International Financial Markets and Instruments

An Introduction

Globalization --- New Phenomenon

Alan M. Taylor (2004) noted that the surge in international payments we see today occurred earlier, between 1870 to 1914 Laura Brown (1997) , Canada, Globalization and Free Trade: The Past is New! wrote that the globalization phenomenon we are experiencing was also seen at the turn of the last century. Brown focussed on North America In Mexico it ended with a revolution.

Globalization 2nd surge

Both periods are similar with great changes in transportation and communication (telegraph, train era) Taylor notes that last period, world economy had a gold standard, now mixed flexible exchange rates earlier period, a lot of the flow was to developing regions, now mostly between developed

Globalization 2nd surge

What can we learn from this? Even when a trend seems new and unstoppable .Trends can end, sometimes abruptly and be reversed The forces that cause the end are often present but ignored during the surge (environmental problems, inequality)

Back to the present markets and Instruments

This chapter surveys assets
1. 2. 3. 4. International bank lending International bonds Inernational stock markets (and mutual funds) Derivatives

It will examine
size how they work

International Bank Lending

The exclusively domestic approach to understanding money is no longer valid. Some first year texts already discuss international transactions and exchange rate risks (McConnell & Brue, for example) Why not only domestic approach?
the size and scope of international transactions are huge even small investors and companies can be part of the international lending market

Bank lending
International bank lending can occur for many reasons
domestic banks lend to private firms abroad who are making real investments domestic banks purchase foreign financial instruments, if return is higher than at home foreign banks may borrow from domestic banks to have working balances of domestic currency

Bank lending
Table 1 (coming up) shows total bank lending from the Bank for International Settlements (BIS) (http://www.bis.org) BIS acts as a clearinghouse for central bank settlements, deals with international banking matters, and promotes international financial cooperation

International Bank Lending

Gross international bank lending is the sum of total cross-border claims and local claims in foreign dollars. Net international bank lending is this gross number, less interbank deposits Interbank deposits are deposits by foreign banks in home banks and home banks in foreign banks. They arent really loans, but exist to facilitate international transactions --- they are big

International Bank Lending

Table 1. Gross and Net International Bank Lending, Dec 2003 ($bil)

(1) Total cross-border bank claims (2) Local claims in foreign currency
(3) Gross international bank lending (4) Minus: Interbank deposits (5) Net international bank lending

$14,944.3 2,147.1
17,091.4 10,486.4 6,605.0

International Bank Lending

$6,605 billion dollars is a lot of money. To provide a further perspective, the next table shows bank liabilities (deposits, not loans) as a percentage of GDP for various international banking centres Looking at the last column, in 2006, the area with the smallest liabilities to GDP ratio is developing countries at 16% The highest area is Carribean offshore, where these liabilities constitute 5,608 % of GDP.

International bank lending

There are 3 components to bank lending
domestic bank loans in domestic currency to nonresidents
(German bank lending Euros to US firm for purchase of German exports)

domestic bank loans in foreign currency to nonresidents

(German bank lends dollars to US firm to buy Saudi oil)

domestic bank loans in foreign currency to domestic residents

(German bank lending dollars to German firm to buy Saudi oil)

International Bank Lending

Component 1 is called traditional bank lending
this type of lending facilitates trade, it has a long history

Components 2 and 3 are more recent

they are part of activity in the eurocurrency market (aka eurodollar market)

The eurocurrency market is the market for currencies outside the home country. (ex. British bank lending dollars)

Eurocurrency Market
Historically, this was the Eurodollar market because it was based on US dollars in European banks US dollars came to be important in Europe in the 1950s, (after WWII, during the Cold War between US and the Soviet Union) Soviet Union shifted its dollar accounts out of US to Britain in case US decided to seize the money Britain had currency controls on British pounds US dollars were not controlled US had controls on interest rates that could be paid to depositors, these didnt apply to British banks with US dollars

Eurocurrency Market
Also, in 1960s, US introduced policies that increased demand for Eurodollars
Federal Reserve introduced lending guidelines to discourage loans to foreigners, also taxed these loans Vietnam war caused US to tighten money supply at home, and so, US dollars were cheaper to borrow in Europe than in US

Eurocurrency Market
On the supply side
Oil shock! 1973-74.. OPEC quadrupled oil prices, which were denominated in dollars, OPEC countries (wisely for the time) deposited dollars in European banks

In sum a lot of dollars have been deposited and loaned in Europe. And now, a lot of various currencies are deposited and loaned in other countries.

