INTERNATIONAL FINANCIAL MARKETS

INTERNATIONAL FINANCIAL MARKETS

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  CHAPTER - 3 INTERNATIONALFINANCIAL MARKETS
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  FOREIGN EXCHANGE MARKET •Allows the exchange of one currency for another. • To facilitate international trade and financial transactions. • Exchange rate is the rate at which one currency can be exchanged for another. TYPES OF MARKET • Spot Market: Market for immediate exchange of currency. • Forward Market: Market that enables to lock in the exchange rate at which a certain amount of currency will be bought or sold on a specified future date.
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  • Futures Market:Market that enables to lock in the exchange rate at which a standardized amount of currency will be bought or sold on a specified future date. • Option Market: Market that provides the right to buy or sell a specified amount of currency at a specific price within a specified period. – Call option, provides the right to buy a specific currency at a specific price within a specific period of time. – Put option, provides the right to sell a specific currency at a specific price within a specific period of time. • The price at which forward / future / option contracts are executed is called strike price or exercise price. FOREIGN EXCHANGE MARKET
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  Foreign Exchange Quotation •Bid Quote = Buy Price Ask Quote = Sell Price Bid/Ask spread = Difference between bid and ask quote. • Example: Bid price for £ = $1.52, Ask price for £ = $1.60. Bid/Ask spread = (1.60–1.52)/1.60 = 5% FOREIGN EXCHANGE TRANSACTIONS Bid/Ask spread (%) = Ask Rate – Bid Rate  100 Ask Rate
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  Factors Affecting theSpread • Order costs • Inventory costs • Competition • Volume • Currency risk FOREIGN EXCHANGE TRANSACTIONS
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  Foreign Exchange Quotation •Direct Quotations: – Represent the value of per unit foreign currency in terms of domestic currency. – The amount of domestic currency required to buy or sell one unit of foreign currency. – $1 = Tk. 77 • Indirect Quotations, – Represent the value of per unit of a domestic currency in terms of foreign currency. – The amount of foreign currency required to buy or sell one unit of domestic currency. – Tk. 1 = $ 0.013 FOREIGN EXCHANGE TRANSACTIONS
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  Foreign Exchange Quotation •Cross Exchange Rate: The exchange rate between two currencies, calculated by comparing them to third currency. • Example: – Peso 1 = $ 0.07 – C$ 1 = $ 0.70 – • Assume, $1 = Tk. 78; £1 = Tk. 88. What is the exchange rate of Dollar to Pound? FOREIGN EXCHANGE TRANSACTIONS
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  MOTIVES FOR BORROWINGFROM FOREIGN MARKET • First, Govt. / MNC may need to borrow funds to pay for imports denominated in a foreign currency. • Second, To support local operations, Govt. / MNC may consider borrowing in a currency in which the interest rate is lower. • Third, Govt. / MNC may consider borrowing in a currency that will depreciate against their home currency, as they would be able to repay the loan at a more favorable exchange rate over time.
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  MOTIVES FOR INVESTINGIN FOREIGN MARKET • First, Govt. / MNC would receive more interest from investments denominated in foreign currencies than their investments in home currency. • Second, Investors may expect firms in a particular foreign country to achieve more favorable performance than those in the investor’s home country. • Third, Govt. / MNC may consider investing in a currency that will appreciate against their home currency because they would be able to convert that currency into their home currency at a favorable exchange rate at the end of the period.