Introduction: International Financial Markets

International Finance Dr. Angela Ng

FINA 342 HKUST

Class Notes 1

INTRODUCTION: INTERNATIONAL FINANCIAL MARKETS

I. 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.

II. 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

ADRs

Mutual Funds

III. 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