What is the function of the international money market? Briefly describe the reasons for the development and growth of the European money market. Explain how the international money, credit, and bond markets differ from one another.
ANSWER: The function of the international money market is to efficiently facilitate the flow of international funds from firms or governments with excess funds to those in need of funds. Growth of the European money market was largely due to 1 regulations in the U. Chapter 3: International Financial Markets 27 The international money market focuses on short-term deposits and loans, while the international credit market is used to tap medium-term loans, and the international bond market is used to obtain long-term funds by issuing long-term bonds.
Evolution of Floating Rates. Briefly describe the historical developments that led to floating exchange rates as of In , the bands were widened. Yet, the difficulty of controlling exchange rates even within these wider bands continued. As of , the bands were eliminated so that rates could respond to market forces without limits although governments still did intervene periodically.
International Diversification. Explain how the Asian crisis would have affected the returns to a U. Furthermore, the Indonesian rupiah declined again the U. Eurocredit Loans. With regard to Eurocredit loans, who are the borrowers? Why would a bank desire to participate in syndicated Eurocredit loans? Large corporations and some government agencies commonly request Eurocredit loans. With a Eurocredit loan, no single bank would be totally exposed to the risk that the borrower may fail to repay the loan.
The risk is spread among all lending banks within the syndicate. It is used as a base from which loan rates on other loans are determined in the Eurocredit market. Foreign Exchange. Next week, you will be going to Mexico and will need pesos. You met a tourist at the airport who is from Mexico and is on his way to Canada. Should you accept the offer or cash the Canadian dollars in at the airport? If you exchange Canadian dollars for pesos with the tourist, you will receive pesos.
Foreign Stock Markets. Explain why firms may issue stock in foreign markets. Why might U. ANSWER: Firms may issue stock in foreign markets when they are concerned that their home market may be unable to absorb the entire issue.
In addition, these firms may have foreign currency inflows in the foreign country that can be used to pay dividends on foreign-issued stock. They may also desire to enhance their global image. Since the euro can be used in several countries, firms may need a large amount of euros if they are expanding across Europe. Stock Market Integration.
Bullet, Inc. The only decision still to be made is the specific day on which the stock will be issued. Why do you think Bullet monitors results of the Tokyo stock market every morning? Thus, the firm would possibly be able to issue its stock at a lower price in the U.
However, this indicator will not always be accurate. Advanced Questions Effects of September Why do you think the terrorist attack on the U. Given the expectations for a potential decline in U. Given the lower interest rates, and the weak stock prices, the amount of funds invested by foreign investors in U. International Financial Markets.
Recently, Wal-Mart established two retail outlets in the city of Shanzen, China, which has a population of 3. These outlets are massive and contain products purchased locally as well as imports. As Wal-Mart generates earnings beyond what it needs in Shanzen, it may remit those earnings back to the United States.
Wal-Mart is likely to build additional outlets in Shanzen or in other Chinese cities in the future. Explain how the Wal-Mart outlets in China would use the spot market in foreign exchange. Chapter 3: International Financial Markets 29 ANSWER: The Wal-Mart stores in China need other currencies to buy products from other countries, and must convert the Chinese currency yuan into the other currencies in the spot market to purchase these products.
They also could use the spot market to convert excess earnings denominated in yuan into dollars, which would be remitted to the U. Explain how Wal-Mart might utilize the international money market when it is establishing other Wal-Mart stores in Asia. When some Wal-Mart stores in foreign markets need funds, they borrow from banks in the Eurocurrency market.
Thus, the Eurocurrency market serves as a deposit or lending source for Wal-Mart and other MNCs on a short-term basis. Explain how Wal-Mart could use the international bond market to finance the establishment of new outlets in foreign markets. The bonds may be denominated in the currency that is needed; then, once the stores are established, some of the cash flows generated by those stores could be used to pay interest on the bonds.
Interest Rates. Why do interest rates vary among countries? Why are interest rates normally similar for those European countries that use the euro as their currency? Offer a reason why the government interest rate of one country could be slightly higher than that of the government interest rate of another country, even though the euro is the currency used in both countries.