Eurocurrency Market
Like all bank deposits, Eurocurrency increases with the multiple-deposit expansion process
An initial $1 million dollar deposit in a Eurobank can become $10 million in deposits with a 10% reserve. $1 million deposited -> $0.9 mil loaned, deposited again $0.9 million deposited -> $0.81 mil loaned Final result $1 mil / 0.1 = $10 million

Eurocurrency Market
The rate of interest on loans is based on the London Interbank Offered Rate (LIBOR) LIBOR is found by an average of the rate of interest that major banks are using when lending money to each other Other parties can borrow at a rate that is above LIBOR Note: international banks dealing in loans in foreign currency are still sometimes called eurobanks even though it may be a Carribean bank loaning yen.

Eurocurrency Market
The effect of eurocurrency markets is that international financial transactions are very easy. They have also encouraged the relaxation of barriers to capital flows (since such a barrier will simply encourage this market) There are concerns though, because the central bank of an issuing country has no control over eurocurrency, and so it can increase home market instability. This is a bigger concern for the US, because its currency is a major part of the Eurocurrency market.

International Bond market

Governments and corporations issue bonds, which are a form of borrowing a fixed amount for a fixed period of time. The maturity period is the time of the loan. Notes: maturity is less than 10 years Bonds: maturity is 10 years or longer

International Bond market

Bonds have a face value or maturity value which is the value of the bond at the maturity date.
For example, a bond may have a value of $5,000 upon redemption at maturity.

Bonds will also have interest payments, or a coupon rate which are usually paid yearly.
For example, a $1,000 bond paying 5% coupon rate will yield an annual payment of $50.

International Bond market

Bond underwriters are banks or financial institutions that sell the bonds for the issuing entity. If a bond has an underwriter, then the underwriter essentially buys all the bonds and resells them. It receives a fee for this service, and because it bears the risk that the bond issue will not sell out.

International Bond market

A sometimes blurred distinction of bond markets Foreign bond market is used when a borrower in one country issues bonds in a second, host, country. Sale is mainly to residents of the host country Eurobond market is used when a borrower in one country issues bonds in many countries, using a multinational loan syndicate. These bonds could be in several currencies.

International Bond market

Size of market: The stock of bonds and notes at the end of 2003 was $11,681.4 billion Issued in Euro area $4,524.2 US $3,105.9 Japan $ 120.9 Offshore centers $ 750.4 Other countries $ 564.3 Intl Institutions $ 507.1

International Bond market

More were issued in Euros than US dollars ($5,104.8 Euros, $4,655.6 US$, $859.8 British ) $8,546.5 bil issued by commercial banks and other financial institutions.

International Bond market

Bond market grew for the same reasons Eurocurrency market grew
US tax on on income from new and existing foreign securities held by US citizens (Interest Equalization Tax or IET) voluntary lending restraints on US banks lending abroad

Price of European bonds fell in US (interest rate higher) so US people would buy them lenders issued bonds in Europe

International Stock Markets

Stock holding allows you to own a tiny piece of a company If you own a lot, then there is an element of control in the purchase of a stock In practice, that is rarely meaningful. Size of market is difficult to measure as the information is not collected in many countries

International Stock Markets

We know the market has grown from countries that do collect data Cross-Border transactions in stocks as a percentage of GDP (gross purchases and sales)

Country
Germany Japan US

75-79
1.6 % 0.6 % 1.9 %

80-89
7.3 % 9.7 % 6.7 %

1999
83.4 % 29.1 % 53.1 %

International Stock Markets

We know the market has grown from countries that do collect data Cross-Border transactions in stocks as a percentage of GDP (gross purchases and sales)

Country
Germany Japan US

75-79
1.6 % 0.6 % 1.9 %

80-89
7.3 % 9.7 % 6.7 %

1999
83.4 % 29.1 % 53.1 %

International Stocks
Developing countries are becoming more important as issuers of international stocks as their governments open their economies. Most (not all) showed significant gains in their stock price indices through 2003. Example (in dollar terms):
China - 8.4 % Indonesia 117.2 % Mexico 26.2 % - Chile - India - Peru 50.2 % 88.3 % 107.8 %

International Stocks
The statement that international financial flows are not going to developing countries during this surge in internationalization is not entirely exact. There is money flowing south, just not a lot compared to the vast amounts flowing between developed countries.

