International Finance

International finance


Foreign Exhange Markets

Foreign Exchange Rate Markets (FEM) are places where foreign currencies can be gought or sold. Markets found in banks, burae-de-change offices, some exhnges (e,g, Chicago Mercantile Exchange)

Functions of FEM: faciliate payment for international transactions; facilitate investment abroad; facilitate borrowing abroad.

Motives for investng in FEM: economic conditions (eg. relaxation of restrictions in Eastern European countries attracted foreign investors and creditors); exchange rate expectations (some investors purchase financial securities denominated in a currency expected to aprreciate against their own - performance dependent on currency movement over investment horizon); international diversification (cross border differences in econmic conditions can allow for risk reduction benefits)

3 forms of FEM: spot market - buy or exchange currency immediately or in less than 3 working days; forwards market - agree to buy or exchange in three months at a fixed rate; swaps market - agreement involves several transactions, thus a combination of futures - market for swaps has grown.

4 Reasons for growth in FEM': increasing specialisation (comparative advantage) thus need for importation bring's need for exportation thus need use of FEM; increasing gloabiilisation; reduction in tariffs, quotas, currency controls (have to disclose curreny taking upon holidaying like in UK before 1970s); improvements in technology.

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The benefits the markets generate for users

Due to the double coincidence of wants, the markets facilitates reduction in the process of exchange of goods/services among countries.

It facilitates efficient allocation of physical and finacial resources worldwide. Thus specialisation countries contribute to the efficient functioning of the economy.

The International Money Markets:

The IMM allows MNC's to borrow money or invest surplus funds in various currencies in the short run (less than a year)

The International Credit Market provides facilities for MNC's to borrow money or invest surplus funds in various currencies in the long run

Loan syndicate involves banks collaborating to lend money as a single bank is unwilling to lend to the organisation alone. Lead bank writes terms of loan and organises group of banks to underwrite.  Syndicate formed within 6 weeks or less if borrower is well known.

International Bond Markets: markets where MNCs can sell bonds to raise debt capital or invest their surplus funds in bonds, in various currencies.

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International Bond Markets

Foreign Bonds: are denominated in the currency of the country where they are placed but issued by foreign borrowers. eg. Uk company selling bonds in Germany denominated in Euro's (specifically referred to as parallel bonds).

Euro Bonds (EB): denominated in a different currency to the currency of the country in it is sold in. eg. Uk company selling bonds with it's trademark on it in Germany denominated in Pounds.

EBs have become very popular part because they circumvent registration requirements. US Based MNC's such as McDonalds and Walt Disney commonly issue EBs. Non US do too such as Guiness, Nestle and VW.

New corporations established in foreign markets rely on EBs to finance growth; note - they pay risk premium of 3% above US Trasury Bond rate on dollar denominated EBs.

International Stock Makets: where MNC's cans sell shares to raise 'equity capital'

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