Chapter 3

 

INTERNATIONAL FINANCE

Jeff Madura 10th Edition Chapter 3:

International Financial Markets 1

Umar Nawaz (Lecturer UAF)

 

Motives for Using International Financial Markets 

Investors invest in foreign markets: 

to take advantage of favorable economic conditions; when they expect foreign currencies to appreciate against their own; and to get the benefits of international diversification.

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Creditors provide credit in foreign markets: 

to capitalize on higher foreign interest rates;

when they expect foreign currencies to appreciate against their own; and to get the benefits of international diversification. 

 

(1) Foreign Exchange Market 

The foreign exchange market allows currencies to be exchanged in order to facilitate international trade or financial transactions. transactions.

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The system for establishing exchange rates has evolved over time. 

From 1876 to 1913, each currency was convertible into gold at a specified rate, as dictated by the  gold standard .

The 1944 Bretton Woods Agreement  called  called for fixed currency exchange rates. Even then, governments still had difficulties maintaining exchange rates within the stated boundaries.

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Foreign Exchange Transactions 

There is no specific building or location where traders exchange currencies. Trading also occurs around the clock.

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The market for immediate exchange is known as the  spot market .

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market  enables The forward market   enables an MNC to lock in the exchange rate at which it will buy or sell a certain quantity of currency on a specified future date.

 

Foreign Exchange Transactions 

The following attributes of banks are important to foreign exchange customers:

1. Competitiveness of quote. A savings of l¢ per unit on an order of 1 million units of currency is worth $10,000.

2. Special relationship with the bank. The bank may offer cash management services or be willing to t o make a special effort to obtain even hard-to-find foreign currencies for the corporation.

3. Forecasting advice. Some banks may provide forecasts of the future state of foreign investments

 

Foreign Exchange Transactions 4. Advice about current market conditions. Some banks may provide assessments of foreign economies and relevant activities in the international financial environment that relate to corporate customers.

5. Speed of execution.  Banks may vary in the efficiency with which they handle an order. A corporation needing the currency will prefer a bank that conducts the transaction promptly and handles any paperwork properly.

 

Presentations Group : International Money Market Group : Building blocks of Finance (Finance Theories)