International Stock markets

The problem with stock market transactions is that people occasionally act like lemmings
one leads all follow whether it be to wealth or a crash

This can lead to increased volatility in markets if one market has high stock prices,
people should lower demand, but if the expectation is that prices will rise even higher, demand increases, driving prices higher

International Stock Markets

Similarly, if one market has low stock prices,
people should increase demand, but if the expectation is that prices will fall even lower, demand falls, driving prices down, sometimes to a crash

Sooner or later, the underlying value of companies will cause soaring markets to fall, or help languishing markets recover. (usually)

International Stock Markets

When demand behaves as it is expected to, given rational decision-makers
high price lowers demand low price raises demand

Then, the international purchase of stocks would push yields toward convergence,
where stocks with similar risks in different countries have the same return

International Portfolio Diversification

Investors can reduce the risk of losing a lot of money in a crash by holding stocks in different countries. This is called guess what? This way, there is a smaller gain when a market soars, and a smaller loss when it crashes, so that investors can earn a good, but steady return.

International Portfolio Diversification

One tool that can help with diversification is mutual funds With a mutual fund, investors need very little information on the countries and companies in which they are investing They trust fund managers to purchase equities (stocks) and other financial assets and to manage the mutual fund portfolio for a long-term gain They mainly need to look at fun performance to make a decision about which funds to choose

International Portfolio Diversification Types of funds

Global funds contain stocks of corporations in many different countries, including the home country International funds hold stocks of corporations outside the country Emerging market funds hold developing countries stocks Regional funds hold stocks in specific regions (Asia, Latin America, China..) Funds can charge fees load entry, exit, as well as management ratios.

International Markets
There are costs and opportunities with the growth of these international markets International stock market, bond market and currency markets can all serve to help funds move to where they can be best used. These markets
can lead to convergence of returns across the world for investments with similar risks can lead to wild swings due to bandwagon effects can encourage more freedom in international transactions.

Review
What can we learn from previous surges in international finance? What is a eurocurrency? What is the difference between a eurobond and a foreign bond? Name and explain the four types of mutual funds.

Financial Linkages and Eurocurrency Derivatives

Now we will look at how financial markets are linked through interest rates and exchange rates Later we will look at more financial instruments that can be used for hedging or speculation, called derivatives.

Financial Linkages
In the last chapter, we looked at financial linkages between exchange rates and interest rates in various markets. We now have (at least) two more markets where these links can be observed. Given our example of US and London markets, we can add
US dollar market in London (eurodollar) British market in US. (eurosterling market)

Financial linkages
First, lets recap what we learned about the markets in Chapter 20. Remember the domestic investor who is considering international investments must consider
1. the domestic rate of return 2. the foreign rate of return 3. expected changes in the exchange rate

Financial linkages
The parity condition without consideration of exchange rate risk was: (1+ ihome)/(1+iforeign) = E(e)/e

We had set xa = 1 + E(e)/e then showed that the above could be written as (ihome - iforeign)/(1+iforeign) = xa which could be approximated by (ihome - iforeign) = xa

Financial linkages
The parity condition without (ihome - iforeign) = xa states that equilibrium occurs in the international financial market when the difference in interest rates is offset by the expected appreciation of the foreign currency Because xa is an estimate, if actors are risk-averse, we replace this condition with: (ihome - iforeign) = xa - RP

Financial linkages
The parity condition without (ihome - iforeign) = xa - RP states that equilibrium occurs in the international financial market when the difference in interest rates is offset by the expected appreciation of the foreign currency less a risk premium for this investment If RP is the risk premium for expected exchange rate risk, and this risk can be covered in the forward market, we have the equivalence of two conditions. (ihome - iforeign) = p = xa - RP

Financial linkages
Now let us consider the financial markets with the inclusion of eurocurrencies We now have 6 prices to consider: Interest rates:
U.S. interest rate (in US) U.K. interest rate (in UK) eurodollar interest rate eurosterling interest rate

Exchange rates:
spot rate (dollars/pound) forward exchange rate (dollars/pound)

Relation between home rates and Eurorates

As the graphs show, there is a consistent pattern between US interest rates at home, and the eurodollar rate, as summarized by LIBOR. The LIBOR deposit rate is slightly higher than the deposit rate in the US The LIBOR lending rate is slightly lower than the lending rate in the US.

