International Finance

” .Globalisation • Globalization is the process of international integration arising from the interchange of world views. and economics . These forces include religion. Globalization describes the interplay across cultures of macro-social forces. and other aspects of culture. politics. “The broadening set of interdependent relationships among people from different parts of a world that happens to be divided into nations. products. ideas.

practices. institutions. regulations. and mechanisms that determine the rate at which one currency is exchanged for another.” .International Monetary System • “International monetary system refers to the set of policies.

. It represents the flows of financial assets either bought & sold. The balance of Payment is divided into the 2 principal divisions: (A) Current account.Balance of Payment • A Balance of payments (BOP) sheet is an accounting record of all monetary transactions between a country and the rest of the world. (B) Capital account. It is the record of all purchases and sales of goods and services with respect to the rest of the world.

the currency of a high-interest-rate-country will be at a forward discount .The Market for Foreign Exchanges • The foreign exchange market is the market where the currency of one country is exchanged for the currency of another country. International Parity Relationship (A) Interest rate parity (IRP) It states that the exchange rate of two countries will be affected by their interest rate differential. Most currency transactions are channeled through the world-wide Interbank market. In other words.

International Parity Relationship (Cont…) (B) Purchasing power parity (PPP) In absolute terms. (c) Forward rates and future spot rates parity • The expectation theory of forward exchange rates states that the forward rate provides the best and unbiased forecast of the expected future spot rate . purchasing power parity states that the exchange rate between the currencies of two countries equals the ratio between the prices of goods in these countries.

International Parity Relationship (Cont…) (D) International Fisher effect (IFE). When the rate is quoted per unit of the domestic currency. . the international Fisher effect states that the nominal interest rate differential must equal to the expected inflation rate differential in two countries Foreign Exchange Rates A foreign exchange rate is the price of one currency quoted in terms of another currency. In formal terms.

. Bid-ask spread are the difference between the bid and ask rates of a currency.Foreign Exchange Rates (Cont…) • When the rate is quoted as units of domestic currency per unit of the foreign currency. • A cross rate is an exchange rate between the currencies of two countries that are not quoted against each other. it is referred to as indirect quote. but are quoted against one common currency. • The spot exchange rate is the rate at which a currency can be bought or sold for immediate delivery which is within two business days after the day of the trade. • The forward exchange rate is the rate that is currently paid for the delivery of a currency at some future date.

generalized international financial market includes. International financial assets transaction and its supply demand relations International Financial Market International Banking & Money Market International Banking & Money Market International Equity Market LIBOR International Bond Market .International Financial Markets & Cash Management • International Finance market refers to the international financing and loan transactions.

(B) International Bond Market International bonds include Eurobonds.S.International Financial Markets (Cont…) (A) International Banking & Money Market A Short term market in which currencies can be borrowed and lent and converted into other currencies for short term period is called International Money Market. Brady bonds are issued in order to help developing countries better manage their international debt. . which is issued in U. foreign bonds and global bonds. A different type of international bond is the Brady bond. currency.

such as those in New York. An indirect method of raising equity capital from foreign markets is to issue depository receipts. (1) ADR (2) GDR . Tokyo. The purpose of foreign issues and listings is to expand the investor base in the hope of gaining access to capital markets in which the demand for shares of equity ownership is strong.International Financial Markets (Cont…) (C) International Equity Market Foreign firms often issue new shares in foreign markets and list their stock on major stock exchanges. or London.

International Financial Markets (Cont…) (D) London Interbank Offer Rate (LIBOR) An interest rate at which banks can borrow funds. from other banks in the London interbank market. The LIBOR is fixed on a daily basis by the British Bankers' Association. in marketable size. .