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Questions and Answers

What is the bid price in the foreign exchange market?

The average price of a currency in the market

The difference between the buy and sell price

The price at which the bank buys a currency (correct)

The price at which the bank sells a currency

Which of the following best describes currency hedging?

Holding a currency to gain long-term value appreciation

Converting currencies to profit from exchange rate fluctuations

Buying and selling currencies instantly for profit

Insuring against potential losses from adverse exchange rate changes (correct)

What does transaction exposure refer to in exchange-rate risk?

The potential for market changes to benefit currency sales

The effect of exchange rate changes on financial statements

The risk that exchange rate changes will impact the value of a specific business transaction (correct)

The risk from market fluctuations on a company's long-term earnings

What is the primary goal of currency speculation?

To profit from anticipated changes in a currency's value Signup and view all the answers

Which type of exposure addresses the long-term impact of exchange rate changes on earnings potential?

Economic exposure Signup and view all the answers

What are the two primary means of obtaining external financing in the international capital market?

Debt and Equity Signup and view all the answers

Which of the following best defines the international capital market?

A network that allows investments and borrowing across national boundaries Signup and view all the answers

What distinguishes a Eurobond from a foreign bond?

A Eurobond is issued outside the country in which it is denominated. Signup and view all the answers

Which of the following is NOT an advantage of the international capital market?

Increases the cost of capital for lenders Signup and view all the answers

What role does microfinance serve in the context of underbanked individuals?

Offers financial services to those with limited access to traditional providers Signup and view all the answers

In the context of international bonds, what is a foreign bond?

Issued by a foreign government, denominated in its currency Signup and view all the answers

What is considered a primary risk factor in the foreign exchange market?

Interest rate fluctuations Signup and view all the answers

Which function does the international capital market primarily serve?

Allocating financial resources efficiently Signup and view all the answers

What is a significant challenge that entrepreneurs in developing countries face when obtaining loans?

High interest rates can significantly reduce profits. Signup and view all the answers

Which factor is NOT listed as contributing to the growth of the international equity market?

Government subsidies for stocks. Signup and view all the answers

What differentiates Eurocurrency from traditional currencies?

It is banked outside of its country of origin. Signup and view all the answers

What is a primary attraction of the Eurocurrency market?

Absence of regulation lowering banking costs. Signup and view all the answers

Which of the following financial instruments is associated with the Eurocurrency market?

Eurodollars. Signup and view all the answers

What role do investment banks play in the international capital market?

They connect borrowers with investors. Signup and view all the answers

Which of the following is an example of a factor that helps prevent defaults in loans?

Peer pressure and community support. Signup and view all the answers

Which interbank loan rate is commonly referenced in the Eurocurrency market?

London Interbank Offer Rate (LIBOR). Signup and view all the answers

Study Notes

BUS 200 - International Financial Markets

This course covers international financial markets.

Learning Objectives

Describe the features and key elements of the international capital market.
Understand the workings and potential risks of foreign exchange markets.
Identify various currency exchange rates and associated instruments.
Examine the structure of foreign exchange markets and currency convertibility.

The International Capital Market

A system for allocating financial resources (debt and equity) based on their most efficient use.
Two main ways to finance externally:
- Debt (bonds).
- Equity (stock and dividends).

The International Capital Market: Benefits

A network of individuals, companies, financial institutions, and governments investing and borrowing internationally.
Expands opportunities for borrowers.
Reduces risks for lenders.

The International Capital Market: Bonds

International bond market deals with bonds issued by companies, governments, or organizations outside their home countries.
Issuing bonds is a common method for securing needed funding.

Types of International Bonds

Eurobonds: issued outside the country whose currency they're denominated in.
Foreign bonds: issued in the borrower's country and denominated in that country's currency.

Culture Insights: Big Results from Microfinance

Microfinance provides small loans and financial services to underbanked entrepreneurs, small businesses, and families, helping them overcome challenges in developing economies.
Loans can be difficult to obtain and high interest rates may deplete profits.
Peer pressure and support among borrowers can help prevent defaults.
Microfinance assists minority entrepreneurs in developed nations.
Additional support can include job training, savings accounts, and basic healthcare.

The International Capital Market: Equity

International equity market encompasses stocks bought and sold outside the issuer's home countries.
Key stock exchanges (Frankfurt, London, and New York) list a large number of companies from outside their jurisdictions.

Factors in International Equity Market Growth

Privatization in certain developing markets.
Emerging markets increase investment opportunities.
International investment banks provide funding.
Electronic trading platforms facilitate seamless transactions.

The International Capital Market: Eurocurrency

A market for currencies outside their countries of origin.
Includes Eurodollars, Europounds, and Euroyen.
Sources encompass governments, commercial banks, international companies, and wealthy individuals.

The Main Appeal and Risks of the Eurocurrency Market

The main appeal is the absence of regulation.
This lowers the cost of banking but increases potential risks due to the lack of regulatory oversight.
Interbank rates are the interest rates major banks charge each other for loans.
Key examples include LIBOR (London Interbank Offer Rate) and LIBID (London Interbank Bid Rate).

The Foreign Exchange Market

A market for buying and selling currencies, setting their exchange rates.
Exchange rate is the rate at which one currency is traded for another.
Currency transactions involve bid and ask quotes.
- Bid quote is the price at which a bank will buy.
- Ask quote is the price at which a bank will sell.
- Bid-ask spread is the difference between these two prices.

Exchange Rate Risk Exposure

Exchange-rate risk is the potential for adverse changes in exchange rates to negatively affect a business.
- Transaction exposure: How exchange rate changes affect the value of a business transaction.
- Translation exposure: How exchange rate changes impact a company's financial statements.
- Economic exposure: How exchange rate changes influence a company's long-term earning potential from international operations.