Last Updated 10 Aug 2020

International Financial Markets

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Describe the background and corporate use of the following international financial markets: Foreign exchange market International money market International credit market International bond market International stock markets Foreign Exchange Market.

  • A worldwide decentralized market for trading currencies that determines the relative values of foreign currencies.
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  • Assist international trade, investments, foreign traveling.
  • Foreign exchange dealers act as intermediaries.
  • Spot Rate & its features;

The rate at which one currency is traded for another is spot rate. SUDS is the most commonly accepted currency especially in countries with weak currencies.

  • Spot market liquidity Spot Market Structure; Company 'A' purchases supplies on the first day of every month priced at 100,000 Euros from Company 'B'. Chi 3 International Financial Markets 1 By pm month ago, Euro was worth $1. 08. 'A' needed $108,000 (Euro to pay. Sank transferred money to 'B'.
  • Today a new payment is due.

Euro is valued at $1. 12. Company 'A' needs $112,000 (Euro $1. 2) to make payment to 'B'. Time Zones & Spot Market Attributes of Banks Providing Foreign Exchange Offer cash management services for the clients.

  • May provide an assessment of foreign economies.
  • Provide a forecast of the future value of exchange rates. Foreign Exchange Quotations
  • Bid-Ask Spread: Commercial banks charge a fee for conducting foreign exchange transactions. Ask rate - Bid rate
  • Bid-Ask Spread % Ask rate - Bid rate Ask rate - Spread is higher for an illiquid currency that is not traded frequently as compared to the liquid currencies.

X 100 Exercise

  • Utah Banks bid price for Canadian dollar is $0. 7938 and its ask price is $0. 81. What is the bid/ask percentage spread? Compute the bid/ask percentage spread for Mexican Peso retail transaction in which the ask rate is $. 11 and the bid rate is $. 10. Solution
  • ($. 81 - $. 7938)/$. 81 = . 02 or ; [($. 11 - $. 10)/$. 11] = . 091, or 9. 1%.

Interpreting Foreign Exchange Quotations

  • the Ever-changing value of exchange rates throughout the day leads to direct and indirect quotations at a point of time.
  • No. Of dollars per currency 1 = $1. 0
  • Indirect Quotations
  • No. Of units of currency per dollar (Reciprocal of Direct Quotation) 1 / 1. 20 Example
  • If the spot rate of the Euro is the US $1. 031 Direct Quotation 1 = $1. 031
  • Indirect Quotation = 1/ Direct Quotation = 1/ $1. 031 0. 97=$1 Cross Exchange Rate
  • It is the exchange of two non-US dollar currencies. Tourist at the airport who is from Mexico and is on his way to Canada.

He is willing to buy your C$200 for 1,300 pesos. Should you accept the offer or cash the Canadian dollars at the airport? Explain.

Calculate:

Today you notice the following exchange rate quotations:

  • $1 is equal to 3. 00 Argentine pesos
  •  1 Argentine peso = 0. 50 Canadian dollars
  • You need to purchase 100,000 Canadian dollars with U. S. Dollars. How many U. S. Dollars will you deed for your purchase? International Credit Market
  • Sometimes, Macs obtain medium-term funds
  • Funds are obtained through term loans from local financial institutions. Funds may be obtained through the issuance of notes in their local markets.
  • NC may obtain funds through banks located in foreign markets.
  • Reoccurred Market.

Euro credit loans:

  • Loans of one year or longer extended by banks to Macs/Gobo. Agencies in Europe are called Euro credit loans.
  • Loans are denominated in dollars or other currencies with a maturity of 5 years.

The market dealing with Euro credit loans is called Floating Rate Loans:

London Interbrain Offer Rate (LABOR) with premium up to 3% depending upon credit worthiness of a borrower. LABOR is the rate commonly charged for loans between banks.

  • Labor Syndicated Loans.
  • When banks are unwilling/unable to process a huge loan they form groups know as syndicates.
  • Lead banks negotiate terms with borrowers.
  • The underwriting fee is paid by the borrower.
  • A commitment fee of 0. 25% or 0. 50% P. A.

Is paid for the unused portion of the available credit. Interest rates are determined by:

  1. Creditworthiness of borrower
  2. Maturity period Currency denominating the loan.

Read about the disadvantages of Single Currency

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