INB 200 Chapter 10: International Financial Markets

Study Notes

Introduction to International Business (INB 200)

Textbook title: International Business: The Challenges of Globalization
Edition: Tenth Edition
Publisher: Pearson
Copyright: ©2023, 2019, 2016 Pearson Education, Inc.
Relevant chapters include: Chapter 10: International Financial Markets

Welcome and Introductions

Course instructor provided a welcome
General comments and questions were addressed
Chapter 10 introduction was given
Appreciation of student presence and participation was expressed

International Financial Markets Content Overview

Overview: The slides cover the structure and functionality of international financial markets.
International Capital Market: A system that allocates financial resources (debt and equity) efficiently.
Debt Instruments: Bonds are a key method of raising capital.
Equity Instruments: Stocks, and dividends represent ownership.
International Bond Market: Market for bonds sold internationally by companies, governments, or other organizations.
Types of International Bonds: Eurobonds (issued outside the issuing country's currency) and foreign bonds (issued outside the borrower's country, denominated in the country of issue) are key types.
International Equity Market: The market for stocks bought and sold outside the issuing country's home market. Exchanges like Frankfurt, London, and New York list companies from other countries.
Factors in the Growth of the International Equity Market: Privatization of companies (e.g., Telefonica del Peru), and emerging market companies, alongside the increasing efficiency of global investment banks and electronic trading.
Eurocurrency Market: A market where currencies are banked outside of their country of origin. Eurodollars, Europounds, and Euroyen are examples.
Features of Eurocurrency Market: Absence of regulation, which reduces the cost of banking, but also increases the potential risk. Other factors include interbank interest rates (LIBOR and LIBID)
Foreign Exchange Market: A market where currencies are traded - prices are determined by supply and demand.
- Exchange Rate – Currency exchange rate.
- Currency transactions – Conducted through a bid-ask process. Bid quote = buy price, Ask quote = sell price. Bid-ask spread = difference between the two.
- Functions of Foreign Exchange Market: Currency conversion, currency hedging, currency arbitrage, interest arbitrage, currency speculation
- Exchange Rate Risk Exposures: Transaction exposure (risk to a business transaction from exchange rate changes), Translation exposure (risk to a company's financial statements from exchange rate changes), and Economic exposure (risk to a company's long-term earnings from exchange rate changes).
Currency Rates and Instruments - various components of currency rates and instruments, such as spot rates, forward rates, swaps, options, and futures
Market Structure and Convertibility - components and how currencies are converted.
- Vehicle currency: currency that is used to facilitate trades between two other currencies (e.g. EUR, USD).
- Financial centers: major trading centers worldwide.
Interbank Market – Market for currency transactions among major banks. Includes clearing mechanisms.

Quick Studies

Quick Study 10.1: Focuses on the purposes of the international capital market, traded financial instruments (bonds), definition of the international equity market, and appeal of the Eurocurrency market.
Quick Study 10.2: Details on the foreign exchange market (where currencies are traded), four primary functions of the foreign exchange market, and three exchange-rate risk exposures for companies.
Quick Study 10.3: Covers elements of currency exchange rates and instruments (including spot, forward, swaps, options).
Quick Study 10.4: Highlights the foreign exchange trading centers, interbank market's role, the definition of convertible currency, and reasons for currency restrictions.

Additional Topics

Samsung's Number Won: Illustrates a company with many subsidiaries, operating internationally and involved in transaction and translation risk.
Culture Insights: Microfinance services are useful for smaller businesses in developing countries.
Global Managers: Practical tips for managers working with foreign exchange, such as consulting multiple providers (e.g., banks), aggregating transfers to save on costs, and leveraging technology
Figure 10.1: World's Most Traded Currencies (pie chart showing the major traded currencies)
Figure 10.2: Financial Trading Centers by Time Zone (map showing locations).
Photo and Discussion Questions: (Various images related to the content).

Learning Objectives

10.1: Describe the nature and main components of the international capital market
10.2: Outline the main functions and risks of the foreign exchange market
10.3: Explain different types of currency exchange rates and instruments
10.4: Describe foreign exchange market structure and currency convertibility