However, the supply and demand conditions for the euro are dictated by all participating countries in aggregate, and do not vary among participating countries. Yet, the government interest rate in one country that uses the euro could be slightly higher than others that use the euro if it is subject to default risk. The higher interest rate would reflect a risk premium. One point of concern for you is that there is a tradeoff between the higher interest rates in Thailand and the delayed conversion of baht into dollars.
Explain what this means. ANSWER: If the net baht-denominated cash flows are converted into dollars today, Blades is not subject to any future depreciation of the baht that would result in less dollar cash flows.
If the net baht received from the Thailand operation are invested in Thailand, how will U. Assume that Blades is currently paying 10 percent on dollars borrowed, and needs more financing for its firm. For example, if the baht will depreciate by 10 percent over the next year, the Thai investment will render a yield of roughly 5 percent, while the company pays 10 percent interest on funds borrowed in the U. Construct a spreadsheet that compares the cash flows resulting from two plans.
Under the first plan, net baht-denominated cash flows received today will be invested in Thailand at 15 percent for a one-year period, after which the baht will be converted to dollars. Under the second plan, net baht- denominated cash flows are converted to dollars immediately and invested in the U. For this question, assume that all baht-denominated cash flows are due today.
Compare the choice of investing the funds versus using the funds to provide needed financing to the firm. If Blades can borrow funds at an interest rate below 8 percent, it should invest the excess funds generated in Thailand at 8 percent and borrow funds at the lower interest rate.
If, however, Blades can borrow funds at an interest rate above 8 percent as is currently the case with an interest rate of 10 percent , Blades should use the excess funds generated in Thailand to support its operations rather than borrowing. Therefore, Ben Holt's plan should not be implemented. Citicorp could facilitate the following financial transactions: 1. Citicorp could provide whatever currency was needed by Gretz in the foreign exchange market.
Short-Term Financing. Citicorp could provide short-term loans to Gretz in whatever currency is desired through the international money market. Citicorp would be the creditor here. Citicorp could also accept short-term deposits in various currencies through the international money market. Medium-Term Financing. Citicorp could provide medium-term loans to Gretz in whatever currency is desired through the international credit market Citicorp would be the creditor here.
Long-Term Financing. Citicorp could place bonds issued by Gretz in the international bond market Citicorp would normally serve as an intermediary rather than the creditor here. Citicorp could also help Gretz place newly issued stock in foreign stock markets. Normally, a subsidiary would prefer to borrow the currency that it uses to invoice its products. Traders or businesses having import and export transaction also have frequent access to these markets. International banking is quite different from the domestic banking as there are several services which are required only in an international environment and are provided by international banks.
Following are such services:. Several trade financing services are required by importers and exporters. An importer importing goods from outside may. The importer is not known to the exporter and therefore the deal is routed through the banks. Documentary collection is another in which the exporter of goods provides the bank with all the documents required for releasing the goods under shipment.
They are handed over to the importer only after the payment is made to the bank. A trader who is not a place invest a lot of money into his debtors can avail factoring and forfeiting services. The trader effectively sells his debtors at a discount and frees his money.
International businesses have frequent transactions in foreign currencies and therefore have payables or receivables in those currencies.
To close such transactions the businesses need foreign exchange which is provided by international banks and institutions.
These institutions have their bid and ask rates for such currency buying and deposits. They buy or accept currencies at a bid price which is less than their ask price at which they sell. These banks have the privilege to trade foreign exchange in international markets.
We all know that the banks are no more doing traditional banking. They have a gamut of services to be provided to their clients both domestic and international. Foreign investment is one of such services being provided by multinational banks to their clients.
Since these banks have the presence in many countries; they are better positioned to provide consulting services to their clients for their investing requirements. It is known fact that the dealing in foreign currency is risky. The risk is assumed because the prices of currencies are very fluctuating. The price at which a deal is struck may not remain constant till all the transactions are over. Here is where the hedging plays an important role.
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