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Class Notes 1 Introduction: International Financial Markets: I. What Is Special About International Finance?

This document provides an overview of international financial markets. It discusses several key aspects that make international finance different than domestic finance, including foreign exchange risk, political risk, and market imperfections. It also outlines some of the major players in international markets such as multinational corporations, institutional and private investors. Finally, it discusses trends toward increasing globalization in financial markets over recent decades, including deregulation, new financial instruments, and privatization in many countries.

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47 views7 pages

Class Notes 1 Introduction: International Financial Markets: I. What Is Special About International Finance?

This document provides an overview of international financial markets. It discusses several key aspects that make international finance different than domestic finance, including foreign exchange risk, political risk, and market imperfections. It also outlines some of the major players in international markets such as multinational corporations, institutional and private investors. Finally, it discusses trends toward increasing globalization in financial markets over recent decades, including deregulation, new financial instruments, and privatization in many countries.

Uploaded by

ravi_nyse
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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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 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 o
terroris#.
.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
1 Exa#*le2 Hon)a )eci)e) to esta&lish *ro)$ction
acilities in 3hio #ainl' to circ$#,ent tra)e &arriers.
Ex*an)e) 3**ort$nit' Set
Fir#s can locate *ro)$ction in an' co$ntr' or region to
#axi#i4e 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,erseas
in,est#ent o**ort$nities an) are (illing to )i,ersi'
internationall'.
2
II. PLAYERS IN INTERNATIONAL FINANCIAL
MARKETS
3
.$ltinational
/o#*anies
Instit$tional
In,estors
+ri,ate
In,estors
Foreign
Exchange
Ex*os$re
5lo&al
Financing
5lo&al
In,est#ents
Financial Inter#e)iation
International Financial .arkets
5o,ern#ents- /entral 6anks-
International Instit$tions
Forex .arket 3*tions- F$t$res-
For(ar) /ontracts
E$roc$rrenc' .arket 3*tions- F$t$res-
FRAs
E$roc$rrenc' De*osits
E$rocre)its
E$ronotes
6on) .arket 3*tions- F$t$res-
S(a*s- /a*s-
Do#estic Floors- S(a*tions
Foreign
E$ro&on)
E7$it' .arket 3*tions- F$t$res
E$roe7$it'
ADRs
.$t$al F$n)s
4
Ite!at"oal
F"a#"al
Ma!$ets
De!"%at"%e
P!o&'#ts
III. TRENDS IN INTERNATIONAL FINANCIAL
MARKETS: INCREASIN( (LOBALI)ATION
8ong9ter# tren) to(ar)s increasing tra)e (ith other
co$ntries. !See Exhi&its 0.0 : 0.2"
/o#*letion o the Ur$g$a' Ro$n) o the 5eneral
Agree#ent on Taris an) Tra)e !5ATT"
/reation o the ;orl) Tra)e 3rgani4ation !;T3"
For#al arrange#ents a#ong co$ntries to *ro#ote
econo#ic integration on the regional le,el- or exa#*le-
the E$ro*ean Union !EU" an) the North A#erican Free
Tra)e Agree#ent !NAFTA"
5lo&ali4ation o inancial #arkets- (ith es*eciall' *roo$n)
changes in the 0<=>s.
The i#*et$s or glo&ali4e) inancial #arkets initiall'
ca#e ro# the go,ern#ents o #a?or co$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 oreign
ir#s as $ll #e#&ers in Fe&r$ar' 0<=A.
Ra*i) gro(th o international in,est#ent an) &orro(ing
6eneits2 international )i,ersiication re)$ces risk
A))itional Risks2 exchange rate risk- co$ntr' risk
B
Ne( an) so*histicate) inancial instr$#ents
1 Exa#*les2 c$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,estors
to &$' an) sell oreign shares as i the' (ere )o#estic
shares- acilitating international in,est#ents.
Declining relati,e i#*ortance o the US inancial #arkets
1 Exa#*le2 ;hat ca$se) the 0<=C #arket crashD
Increase) *ri,ati4ation
1 Thro$gh *ri,ati4ation- a co$ntr' )i,ests itsel o the
o(nershi* an) o*eration o a &$siness ,ent$re &'
t$rning it o,er to the ree #arket s'ste#.
1 3ne &eneit o *ri,ati4ation or #an' less9)e,elo*e)
co$ntries is that the sale o state9o(ne) &$sinesses
&rings to the national treas$r' har)9c$rrenc' oreign
reser,es.
A
E*+","t 1.1
US .erchan)ise Tra)e
E*+","t 1.-
8ong9Ter# 3*enness in +ers*ecti,e
!.erchan)ise Ex*orts *er 5D+- at 0<<> +rices- in E"
C
92>>
>
2>>
4>>
A>>
=>>
0>>>
0<CB 0<=> 0<=B 0<<> 0<<B
F &illions
U.S. I#*orts
U.S. Ex*orts
Net Ex*orts !Ex*orts9I#*orts"

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