Chapter 9: International Financial Markets

Front 1

Capital market

Back 1

System that allocates financial resources in the form of debt and equity according to their most efficient uses.

Front 2

-Debt

-Equity

Back 2

2 Primary means of obtaining external financing

Front 3

Debt

Back 3

Loan in which the borrower promises to repay the borrowed amount (the principal)plus a predetermined rate of interest.

Front 4

Bonds

Back 4

Form of company debt instrument which specify the timing of principal and interest payments

Front 5

Equity

Back 5

Part ownership of a company in which the equity holder participates with other part owners in the company’s financial gains and losses

Front 6

Stock

Back 6

Shares of ownership in a company’s assets that give shareholders a claim on the company’s future cash flows.

Front 7

dividends

Back 7

payments made out of surplus funds or by increases in the value of the shares

Front 8

Liquidity

Back 8

Ease with which bondholders and shareholders may convert their investments into cash.

Front 9

Internationalcapital market

Back 9

-Network of individuals, companies, financial institutions,and governments that invest and borrow across national boundaries.

-Consists of both formal exchanges (meet up totrade financial instruments) and electronic networks (anonymous trading).

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1. expand money supply for borrowers (for small ordeveloping capital markets)

2. reduces the cost of money for borrowers (forces interest rates down)

3. reduces risk for lenders

Back 10

Purposes of International Capital Market

Front 11

1. investors enjoy a greater set of opportunities from which to choose (loss is offset elsewhere)

2. investing in international securities benefits investors because some economies are growing while others are in decline

Back 11

Ways on how international capital market reduce risk for lenders

Front 12

-Information Technology

- Deregulation

- Financial Instruments

Back 12

Forces expanding the International capital market

Front 13

Securitization

Back 13

Unbundling and repackaging of hard-to-trade financial assets into more liquid, negotiable,and marketable financial instruments (or securities).

Front 14

Offshorefinancial centers

Back 14

Country or territory, whose financial sector features very few regulations and few, ifany, taxes.

Front 15

-Operational centers

- Booking centers (small nations with tax or secrecy laws)

Back 15

Categories of offshore financial centers

Front 16

-international bond

- international equity

- Eurocurrency markets

Back 16

Main Components of international capital market

Front 17

internationalbond market

Back 17

Market consisting of all bonds sold by issuing companies, governments, or other organizations outside their own countries.

Front 18

- Eurobond

- foreign bonds

Back 18

Types of International bonds

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Eurobond

Back 19

-Bond issued outside the country in whose currency it is denominated

-Popular because not regulated thus reduces the cost of issuing a bond

Front 20

Foreign bonds

-samurai bond (Japan)

-yankee bonds (US)

-dragon bonds (Asia)

-bulldog bonds (UK)

Back 20

Bond sold outside the borrower’s country and denominated in the currency of the country in which it is sold.

*subject to the same rules and regulations as the domestic bonds of the country in which they are issued

Front 21

Lowinterest rates

Back 21

Driving force in the growth in the international bond market

Front 22

Internationalequity market

Back 22

Market consisting of all stocks bought and sold outside the issuer’s home country

Front 23

-Spread of Privatization

-Economic growth in emerging markets

-Activity of investment banks

-Advent of cybermarkets

Back 23

Factors responsible for growth of International equity market

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cybermarkets

Back 24

Stock markets that have no central geographic locations.

Front 25

Eurocurrency market

Back 25

Market consisting of all the world’s currencies (referred to as “Eurocurrency”) that are banked outside their countries of origin.

*Only largest companies, banks, and governments are typically involved

Front 26

1. Governments with excess funds generated by a prolonged trade surplus

2. Commercial banks with large deposits of excess currency

3. International companies with large amounts of excess cash

4. Extremely wealthy individuals

Back 26

Sources of deposits in Eurocurrency market

Front 27

Interbank interest rates

Back 27

Interest rates that the world’s largest banks charge one another for loans.

Front 28

regulation

lowers

risk

Back 28

The main appeal of the Eurocurrency market is the complete absence of _______,which ________ the cost of banking. An unappealing feature of the Eurocurrency market is greater _____; government regulations that protect depositors in national markets are nonexistent here

Front 29

foreign exchange market

Back 29

Market in which currencies are bought and sold and their prices determined.

