉匯率 ) reflects the amount of one foreign currency per unit of another foreign currency.

sometimes referred to separately as the Asian dollar market( 亞洲美元市場 _).

^BONDS

• Then in 1984, U.S. corporations were allowed to issue bearer bonds( 無記名債券 ) directly to non-U.S.

^BONDS