INTERNATIONAL FINANCE

WHY TO STUDY
Finance cannot be anything but
international
Enormous growth in international trade
Increasing capital flows
Increasing trend of free trade
Multilateral negotiations regarding the
phase out of trade barriers
Gigantic global marketplace
FOREIGN EXCHANGE MARKET
What about the location?
Revolutionary changes
Originally conceived to facilitate
international trade
Twenty four hour non stop market
Actors?
(i) Primary dealers (ii) Brokers (iii)
Hedgers (iv) speculators (v) Arbitragers
MARKET SEGMENTS
Wholesale Segment
Commercial Banks
Investment Banks
Corporations
Central Bank
Retail Segment

Bid/Ask Spread
Buy quote/sell quote
Base currency/Quoted currency
USD/INR. 39.5469/39.5471
Determinants of Bid/Ask : Order costs,
Inventory costs, Competition, Volume,
Currency risk.
Bid/Ask spread. Ask rate-Bid rate/Ask rate
ARTICLE FROM WSJ
A Falling Dollar Will Mean a Faster U.S. Recovery
(Martin Feldstin)
Reason I : Sale of large dollar balances. to reduce the
risk. Korea, Taiwan and oil producing countries,
accumulated large reserves of dollars because of trade
surpluses. They have changes their portfolio. Euro
bonds.
Reason II: ECB has set higher interest rates. Germany,
Norway and Sweden.
Reason III: Large trade deficits. Nearly 500 billion.
Reason IV: Chinas declining surplus. Declining saving
rate.
PPP and IFE
The exchange rate differentials offset the
inflation differentials.
PPP has its own limitations
a) Compounding effects
b) Lack of substitutes
What is IFE?
Interest rate differentials
Its relationship with PPP