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 that determines the relative values of foreign currencies.
Assist international trade, investments, foreign traveling.
Foreign exchange dealers act as intermediaries.
Spot Rate & its features;
The rate at which one currency is traded for another is spot rate. SUDS is the most commonly accepted currency especially in countries with weak currencies.
Spot market liquidity Spot Market Structure; Company ‘A’ purchases supplies on the first day of every month priced at 100,000 Euros from Company ‘B’. Chi 3 International Financial Markets 1 By pm month ago, Euro was worth $1. 08. ‘A’ needed $108,000 (Euro to pay. Sank transferred money to ‘B’.
Today a new payment is due.
Euro is valued at $1. 12. Company ‘A’ needs $112,000 (Euro $1. 2) to make payment to ‘B’. Time Zones & Spot Market Attributes of Banks Providing Foreign Exchange Offer cash management services for the clients.
May provide an assessment of foreign economies.
Provide a forecast of the future value of exchange rates. Foreign Exchange Quotations
Bid-Ask Spread: Commercial banks charge a fee for conducting foreign exchange transactions. Ask rate – Bid rate
Bid-Ask Spread % Ask rate – Bid rate Ask rate – Spread is higher for an illiquid currency that is not traded frequently as compared to the liquid currencies.
X 100 Exercise
Utah Banks 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 rate is $. 11 and the bid rate is $. 10. Solution
($. 81 – $. 7938)/$. 81 = . 02 or ; [($. 11 – $. 10)/$. 11] = . 091, or 9. 1%.
Interpreting Foreign Exchange Quotations
the Ever-changing value of exchange rates throughout the day leads to direct and indirect quotations at a point of time.
No. Of dollars per currency 1 = $1. 0
No. Of units of currency per dollar (Reciprocal of Direct Quotation) 1 / 1. 20 Example
If the spot rate of the Euro is the US $1. 031 Direct Quotation 1 = $1. 031
Indirect Quotation = 1/ Direct Quotation = 1/ $1. 031 0. 97=$1 Cross Exchange Rate
It is the exchange of two non-US dollar currencies. Tourist at the airport who is from Mexico and is on his way to Canada.
He is willing to buy your C$200 for 1,300 pesos. Should you accept the offer or cash the Canadian dollars at the airport? Explain.
Today you notice the following exchange rate quotations:
$1 is equal to 3. 00 Argentine pesos
1 Argentine peso = 0. 50 Canadian dollars
You need to purchase 100,000 Canadian dollars with U. S. Dollars. How many U. S. Dollars will you deed for your purchase? International Credit Market
Sometimes, Macs obtain medium-term funds
Funds are obtained through term loans from local financial institutions. Funds may be obtained through the issuance of notes in their local markets.
NC may obtain funds through banks located in foreign markets.
Euro credit loans:
Loans of one year or longer extended by banks to Macs/Gobo. Agencies in Europe are called Euro credit loans.
Loans are denominated in dollars or other currencies with a maturity of 5 years.
The market dealing with Euro credit loans is called Floating Rate Loans:
London Interbrain Offer Rate (LABOR) with premium up to 3% depending upon credit worthiness of a borrower. LABOR is the rate commonly charged for loans between banks.
Labor Syndicated Loans.
When banks are unwilling/unable to process a huge loan they form groups know as syndicates.
Lead banks negotiate terms with borrowers.
The underwriting fee is paid by the borrower.
A commitment fee of 0. 25% or 0. 50% P. A.
Is paid for the unused portion of the available credit. Interest rates are determined by:
Creditworthiness of borrower
Maturity period Currency denominating the loan.
Read about the disadvantages of Single Currency
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