Chapter 3
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International Financial Markets Lecture Outline
Foreign Exchange Market
History of Foreign Exchange
Foreign Exchange Transactions
Foreign Exchange Quotations
Exchange Quotations
Interpreting
Foreign
Forward, Futures, and Options Markets
International Money Market
Origins and Development
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Money Market Interest Rates Among Countries Standardizing Global Bank Regulations
International Credit Market
Syndicated Loans
Impact of the Credit Crisis on the Credit Market
International Bond Market
Eurobond Market
Development of Other Bond Markets
International Stock Markets
Issuance of Stock in Foreign Markets
Issuance of Foreign Stock in the U.S.
2 International Financial Markets
Chapter Theme
This chapter identifies and discuss the various international financial markets ud by MNCs. The markets facilitate day-to-day operations of MNCs, including foreign exchange transactions, investing in foreign markets, and borrowing in foreign markets.
Topics to Stimulate Class Discussion
1. Why do international financial markets exist?
2. How do banks rve international financial markets?
3. Which international financial markets are most important to a firm that consistently needs short-term刀出鞘
funds? What about a firm that needs long-term funds?
POINT/COUNTER-POINT:
Should Firms That Go Public Engage in International Offerings?
POINT: Yes. When a U.S. firm issues stock to the public for the first time in an initial public offering (IPO), it is naturally concerned about whether it can place all of its shares at a reasonable price. It will be able to issue its stock at a higher price by attracting more investors. It will increa its demand by spreading the stock across countries. The higher the price at which it can issue stock, the lower is its cost of using equity capital. It can also establish a global name by spreading stock across countries. COUNTER-POINT: No. If a U.S. firm spreads its stock across different countries at the time of the IPO, there will be less publicly-traded stock in the U.S. Thus, it will not have as much liquidity in the condary market. Investors desire stocks that they can easily ll in the condary market, which means that they require that the stocks have liquidity. To the extent that a firm reduces its liquidity in the U.S. by spreading its stock across countries, it may not attract sufficient U.S. demand for the stock in the U.S. Thus, its efforts to create global name recognition may reduce its name recognition in the U.S.
WHO IS CORRECT? U the Internet to learn more about this issue. Which argument do you support? Offer your own opinion on this issue.
ANSWER: The key is that students recognize the tradeoff involved. A firm that engages in a relatively small IPO will have limited liquidity even when all of the stock is issued in the U.S. Thus, it should not consider issuing stock internationally. However, firms with larger stock offerings may be in a position to issue a portion of their shares outside the U.S. They should not spread the stocks across veral countries, but perhaps should target one or two countries where they conduct substantial business. They want to ensure sufficient liquidity in each of the foreign countries where they ll shares.
International Financial Markets 3 Answers to End of Chapter Questions
1. Financing With Stock. Chapman Co. is a privately owned MNC in the U.S. that plans to engage
in an initial public offering (IPO) of stock, so that it can finance its international expansion. At the prent time, world stock market conditions are very weak but are expected to improve. The U.S.
market tends to be weak in periods when the other stock markets around the world are weak. A
financial manager of Chapman Co. recommends that it wait until the world stock markets recover before it issues stock. Another manager believes that Chapman Co. could issue its stock now even if the price would be low, since its stock price should ri later once world stock markets recover. Who is correct? Explain.
ANSWER: Chapman Co. should wait until the world stock markets recover, and the U.S. stock
market conditions have improved. If it issues stock now when the price is low, it would receive a lower dollar amount of proceeds to u for its expansion. If its stock price ris later, it would not benefit becau it already sold the shares (only its shareholders who originally purchad the
shares would benefit if the stock price incread).
2. Indirect Exchange Rate. If the direct exchange rate of the euro is worth $1.25, what is the indirect
幼儿园安全教育内容rate of the euro? That is, what is the value of a dollar in euros?
ANSWER: 1/1.25 = .8 euros.
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3. Foreign Stock Markets. Explain why firms may issue stock in foreign markets. Why might U.S.
firms issue more stock in Europe since the conversion to the euro in 1999?
ANSWER: Firms may issue stock in foreign markets when they are concerned that their home
market may be unable to absorb the entire issue. In addition, the firms may have foreign currency inflows in the foreign country that can be ud to pay dividends on foreign-issued stock. They may also desire to enhance their global image. Since the euro can be ud in veral countries, firms may need a large amount of euros if they are expanding across Europe.
4. Euro. Explain the foreign exchange situation for countries that u the euro when they engage in
international trade among themlves.
ANSWER: There is no foreign exchange. Euros are ud as the medium of exchange.
5. Foreign Exchange. You just came back from Canada, where the Canadian dollar was worth $.70.
You still have C$200 from your trip and could exchange them for dollars at the airport, but the airport
foreign exchange desk will only buy them for $.60. Next week, you will be going to Mexico and will need pesos. The airport foreign exchange desk will ll you pesos for $.10 per peso. You met a tourist at the airport who is from Mexico and is on his way to Canada. He is willing to buy your C$200 for 1,300 pesos. Should you accept the offer or cash the Canadian dollars in at the airport? Explain.