Relation between home rates and Eurorates

The difference exists for several reasons:
to lure financial transactions from home to the euromarket. because banks have greater costs in operating at home than in the euromarket (deposit insurance, reserve requirement), the bank will give a lower interest rate on deposits at home.

Market adjustment with six markets

In the text, they show adjustment to a tightening of monetary policy in the US. The first graph shows the NY money (financial) market.
tighter monetary policy is reflected as a shift up of the money supply curve

The second graph is the London money (financial) market

lower supply in the US shifts demand for investment dollars to London, increasing demand

Market adjustment with six markets

The third graph is the spot exchange market (price of s)
the higher US interest rate leads to an increase in the supply of s as savers buy US securities at the higher rate

The sixth graph is the forward market

demand for s increases as those buying 3 month securities want to bring the s home at the end of the period.

Market adjustment with six markets

The fourth and fifth graphs are the London money markets (eurosterling financial and home financial market) there is pressure to increase the interest rate there (decrease supply) as savers shift funds to the US market. However, it is possible for the British central bank to circumvent that pressure, and the effect to be played out only in the US and exchange rate markets

Market adjustment with six markets

Note, in all financial market the slides, the intersection of the curves is NOT where equilibrium exists. The text is careful to show that the movement of the markets maintains a spread between the lending rate and the borrowing rate. Therefore, the equilibrium amounts are to the left of the intersection.

Hedging Eurodollar Interest Rate Risk

We already discussed how the forward and futures markets can be used to hedge exchange rate risk Now we will look at instruments that are used to hedge against interest rate risk These instruments are called derivatives in the financial markets (because they are offshoots of standard contracts)
(Note: any instrument that is used for hedging can also be used for speculation)

Hedging Eurodollar Interest Rate Risk

1. 2. 3. 4. 5. 6. 7. 8. We describe 8 instruments: maturity mismatching future rate agreements eurodollar interest rate swaps eurodollar cross-currency interest rate swaps eurodollar interest rate futures eurodollar interest rates options options on swaps equity financial derivatives

1. Maturity mismatching
To hedge against a change in interest rate, a financial institution can acquire two or more financial contracts whose maturities overlap. Borrow short term and deposit long term to lock in current interest rate for later deposit Deposit short term and borrow long term to lock in current interest rate for later loan.

1. Maturity mismatching
Example 1: Firm is getting $100,000 in three months and needs to pay $100,000 in six months. Manager is worried interest rate will fall by 3 months and wants to lock in current interest rate for last 3 months.
Firm can borrow $100,000 for 3 months and deposit it now for six months.

This way firm gets current interest rate on savings. Cost is difference between deposit and loan rate for first 3 months.

1. Maturity mismatching
Example 2: Firm is loaning money in 4 months for an 8 month period. Manager is worried interest rate will rise by 4 months and wants to acquire funds for loan at current interest.
Firm can borrow $100,000 for 12 months and deposit it now for 4 months.

This way firm gets current interest rate on funds, and can loan it at expected higher future interest rate.

2. Future Rate Agreements (FRA)

This is an agreement on a future interest rate. It locks in an interest rate for a loan or deposit to be made at a future date for a specific time Also called forward-forward or forward-rate contract The purchaser is paid/charged the difference between the posted interest rate and the agreed upon rate

2. Future Rate Agreements (FRA)

Example: Oly-west wants to borrow $1 mil in 6 months for a one-year period. They purchase a forward rate agreement at 5.5 %. (the contract is for the rate, and there is a fee) If the market rate in 6 months is above 5.5 % the seller pays Oly-west the difference between the two rates. (If rate is 5.7 % seller pays 0.002X $1 mil. = $2000)

2. Future Rate Agreements (FRA)

Example continued: If the rate in 6 months is below 5.5 %, the seller receives the difference. (If rate is 5.35 % seller receives 0.0015 X $1 mil = $1500) Note: 0.20 % is called 20 basis points; 0.15 % would be 15 basis points. By purchasing a forward rate agreement, the purchaser gets a fixed interest rate instead of a floating rate for the period waiting for the loan

3. Eurodollar interest rate swaps

This is similar to forward rate agreements, except
there are two different kinds of interest rates for a number of time periods in the future it can involve two floating rates, one relative to LIBOR, another relative to a specific basket of currencies (floating-floating swap)

3. Eurodollar interest rate swaps

Text example: Ms. Smith has an 8 percent, three-year euro-dollar based loan
she wants a variable rate loan

Mr. Brown has a eurodollar loan. He is paying sixmonth LIBOR+30 basis points. They swap interest rates. If interest rates fall, Smith gets the lower floating rate. If they rise, Brown now has a fixed rate loan. If they fall and look like they will rise, Smith can swap again for a new, lower, fixed rate.

