INB 200 Introduction to International Business Ch. 10 PDF

# INB 200 – Introduction to International Business - Chapter 10: International Financial Markets ## Tenth Edition - Welcome! - General Comments/Questions - Chapter 10: International Financial Markets - Thank You for Your Presence & Participation A globe and a tree are shown. ## International B...

# INB 200 – Introduction to International Business - Chapter 10: International Financial Markets ## Tenth Edition - Welcome! - General Comments/Questions - Chapter 10: International Financial Markets - Thank You for Your Presence & Participation A globe and a tree are shown. ## International Business: The Challenges of Globalization - Chapter 10: International Financial Markets ## Tenth Edition ## Financial Markets A man is shown on a whiteboard which is showing the following: <br> **AN INTROUDCTION TO FINANCIAL MARKETS** <br> RETURN <-> COST INVESTORS (LENDERS)<-> FINANCIAL MARKETS <-> BORROWERS ↓ GOV'T COMPANIES <br> **Video-link:** https://www.youtube.com/watch?v=6OoMQiCIXCs ## The International Capital Market ### Capital market System that allocates financial resources in the form of debt and equity according to their most efficient uses. Two primary means of obtaining external financing: #### Debt - Bonds #### Equity - Stock #### Dividends ## The International Capital Market: Benefits **International capital market** Network of individuals, companies, financial institutions, and governments that invest and borrow across national boundaries. **Offers two key benefits**: - Expands opportunities for borrowers - Reduces risk for lenders ## The International Capital Market: Bonds (1 of 2) **International bond market** Market consisting of all bonds sold by issuing companies, governments, or other organizations outside their own countries. **Issuing bonds is a popular way to obtain needed funding** ## The International Capital Market: Bonds (2 of 2) **Types of international bonds:** - **Eurobond** - Bond issued outside the country in whose currency it is denominated - **Foreign bond** - Bond sold outside the borrower's country and denominated in the currency of the country in which it is sold **Low interest rates fuel growth in the bond market** ## The International Capital Market: Equity (1 of 2) **International equity market** Market consisting of all stocks bought and sold outside the issuer's home country. The stock exchanges of Frankfurt, London, and New York list the greatest number of companies from outside their own borders. ## The International Capital Market: Equity (2 of 2) **Factors in the growth of the international equity market:** - **Privatization** - Telefonica del Peru - **Emerging markets** - International markets are a major source of funding. - **Investment banks** - Bring together borrowers and investors. - **Electronic trading** - Match buyers and sellers in nanoseconds ## The International Capital Market: Eurocurrency (1 of 2) **Eurocurrency market** Market consisting of all the world’s currencies that are banked outside their countries of origin (referred to as Eurocurrency). - Eurodollars - Europounds - Euroyen **Sources** - Governments - Commercial banks - International companies - Wealthy individuals ## The International Capital Market: Eurocurrency (2 of 2) The main appeal of the Eurocurrency market is a complete absence of regulation. - Lowers the cost of banking but increases potential risk. **Interbank interest rates** Interest rates that the world's largest banks charge one another for loans. - London Interbank Offer Rate (LIBOR) - London Interbank Bid Rate (LIBID) ## The Foreign Exchange Market (1 of 2) **Foreign exchange market** Market in which currencies are bought and sold and their prices are determined. **Exchange rate** Rate at which one currency is exchanged for another. Currency transactions are conducted through a process of bid and ask quotes. - The **bid quote** is the price at which the bank will buy. - The **ask quote** is the price at which the bank will sell. - The **bid-ask spread** is the difference between the two. ## The Foreign Exchange Market (2 of 2) An exchange rate quote in the foreign exchange market states the amount of a currency that is required to buy one unit of another currency. The exchange rate between the Japanese yen and the US dollar is stated as - We read this as “110 yen to the dollar,” or “110 yen are needed to buy one dollar." An exchange rate of… tells us that… are needed to buy one US dollar. To learn how many US dollars are needed to buy one euro, we divide 0.84 into 1. - This tells us that $1.19 is needed to buy one euro. We write this exchange rate as…. ## The Foreign Exchange Market: Functions - **Currency conversion** - To facilitate transactions, invest directly abroad, or repatriate profits - **Currency hedging** - Practice of insuring against potential losses that result from adverse changes in exchange rates. - **Currency arbitrage** - Instantaneous purchase and sale of a currency in different markets for profit - **Interest arbitrage** - **Currency speculation** - Purchase or sale of a currency with the expectation that its value will change and generate a profit. ## The Foreign Exchange Market: Exchange Rate Risk - Exposure - **Exchange-rate risk** - Potential for adverse changes in exchange rates that could harm a business. - **Transaction exposure** - Risk that an exchange rate change will affect the value of a business transaction. - **Translation exposure** - Risk that an exchange rate change will affect a company’s financial statements. - **Economic exposure** - Risk that an exchange rate change will affect a company’s longer-term earnings potential from international operations. ## The Foreign Exchange Market: Exchange Rate Risk - Implications **Scenario:** Japanese supplier – Dutch buyer - Euro drops relative to the yen. - Dutch buyer could increase its prices but risks a drop in sales. - Dutch buyer could maintain prices but reduce profit margin. - Japanese supplier could reduce price to maintain relationship with buyer. - If euro declines too much, buyer will be forced to find a new supplier in country with a more favorable exchange rate or that uses the euro. ## Currency Rates and Instruments: Spot Rates - **Spot rate** - Exchange rate requiring delivery of the traded currency within two business days. - **Spot market** - Market for currency transactions at spot rates. - Convert income generated from sales abroad into the home currency. - Convert funds into the currency of an international supplier. - Convert funds into the currency of a country in which the company wishes to invest. ## Currency Rates and Instruments: Forward Rates - **Forward rate** - Exchange rate at which two parties agree to exchange currencies on a specified future date. - **Forward market** - Market