ANSWER: Exchange with the tourist. If you exchange the C$ for pesos at the foreign exchange desk, the cross-rate is $.60/$10 = 6. Thus, the C$200 would be exchanged for 1,200 pesos (computed as 200 × 6). If you exchange Canadian dollars for pesos with the tourist, you will receive 1,300 pesos.
6. Forward Contract. The Wolfpack Corporation is a U.S. exporter that invoices its exports to the
United Kingdom in British pounds. If it expects that the pound will appreciate against the dollar in the future, should it hedge its exports with a forward contract? Explain.
4 International Financial Markets
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ANSWER: The forward contract can hedge future receivables or payables in foreign currencies to insulate the firm against exchange rate risk. Yet, in this ca, the Wolfpack Corporation should not hedge becau it would benefit from appreciation of the pound when it converts the pounds to dollars.
7. Eurocredit Loans.
a.With regard to Eurocredit loans, who are the borrowers?
b. Why would a bank desire to participate in syndicated Eurocredit loans?
c. What is LIBOR and how is it ud in the Eurocredit market?
ANSWER:
a. Large corporations and some government agencies commonly request Eurocredit loans.
b. With a Eurocredit loan, no single bank would be totally expod to the risk that the borrower may
fail to repay the loan. The risk is spread among all lending banks within the syndicate.
c. LIBOR (London interbank offer rate) is the rate of interest at which banks in Europe lend to each
other. It is ud as a ba from which loan rates on other loans are determined in the Eurocredit market.
8. Bid/ask Spread. Compute the bid/ask percentage spread for Mexican peso retail transactions in
which the ask rate is $.11 and the bid rate is $.10.
ANSWER: [($.11 – $.10)/$.11] = .091, or 9.1%.
9. International Diversification. Explain how the Asian crisis would have affected the returns to a U.S.
firm investing in the Asian stock markets as a means of international diversification. [See the chapter appendix.]
ANSWER: The returns to the U.S. firm would have been reduced substantially as a result of the Asian crisis becau of both declines in the Asian stock markets and becau of currency
depreciation. For example, the Indonesian stock market declined by about 27% from June 1997 to June 1998. Furthermore, the Indonesian rupiah declined again the U.S. dollar by 84%.
10. Bid/ask Spread. Utah Bank’s bid price for Canadian dollars is $.7938 and its ask price is $.81. What
is the bid/ask percentage spread?
ANSWER: ($.81 – $.7938)/$.81 = .02 or 2%
11. Evolution of Floating Rates. Briefly describe the historical developments that led to floating
exchange rates as of 1973.
ANSWER: Country governments had difficulty in maintaining fixed exchange rates. In 1971, the bands were widened. Yet, the difficulty of controlling exchange rates even within the wider bands continued. As of 1973, the bands were eliminated so that rates could respond to market forces
without limits (although governments still did intervene periodically).
International Financial Markets 5 12. Bank Services. List some of the important characteristics of b
ank foreign exchange rvices that
MNCs should consider.
ANSWER: The important characteristics are (1) competitiveness of the quote, (2) the firm’s
relationship with the bank, (3) speed of execution, (4) advice about current market conditions, and (5) forecasting advice.
13. International Markets. What is the function of the international money market? Briefly describe the
reasons for the development and growth of the European money market. Explain how the
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international money, credit, and bond markets differ from one another.
ANSWER: The function of the international money market is to efficiently facilitate the flow of international funds from firms or governments with excess funds to tho in need of funds.
Growth of the European money market was largely due to (1) regulations in the U.S. that limited forei
gn lending by U.S. banks; and (2) regulated ceilings placed on interest rates of dollar deposits in the U.S. that encouraged deposits to be placed in the Eurocurrency market where ceilings were
nonexistent.
The international money market focus on short-term deposits and loans, while the international credit market is ud to tap medium-term loans, and the international bond market is ud to obtain long-term funds (by issuing long-term bonds).
14. Exchange Rate Effects on Borrowing. Explain how the appreciation of the Japane yen against the
U.S. dollar would affect the return to a U.S. firm that borrowed Japane yen and ud the proceeds for a U.S. project.
ANSWER: If the Japane yen appreciates over the borrowing period, this implies that the U.S. firm converted yen to U.S. dollars at a lower exchange rate than the rate at which it paid for yen at the time it would repay the loan. Thus, it is adverly affected by the appreciation. Its cost of borrowing will be higher as a result of this appreciation.
knife的复数15. Loan Rates. Explain the process ud by banks in the Eurocredit market to determine the rate to
charge on loans.
ANSWER: Banks t the loan rate bad on the prevailing LIBOR, and allow the loan rate to float (change every 6 months) in accordance with changes in LIBOR.
16. Exchange Rate Effects on Investing. Explain how the appreciation of the Australian dollar against
the U.S. dollar would affect the return to a U.S. firm that invested in an Australian money market curity.
ANSWER: If the Australian dollar appreciates over the investment period, this implies that the U.S.
firm purchad the Australian dollars to make its investment at a lower exchange rate than the rate at which it will convert A$ to U.S. dollars when the investment period is over. Thus, it benefits from the appreciation. Its return will be higher as a result of this appreciation.
17. Syndicated Loans. Explain how syndicated loans are ud in international markets.
