Ch 3 International Financial Markets 1

International
Financial
Markets

Learning Objectives
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 which determines relative values of foreign currencies.
• Assist international trade, investments, foreign travelling.
• Foreign exchange dealers acts as intermediaries.

Spot Rate & its features
• Rate at which one currency is traded for another is spot rate. • USD is the most commonly accepted currency especially in the countries with weak currencies.
• Spot market liquidity

Spot Market Structure
• Company ‘A’ purchases supplies on first day of every month priced at 100,000 Euros from Company ‘B’.
• ‘A’ has account in dollars, ‘B’ has account in Euros. When payment was made one month ago, Euro was worth $1.08.
•

‘A’ needed $108,000 (Euro 100,000*$1.08) to pay. Bank transferred money to ‘B’.

Spot Market Structure
• Today new payment is due. Euro is valued at $1.12.
Company ‘A’ needs $112,000 (Euro 100,000* $1.12) to make payment to ‘B’.

Time Zones & Spot Market

Attributes of Banks Providing Foreign
Exchange
• Offer cash management services for the clients.
• May provide assessment of foreign economies.
• Provide forecast of future value of exchange rates.

Foreign Exchange Quotations
• Bid-Ask Spread: Commercial banks charge a fee for conducting foreign exchange transaction.
Ask rate – Bid rate
• Bid-Ask Spread % Ask rate – Bid rate
Ask rate
– Spread is higher for illiquid currency that are not traded frequently as compared to the liquid currencies.X 100

Exercise
• Utah Bank’s 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