4. Eurodollar cross-currency interest rate swaps

This is similar to interest rate swap, but also includes currency swap. A holder of a fixed rate loan in one currency can change it for a floating rate in another currency. Or it can exchange a floating rate in one currency for a floating rate in a different currency. This one hedges the currency as well as the interest rate.

5. Eurodollar interest rate futures

These are similar to interest forward rate agreements, but with the same types of distinctions we see in future exchange rate agreements.
they are transacted on organized exchanges (CME) they are for fixed periods (3rd Wed. of month) they are for fixed amounts gains and losses are paid daily in a margin account

5. Eurodollar interest rate futures

Eurodollar interest rate futures allow actors to lock into fixed interest rates in specific eurocurrencies. If funds are coming in at a future date (say $3 mil) you can lock in an interest rate now. At the completion date, the earnings on the margin account represent the difference between the current contract rate and LIBOR.

5. Eurodollar interest rate futures

Therefore, investing margin funds and the $3 mil is the same as investing $3 mil at the current interest rate. This would be done if you want to hedge against a fall in interest rates between now and the time you have funds to invest.
this is called a long hedge

A borrower can guard against a rise in interest rate by selling a futures contract expiring at the point where they will be borrowing funds. The margin account earnings would in essence hedge against the interest rate rising.
this is called a short hedge.

5. Eurodollar interest rate futures

The text provides a table of Interest Rate Futures Market Quotations, for Monday Mar 29, 2004 (which gives you an idea of when this book went to press) The contract is for $1 million The change in contract price is measured in basis points per quarter, and represents $25. (1,000,000 X0.0001/4)= 25 The price is relative to 100, that is, 100 price is the yield on the contract. price is 100 spot LIBOR

5. Eurodollar interest rate futures

For contracts expiring in June, the Open price is 98.83, and the settle price happens to be the same. Adjustments to margin accounts are based on the settle price. 98.83 means the yield is 1.17. The previous days price was 98.84 On expiry, the futures yield converges to LIBOR.

5. Eurodollar interest rate futures

For long period hedges (up to 7 years), actors can by a strip of three month futures contracts. (ex. expiry April, June, Sept., Dec) Or they could buy a strip, and then roll it over for a new one again and again.. this is called a stack. Banks (and others) can combine hedging contracts on interest rates and on currencies for specific future needs.

6. Eurodollar interest rate options

Like exchange rate contracts, there is also an options market for interest rates Up until now, all contracts require an exchange to be made, whether the interest rate moves in a favourable direction or not. Again, as in exchange rate contracts, actors can participate in this option market by:
buying a call option selling a call option buying a put option selling a put option

6. Eurodollar interest rate options

buying a call option gives the purchaser the right to purchase a eurodollar time deposit bearing a certain interest rate at a specific date.
there is an up-front price, called the option premium. the buyer can choose to exercise the option (if the market rate is below the option rate) or not exercise the option, if the market rate is above the option interest rate.

If interest rates are expected to fall, the premium will be higher than if they are expected to rise.

6. Eurodollar interest rate options

buying a put option gives the purchaser the right to sell a eurodollar time deposit (acquire eurodollars) bearing a certain interest rate at a specific date.
there is an up-front price, called the option premium. the buyer can choose to exercise the option (if the market rate is above the option rate) or not exercise the option, if the market rate is below the option interest rate.

If interest rates are expected to rise, the premium will be higher than if they are expected to fall.

6. Eurodollar interest rate options

On the other side of the market, an actor can sell a call option or a put option. The seller earns at most, the premium. The buyer pays, at most, the premium. Options contracts are like futures contracts, traded for fixed amounts ($1 mil) in 3 month periods ( Apr, Jun, Sept, Dec) Options for longer periods can be constructed using a series of agreements.