Front 30

exchange rate

Back 30

Rate at which one currency is exchanged for another. Rates depend on the

-size of the transaction

-trader conducting it

-general economic conditions

-government mandate

Front 31

Bid quote

Back 31

price at which it will buy

Front 32

Ask quote

Back 32

price at which it will sell

Front 33

bid–ask spread

Back 33

The difference between the two rates

Front 34

Currency Conversion

Currency hedging

Currency Arbitrage

Currency Speculation

Back 34

Functions of the Foreign Exchange Market

Front 35

currency hedging

Back 35

Practice of insuring against potential losses that result from adverse changes in exchange rates.

Front 36

1. To lessen the risk associated with international transfers of funds

2. To protect themselves in credit transactions in which there is a time lag between billing and receipt of payment

Back 36

Purposes of currency hedging

Front 37

currency arbitrage

Back 37

Instantaneous purchase and sale of a currency in different markets for profit.

*common activity among experienced traders offoreign exchange, very large investors, and companies in the arbitrage business

Front 38

interest arbitrage

Back 38

Profit-motivated purchase and sale of interest-paying securities denominated in different currencies.

Front 39

currency speculation

Back 39

Purchase or sale of a currency with the expectation that its value will change and generate a profit.

*Speculation is much riskier than arbitrage because the value, or price, of currencies is quite volatile and is affected by many factors.

Front 40

quoted currency

Back 40

The numerator in a quoted exchange rate, or the currency with which another currency is to be purchased.

Front 41

base currency

Back 41

The denominator in a quoted exchange rate, or the currency that is to be purchased with another currency

Front 42

exchange-rate risk (foreign exchange risk)

Back 42

Risk of adverse changes in exchange rate

Front 43

Direct and Indirect Rate Quotes

Cross Rates

Back 43

Ways of quoting currencies

Front 44

Spot Rates

Back 44

Exchange rate requiring delivery of the traded currency within two business days.

Front 45

spot market

Back 45

Market for currency transactions at spot rates.

Front 46

1. Converting income generated from sales abroad into their home-country currency

2. Converting funds into the currency of an international supplier

3. Converting funds into the currency of a country in which they wish to invest

Back 46

Functions of spot markets to assist companies

Front 47

banks and foreign exchange brokers

Back 47

The spot rate is available only for trades worth millions of dollars. That is whyit is available only to ____ and __________________________

Front 48

forward rate

Back 48

Exchange rate at which two parties agree to exchange currencies on a specified future date.

Front 49

Forward market

Back 49

Market for currency transactions at forward rates.

Front 50

Forward contract

Back 50

Contract that requires the exchange of an agreed-on amount of a currency on an agreed-on date at a specified exchange rate.

Front 51

Derivative

Back 51

Financial instrument whose value derives from other commodities or financial instruments.

Front 52

-currency swaps,

-options

-futures

Back 52

3 other types of currency instruments in forward market

Front 53

Currency swap

Back 53

Simultaneous purchase and sale of foreign exchange for two different dates

Front 54

Currency option

Back 54

Right,or option, to exchange a specified amount of a currency on a specified date at a specified rate

Front 55

Currency futures contract

Back 55

Contract requiring the exchange of a specified amount of currency on a specified date ata specified exchange rate, with all conditions fixed and not adjustable

Front 56

vehicle currency

Back 56

Currency used as an intermediary to convert funds between two other currencies.

Front 57

Interbank market

Back 57

Market in which the world’s largest banks exchange currencies at spot and forward rates.

Front 58

-interbank market

- securities exchanges

-over-the-counter market.

Back 58

3 main component of Foreign Exchange Market

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clearing

Back 59

Process of aggregating the currencies that one bank owes another and then carrying out the transaction

Front 60

Securities exchange

Back 60

Exchange specializing in currency futures and options transactions

Front 61

over-the-counter(OTC) market

Back 61

Decentralized exchange encompassing a global computer network of foreign exchange traders and other market participants.

Front 62

convertible(hard) currency

Back 62

Currency that trades freely in the foreign exchange market, with its price determined by the forces of supply and demand

Front 63

1. government may be attempting to preserve the country’ shared currency reserves for repaying debts owed to other nations.

2. convertibility might be restricted in order to preserve hard currency to pay for needed imports or to finance a trade deficit.

3. restrictions might be used to protect a currency from speculators.

4. restrictions can be an attempt to keep badly needed currency from being invested abroad

Back 63

Goals of currency restriction

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(1) government approval for currency exchange, (2) imposed import licenses,

(3) a system of multiple exchange rates

(4) imposed quantity restrictions

Back 64

Policies used to enforce currency restrictions

Front 65

countertrade

Back 65

Practiceof selling goods or services that are paid for, in whole or in part, with othergoods or services.