Introduction: International Financial Markets
Introduction: International Financial Markets
International Finance
Dr. Angela Ng
FINA 342
HKUST
Class Notes 1
INTRODUCTION: INTERNATIONAL FINANCIAL MARKETS
WHAT IS SPECIAL ABOUT INTERNATIONAL FINANCE?
Foreign Exchange Risk
Risk of loss (or gain) from unforeseen changes in exchange rates.
Variability of exchange rates is widely regarded as the most serious international financial problem facing policymakers and corporate managers.
Political Risk
Risk of loss (or gain) from unforeseen government action or other events of political character, such as acts of terrorism.
Market Imperfections
The world markets are highly imperfect, in the sense that a variety of barriers still hamper free movements of people, goods, services, and capital across national boundaries.
Multinational Corporations (MNCs) are a gift of market imperfections.
Example: Honda decided to establish production facilities in Ohio mainly to circumvent trade barriers.
Expanded Opportunity Set
Firms can locate production in any country or region to maximize their performance and raise funds in any capital market where the cost of capital is the lowest.
Firms can gain from greater economies of scale when tangible and intangible assets are deployed on a global basis.
Individual investors face a much expanded opportunity set and can benefit from it if they are aware of overseas investment opportunities and are willing to diversify internationally.
PLAYERS IN INTERNATIONAL FINANCIAL MARKETS
Forex Market
Options, Futures, Forward Contracts
Eurocurrency Market
Options, Futures, FRAs
Eurocurrency Deposits
Eurocredits
Euronotes
Bond Market
Options, Futures, Swaps, Caps,
Domestic
Floors, Swaptions
Foreign
Eurobond
Equity Market
Options, Futures
Euroequity
Mutual Funds
TRENDS IN INTERNATIONAL FINANCIAL MARKETS: INCREASING GLOBALIZATION
Long-term trend towards increasing trade with other countries. (See Exhibits 1.1 & 1.2)
Completion of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT)
Creation of the World Trade Organization (WTO)
Formal arrangements