6. Eurodollar interest rate options

Caps, floors and collars: Cap: agreement to pay purchaser if the interest rate rises above a certain level. Floor: agreement to pay purchaser if the interest rate falls below a certain level. Collar: agreement to pay purchaser if the interest rate moves outside a specific range. Often a floating rate loan agreement will have a provision with a cap. (Ex. 7 5 above LIBOR)

6. Eurodollar interest rate options

Caps, floors and collars: Cap: agreement to pay purchaser if the interest rate rises above a certain level. Floor: agreement to pay purchaser if the interest rate falls below a certain level. Collar: agreement to pay purchaser if the interest rate moves outside a specific range. Often a floating rate loan agreement will have a provision with a cap. (Ex. 7 5 above LIBOR)

6. Eurodollar interest rate options

Caps, floors and collars: A floating rate deposit can be protected by purchasing a floor agreement, for a premium.. has the same effect as a strip of call options (Ex. 7 5 above LIBOR)

7. Options on swaps
As financial instruments, caps were very successful. The market next introduced options on swaps It is, as the name implies, an option to swap interest rates purchaser of a call option to swap (swaption) has the right to receive a fixed rate in a swap and pay a floating rate.
purchaser will exercise option if fixed rate is above floating rate

7. Options on swaps
purchaser of a put option to swap (swaption) has the right to pay a fixed rate in a swap and receive a floating rate.
purchaser will exercise option if fixed rate is above floating rate

7. Options on swaps
You can also buy the option to cancel a swap
call option (callable swap)
side paying the fixed rate and receiving the floating rate can cancel swap

put option (putable swap)

option buyer paying the flexible rate and receiving the fixed rate has the right to cancel

8. Equity financial derivative

So far, we have talked about derivatives of the exchange and interest rate markets In an equity swap, an investor can swap the returns on a currently owned equity to another investor for a price With international markets, investors in one country can buy and hold equities and agree to pay investors in another country the gains and losses for an agents fee.

8. Equity financial derivative

This practice keeps the foreign investors identity secret allows investor to get advantage of ownership of foreign equity without worrying about local rules of ownership, fees for foreign purchasers of equities, etc.

Growth in derivative markets

Participants in international financial markets can alter their exposure to foreign exchange rate and interest rate risk to meet
their personal comfort level for risk their changing expectations about the directions of risk their capacity for bearing risk their knowledge about the markets and ability to assess risk

They can also participate in market to make profits from other investors wishes to alter risk exposure

Growth in derivative markets

The growth in derivatives has been phenomenal From 1987 to 2003 the growth in exchange-rate trade instruments (interest rate futures, interest rate options, currency futures, currency options (falling), stock market index options) was from $730 bil. to $36,750 bil

Exchange rate traded instruments are traded on organized exchanges, like the CME

Growth in derivative markets

The growth in over-the-counter instruments (interest rate swaps, currency swaps, interest rate options) was from $866 bil to $169,678 bil Over-the-counter instruments are traded by brokers and individual financial institutions, rather than exchanges.

One last phenomenon

We cant talk about international finance without mentioning loan syndicates This is when a group of banks agree to provide a loan to a corporation or country, and sells shares of the credit to a wider range of smaller banks. The syndicate will usually appoint a manager for the loan agreement

Loan syndicates
In a direct loan syndicate the syndicate banks are making the loan themselves. They are colenders In a loan participation syndicate the lead bank executes the loan with the borrower and syndicates the loan by entering into agreements with other banks By syndicating a loan, a bank reduces its risk exposure banks share risk and return.

Recap
This chapter has taken us from the establishment of the Eurodollar market to the range of international financial derivatives With Eurodollars, market adjustments can help coordinate prices in 6 markets (2 exchange rate markets, 4 interest rate markets)

Recap

1. 2. 3.

4.

We introduced 8 international financial derivatives maturity mismatching borrow and loan for different periods future rate agreements forward purchase of fixed rate loan eurodollar interest rate swaps swapping fixed or flexible loan, or floating based on LIBOR with different based interest rate eurodollar cross-currency interest rate swaps #3 with different currencies involved

Recap
We introduced 8 international financial derivatives 5. eurodollar interest rate futures Set future purchases on margins in recognized exchanges ($1 mil basis point margins) 6. eurodollar interest rates options (options on forward interest rates) 7. options on swaps (just what it says) 8. equity financial derivatives

Next Chapter
In the next chapter, we start on the economic theory of the financial markets It is, necessarily, simple compared to the myriad of instruments that can be traded It starts to try to explain the why of exchange rate and BoP movements.