for currency transactions at forward rates. - Used for all types of transactions that require future payment in other currencies. ## Currency Rates and Instruments: Swaps, Options, and Futures - **Currency futures contract** - Contract that requires the exchange of an agreed-on amount of currency on an agreed‐on date at a specified exchange rate. - **Currency swap** - Simultaneous purchase and sale of foreign exchange for two different dates. - **Currency option** - Right, or option, to exchange a specified amount of a currency on a specified date at a specified rate. ## Market Structure and Convertibility: Financial Centers - **Vehicle currency** - Currency used as an intermediary to convert funds between two other currencies. - European Union euro, Japanese yen, US dollar - **Currency trading centers** - London, New York City, Singapore, Hong Kong - London accounts for 43% of global foreign exchange trading. - **Offshore financial center** - Country or territory whose financial sector features very few regulations and few, if any, taxes. - Booking center ## Market Structure and Convertibility: Interbank Market - **Interbank market** - Market in which the world’s largest banks exchange currencies at spot and forward rates - **Clearing** - Process of aggregating the currencies that one bank owes another and then carrying out the transaction. ## Market Structure and Convertibility: Currency Convertibility (1 of 2) - **Convertible currency** - Currency that trades freely in the foreign exchange market, with its price determined by the forces of supply and demand. - **Goals of currency restrictions** - Repay debts owed to other nations - Pay for imports and finance trade deficits. - Protect a currency from speculators - Keep resident individuals and businesses from investing in other nations ## Market Structure and Convertibility: Currency Convertibility (2 of 2) - **Instruments for restricting convertibility** - Import deposit requirements - Quantity restrictions - Multiple exchange rate systems - **Countertrade** - Practice of selling goods or services that are paid for, in whole or in part, with other goods or services. - Barter ## Thank you ## 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 the different types of currency exchange rates and instruments. - 10.4 Describe the foreign exchange market structure and currency convertibility. ## Quick Study 10.1 - What are the purposes of the international capital market? - What financial instruments are traded in the international bond market? - What is the name for the market of all stocks bought and sold outside the issuer’s home country? - What is the appeal of the Eurocurrency market? ## Quick Study 10.2 - What is the market in which currencies are bought and sold and their prices are determined? - What are the four main functions of the foreign exchange market? - What are the three main exposures that exchange‐rate risk creates for companies? ## Quick Study 10.3 - What do we call an exchange rate requiring delivery of a traded currency within two business days? - What is the purpose of a forward contract? - How does a currency swap work? - What is the purpose of a currency option? ## Quick Study 10.4 - In which trading centers does 75 percent of all foreign exchange trading take place? - What is the purpose of the interbank market? - What is the definition for the term convertible currency? - Why do governments sometimes engage in currency restriction? ## Samsung's Number Won Samsung Electronics - 237 subsidiaries across the world generate annual revenue of 240 trillion won ($200 billion). - Exposed to transaction risk - Periodically integrates subsidiary earnings into consolidated financial statements. - Exposed to translation risk The image is a display of Samsung products. ## Culture Insights: Big Results from Microfinance - **Microfinance Defined:** Microfinance provides small loans and financial services to underbanked entrepreneurs, small businesses, and families without access to traditional providers. - **Overcoming Obstacles:** Loans in developing countries can be difficult to obtain and high interest rates may devour an entrepreneur’s profits. - **One for All, All for One:** Peer pressure and support help prevent defaults. - **Friends and Family:** A variation of microfinance is helping minority entrepreneurs in developed nations. - **Additional Options:** Consider job training, savings accounts, and basic health. ## Global Managers: Managing Foreign Exchange - **Match Needs to Providers:** Find a provider that offers transactions you perform and in the currencies you need. - **Work with the Majors:** Large money‐center banks in financial centers that work directly in foreign exchange can have cost and service advantages over local banks. - **Consolidate to Save:** Time your international payments to consolidate multiple transfers into a large transaction. - **Get the Best Deals:** If your foreign exchange activity is substantial, develop relationships with two or more money center banks to get the best rates. - **Embrace Technology:** Every time a transaction is phoned or emailed in, human error could delay getting funds where and when you need them. ## Figure 10.1: World's Most Traded Currencies A pie chart shows that the US dollar is the most traded currency at 88.3%. Other significant currencies include the euro at 32.3%, the Japanese yen at 16.8% and the Great British Pound at 12.8%. ## Figure 10.2 Financial Trading Centers by Time Zone A world map is displayed showing the time zones and major financial centers around the world, including : New York, San Francisco, London, Tokyo, Hong Kong, Singapore, Sydney. ## Photo and Discussion Question (1 of 4) A photo of a money exchange booth in an airport is displayed. ## Photo and Discussion Question (2 of 4) A photo is displayed of a person looking at their cell phone which is showing the stock market. In the background a personal computer is showing similar information. ## Photo and Discussion Question (3 of 4) A picture is displayed with a chart showing many currency exchanges. ## Photo and Discussion Question (4 of 4) A photo is shown of a factory line assembling bicycles. ## Copyright This work is protected by United States copyright laws and is provided solely for the use of instructors in teaching their courses and assessing student learning. Dissemination or sale of any part of this work (including on the World Wide Web) will destroy the integrity of the work and is not permitted. The work and materials from it should never be made available to students except by instructors using the accompanying text in their classes. All recipients of this work are expected to abide by these restrictions and to honor the intended pedagogical purposes and the needs of other instructors who rely on these materials.