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International Finance Dr. Angela NgFINA 342 HKUST

Class Notes 1

INTRODUCTION: INTERNATIONAL

FINANCIAL MARKETS

I. WHAT IS SPECIAL ABOUT INTERNATIONAL

FINANCE?

Foreign Exchange Risk

Risk o loss !or gain" ro# $noreseen changes in

exchange rates.

%aria&ilit' o exchange rates is (i)el' regar)e) as the

#ost serio$s international inancial *ro&le# acing*olic'#akers an) cor*orate #anagers.

+olitical Risk

Risk o loss !or gain" ro# $noreseen go,ern#ent action

or other e,ents o *olitical character- s$ch as acts oterroris#.

arket I#*erections

The (orl) #arkets are highl' i#*erect- in the sense that a

,ariet' o &arriers still ha#*er ree #o,e#ents o *eo*le-goo)s- ser,ices- an) ca*ital across national &o$n)aries.

$ltinational /or*orations !N/s" are a git o #arket

i#*erections.

0

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1 Exa#*le Hon)a )eci)e) to esta&lish *ro)$ctionacilities in hio #ainl' to circ$#,ent tra)e &arriers.

Ex*an)e) **ort$nit' Set

Fir#s can locate *ro)$ction in an' co$ntr' or region to

#axi#ie their *eror#ance an) raise $n)s in an' ca*ital#arket (here the cost o ca*ital is the lo(est.

Fir#s can gain ro# greater econo#ies o scale (hen

tangi&le an) intangi&le assets are )e*lo'e) on a glo&al&asis.

In)i,i)$al in,estors ace a #$ch ex*an)e) o**ort$nit' set

an) can &eneit ro# it i the' are a(are o o,erseasin,est#ent o**ort$nities an) are (illing to )i,ersi'internationall'.

2

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II. PLAYERS IN INTERNATIONAL FINANCIAL

MARKETS

3

$ltinational/o#*anies

Instit$tionalIn,estors

+ri,ateIn,estors

ForeignExchange

Ex*os$re

5lo&alFinancing

5lo&alIn,est#ents

Financial Inter#e)iation

International Financial arkets

5o,ern#ents- /entral 6anks-International Instit$tions

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Forex arket *tions- F$t$res-For(ar) /ontracts

E$roc$rrenc' arket *tions- F$t$res-FRAs

E$roc$rrenc' De*osits

E$rocre)its

E$ronotes

6on) arket *tions- F$t$res-S(a*s- /a*s-

Do#estic Floors- S(a*tions

Foreign

E$ro&on)

E7$it' arket *tions- F$t$res

E$roe7$it'

ADRs

$t$al F$n)s

4

Ite!at"oal

F"a#"al

Ma!$ets

De!"%at"%e

P!o&'#ts

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III. TRENDS IN INTERNATIONAL FINANCIAL

MARKETS: INCREASIN( (LOBALI)ATION

8ong9ter# tren) to(ar)s increasing tra)e (ith other

co$ntries. !See Exhi&its 0.0 : 0.2"

/o#*letion o the Ur$g$a' Ro$n) o the 5eneral

Agree#ent on Taris an) Tra)e !5ATT"

/reation o the ;orl) Tra)e rganiation !;T"

For#al arrange#ents a#ong co$ntries to *ro#ote

econo#ic integration on the regional le,el- or exa#*le-the E$ro*ean Union !EU" an) the North A#erican FreeTra)e Agree#ent !NAFTA"

5lo&aliation o inancial #arkets- (ith es*eciall' *roo$n)

changes in the 0s.

The i#*et$s or glo&alie) inancial #arkets initiall'ca#e ro# the go,ern#ents o #a?or co$ntries that ha)&eg$n to )ereg$late their oreign exchange an) ca*ital#arkets.

1 @a*an )ereg$late) its oreign exchange #arket in 0.

1 The 8on)on Stock Exchange &egan a)#itting oreignir#s as $ll #e#&ers in Fe&r$ar' 0

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Ne( an) so*histicate) inancial instr$#ents

1 Exa#*les c$rrenc' $t$res an) o*tions- #$ltic$rrenc'&on)s- international #$t$al $n)s- co$ntr' $n)s-oreign stock in)ex $t$res an) o*tions.

1 Across9&or)er listing o stocks (hich allo(s in,estorsto &$' an) sell oreign shares as i the' (ere )o#esticshares- acilitating international in,est#ents.

Declining relati,e i#*ortance o the US inancial #arkets

1 Exa#*le ;hat ca$se) the 0

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E*+","t 1.1

US erchan)ise Tra)e

E*+","t 1.-

8ong9Ter# *enness in +ers*ecti,e!erchan)ise Ex*orts *er 5D+- at 0