MODULE 2 Flashcards
is a financial institution that has been
established (or chartered) by more than one country and hence is subject to international law.
international financial institution (IFI)
The best-known IFIs were established after ___ to assist in the reconstruction of Europe and provide mechanisms for international cooperation in managing the global
financial system.
World War II
Types of International Financial Institutions
- Multilateral Development Banks
- Bretton Woods Institutions
- Regional Development Banks
- Bilateral Development Banks and Agencies
- Other Regional Financial Institutions
Beginning in the ___, the international bond market grew aggressively. It today constitutes a large share in the total outstanding of the global bond market.
1980s
is a market for bonds that are traded beyond national boundaries. They pull together investors from different countries.
international bond market
The bonds which are traded in international bond markets are called ____
international bonds.
Classifications of International Bond Markets
- FOREIGN BONDS
- EURO BOND
- GLOBAL BONDS
are the markets in which shares are issued and traded, either through exchanges or over-the-counter markets. Also known as the stock market,
it is one of the most vital areas of a market economy because it gives companies access
to capital and investors a slice of ownership in a company with the potential to realize
gains based on its future performance.
International Equity Markets
permits the shareholders to reduce
the ownership of unwanted shares and lets the purchasers to buy the stock.
The secondary market
The secondary market consists of brokers who represent the public buyers and sellers.
There are two kinds of orders.
MARKET ORDER AND LIMIT ORDER
is traded at the best price available in the market, which is the market price.
MARKET ORDER
is held in a limit order book until the desired price is obtained.
LIMIT ORDER
the broker takes the trade through the dealer. Public traders do not directly trade with one another
The over-the-counter (OTC)
market is a ____
dealer market
the broker gets client’s orders via an agent.
agency market
is a form of non-continuous trade. In crowd trading, in a trading ring, an
agent periodically announces the issue. The traders then announce their bid and ask prices, and look for counterparts to a trade.
Crowd trading
which has a common
price for all trades, several trades may occur at different prices.
call market
is a receipt that has a number of foreign shares remaining on deposit with the U.S. depository’s custodian in the issuer’s home market.
American Depository Receipts (ADR)
There are two types of ADRs:
sponsored and unsponsored.
are created by a bank after a request of the foreign company. The sponsoring bank offers lots of services, including investment information and the annual report translation.
are listed on the US stock markets. New ADR issues must be sponsored.
Sponsored ADRs
are generally created on request of US investment banking
firms without any direct participation of the foreign issuing firm.
Unsponsored ADRs
are a share that are traded globally, unlike the ADRs that are receipts of the bank deposits of home-market shares and are traded on foreign markets.
are fully transferrable — purchased on one exchange can be sold on another. They usually trade in both US dollars and euros.
Global Registered Shares (GRS)
Factors Affecting International Equity Returns
Macroeconomic factors, exchange rates, and industrial structures
are derivative contracts between two parties that involve the exchange of cash flows. One counterparty agrees to receive one set of cash flows while paying the other another set of cash flows.
SWAPS
involve exchanging interest payments, while currency swaps involve exchanging an amount of cash in one currency for the same amount in another.
Interest rate swaps
is a financial derivative contract in which two parties agree to
exchange their interest rate cash flows. The interest rate swap generally involves
exchanges between predetermined notional amounts with fixed and floating rates.
Interest Rate Swaps
are a foreign exchange agreement between two parties to
exchange cash flow streams in one currency to another.
Currency Swaps
involves an investor purchasing foreign financial assets. The transaction of foreign securities generally occurs at an organized formal securities exchange or through an over-the-counter market transaction.
International foreign investments (IFF) or Foreign portfolio investment (FPI)
Foreign portfolio investing is popular among several different types of investors. Common transactors of foreign portfolio investment include:
- Individuals
- Companies
- Foreign governments
Benefits of Foreign Portfolio Investment
- Portfolio diversification
- International credit
- Access to markets with different risk-return characteristics
- Increases the liquidity of domestic capital markets
- Promotes the development of equity markets
Foreign portfolio investment provides investors with an easy
opportunity to diversify their portfolio internationally. An investor would diversify their
investment portfolio to achieve a higher risk-adjusted return, which is ultimately done
to help generate alpha.
- Portfolio diversification
Investors may be able to access an increased amount of credit
in foreign countries, allowing the investor to utilize more leverage and generate a
higher return on their equity investment.
- International credit
If investors are seeking
out greater returns, they must be willing to take on greater risk. Emerging markets
can offer investors a different risk-return profile.
- Access to markets with different risk-return characteristics
As markets become more liquid,
they become deeper and broader, and a wider range of investments can be financed.
Savers can invest with the assurance that they will be able to manage their portfolio
or sell their financial securities quickly if they need access to their savings.
- Increases the liquidity of domestic capital markets
Increased competition for financing
will lead to the market rewarding superior performance, prospects, and corporate
governance. As the market’s liquidity and functionality develop, equity prices will
become value-relevant for investors, ultimately driving market efficiency
- Promotes the development of equity markets
Risks of Foreign Portfolio Investment (FPI)
- VOLATILE ASSET PRICING
- JURISDICTIONAL RISK
Across international financial markets, some are riskier than
others. For example, consider the Deutscher Aktienindex (DAX). The DAX is a stock
market index of 30 major German companies trading on the Frankfurt Stock Exchange.
The DAX is historically more volatile than the S&P 500 Index.
- VOLATILE ASSET PRICING
can result from investing in a foreign country. For
example, if a foreign country that you were invested in drastically changes its laws, it
could result in a material impact on the investment’s returns.
Moreover, many countries struggle with financial crime, such as money laundering.
Investing in countries where money laundering is prevalent increases the jurisdictional
risk faced by the investor.
- JURISDICTIONAL RISK
is positively
influenced by high rates of return and reduction of risk through geographic diversification.
foreign portfolio investment
are enabled by successful financial intermediation
and the efficient allocation of credit.
Economic growth and development
is inherently volatile, and rigorously regulated financial
markets are needed to manage the risk effectively. Furthermore, the financial system
must be capable of identifying and mitigating risks for prudent and efficient allocation of
foreign or domestic capital flows.
Foreign portfolio investment
