Chapter 3 Flashcards

Question

International Money Market

Answer 1

Corporations or governments need short-term funds denominated in a currency different from their home currency

Answer 2

A. May need to borrow funds to pay for imports denominated in a foreign currency B. need funds to support local operations - may consider borrowing in a currency with lower IR (take advantage) - spec. desirable if it will have receivable denominated in that currency in the future C. May choose to borrow in a currency that is expected to depreciate against their home currency D. Investors? (Interest rate and value of foreign currency)

Answer 3

dollars deposits in banks in Europe &other countries Eurodollars/Eurocurrency market "$"deposits in banks can then be use to lend to corp. customers based in Europe

Answer 4

centeres in HK, Singapore originated as a market involving mostly dollar-denominated deposits originally known as the Asian Dollar Market why? businesses could not rely on banks in Europe (distance &time zones)

Answer 5

rates depend on a) supply of ST funds available (bank deposits) b) total demand for St funds by borrowers Low IR: large supply of savings high IR: strong demand to borrow that currency rates tend to be higher in developing countries normally rates paid by corporations who borrow ST funds in a particular country is slightly higher than rate paid by national government within same country

Answer 6

- rates among countries tend to be highly correlated over time - weak eco. conditions --> corp. will reduce the amount of ST funds they wish to borrow corp. need for liquidity declines - strong eco. conditions --> increase in corp. expansion corp. need additional liquidity to support expansion

Answer 7

debt securities issued by MNCs &government agencies with ST maturity (< 1yr) perceived as very safe (default risk) - spec. for high rated securities bad credit risk still exists but they are more exposed to exchange rate risk when the currency denominating the securities differ from the home currency of the investors

Answer 8

restricted supply of gold - counties cannot have high inflation any BOP disequilibrium can be corrected automatically via cross-borders of gold

Answer 9

world economy can be subject to deflationary pressure due to supply of gold it has no mechanism itself to enforce the rules on the game as a result - countries may pursue economic policies which are incompatible with the GS

Answer 10

automatic achievement of BOP Equilibrium | maintenance of national policy autonomy

Answer 11

random fluctuations may discourage international trade &encourage market segmentation --> suboptimal allocation of resources --> increases uncertainty/risk related to int. trade &investment keeping a fixed exchange rate however is restricting I.T People can use hedging strategies against future currency volatility

Answer 12

1. elimination of uncertainty in risk (stable rate)/fluctuation in the currency 2. greater confidence to invest attract investors due to stable currency system e.g. known cost of imports no speculation possible sense of confidence that payments can me made safely without danger of losses 3. prevention of depreciation of currency 4. adoption of responsible macro-eco. policies 5. anti-inflationary 6. Current Account (rapid appreciation can badly affect exports)

Answer 13

1a) conflict with other macro-economic objectives 1.b) Speculation encourage (if its fundamentally misvalued) --> currency is underpressure &keeps falling (country then has buy convert foreign currency or increase IR to reduce inflationary pressure but if economy is growing slowly this could lead to recession due to decrease of aggregate demand 2. adequacy of FX reserves (poor developing countries find it hard to maintain an adequate Volume of FX reserves) 3. International competitive environment does not get reflected 4. expensive to maintain - as it has to have enough FX reserves to manage its currency´s value 5. less flexible 6. hard to know the exact rate as to join in

Answer 14

1. FX Market 2. International Money Market 3. International Credit Market 4. International Bond Market 5. International Stock Market

Answer 15

banks obtain quotes, contact brokers matching one bank desiring to sell with another bank desire to buy e.g LIBOR

Answer 16

``` Competitiveness of Quotes Special relationship with bank Speed of Executions Advice about current market conditions Foreign Advice ```

Answer 17

a) indv./local inst. investors provide funds through ST deposits at commercial banks b) corp./governments issue ST securities which are purchased by local investors transfer of St funds from savers to borrowers Borrowers = firms (support operations) &government (finance their budget deficit)

Answer 18

- IR that they receive from local currency is less than what they would receive on foreign - consider to invest in currency which could appreciate in future (and convert it later into home so as to receive more) more favourable exchange rate at the end of the period diversify credit risk (not expose to eco. condition in a single country)

Answer 19

a) mayor sources of deposits =international firms with excess cash&gov. agencies) b) mayor borrowers = manufacturers c) another function = interbank lending&borrowing --> banks with more qualified loan applicants that they can accommodate use interbank market to obtain add. funding d) banks in AMM commonly borrow from or led to EM

Answer 20

differences in regulations --> comparative advantages of banks regulations (i,e restriction in local markets) --> allowed for a more competitive global banking

Answer 21

capital can flow freely throughout Europe banks can offer wide range of lending, leasing, securities in EU regulations regarding competitions, mergers, taxes are similar through EU bank established in EU has the right to expand into any or all other Eu states --> efficiency of European banking system

Answer 22

Problem - variation in capital standard imposed on banks --> US were allowed to maintain more capital mayor industrialised countries propose uniform banking standard guidelines --> bank must maintain capital equal to 4% of their assets (assets are weighted my risk

Answer 23

Requirements for better collaterals to back up the loans new accord account for ope. risk --> prevent risk losses resulting from inadequate or failed internal process or system --> encourage banks to improve their techniques for controlling operational risk to reduce failures in bank system --> banks were required to offer more information to existing&prospective investors about exposure to diff. risk

Answer 24

Medium-ST Loans via issuance of notes | Eurocredits or EC Loans

Answer 25

affects performance of banks - -> locked in rates on LT loan whilst St deposits rates rise over time - -> avoid using floating rates (e.g LIBOR) - -> premium paid above Spread will depend on credit risk of borrower

Answer 26

single bank is unwilling or unable to lend alone the amount to firm/government - -> lead bank organises group of banks to underwrite the loan - -> borrowers is required to pay interest + front-end management fee + commitment fee

Answer 27

depends on currency, maturity, creditworthiness IR adjustable to interbank lending rate (6m)

Answer 28

reduce default risk or large loan to the degree for each indv. bank --> increase prob. of prompr repayment add extra incentive for the borrower to repay the loan (reputation)

Answer 29

LT Debt attract stronger demand than home country international firm prefer to finance spec. foreign project using spec. currency financing foreign currency with lower IR which reduce cost of financing

Answer 30

Mutual funds, commercial banks, insurance companies, pension funds - -> earn higher Ir on bonds denominated in foreign currency a) foreign bonds (issued by borrower foreign to the country where bond is placed) b) Eurobond (issued in the country other than country the currency denominating the bond)

Answer 31

stock offering may be easier digested if its issued in several markets enhance global image/reputation increase efficiency of new issue locations to place its stock (maybe there where future CF is likely to be higher)

Answer 32

easier access (non us investors easy access to US stocks) investors of foreign countries are willing to purchase if hey can easily sell their holdings in 2nd market or sock is denominated in currency where it is placed invest in stocks which they expect to strengthen mean of diversifying Pf eco. condition will be more favourable in a spec. country

Answer 33

large MCNs have begun to float new stocks issues simultaneously in various countries (through syndication) global distribution of stocks can be issued much larger market --> greater quantity of stocks at given price --> makes it easier to trade all stocks in just one single market recent years = increase of emerging markets which enables US firms to raise funds by issuing stocks there & listing stock on local stock exchanges

Answer 34

(1) competitiveness of the quote, (2) the firm’s relationship with the bank, (3) speed of execution, (4) advice about current market conditions, and (5)forecasting advice

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Chapter 3 Flashcards

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