Topic 1: International Financial Market & Capital Raising

Question 1

Why do we study international finance?

Answer 1

We are living in a highly globalised and integrated world economy.

Question 2

What are the opportunities presented by international finance?

Answer 2

• Market Imperfections
• Expanded Opportunities

Question 3

What are money markets?

Answer 3

It refers to the market that allows for borrowing and lending of funds for periods shorter than 1 year.

Question 4

What are some examples of money market instruments?

Answer 4

Deposits and short term securities.

Eg.
- Certificate of deposits
- Commercial paper

Question 5

What are capital markets?

Answer 5

It refers to the market that allows for borrowing and lending for long term (2 - 30 years)

Question 6

What are some examples of capital market products?

Answer 6

2 main instruments
- Debt & Equities

Example:
- Common Stock & Ordinary Stock
- Preferred shares
- Bonds

Question 7

What is Foreign Exchange Market?

Answer 7

It allows for one currency to be exchanged for another

Question 8

What are Derivatives Market?

Answer 8

It is a complex instrument whose price is based on the value of the underlying financial asset.

Question 9

What is hedging?

Answer 9

A hedge is a transaction undertaken to reduce potential losses or cancel out the risk of undesirable outcome.

Question 10

What is the Domestic Market?

Answer 10

It is when a local currency instrument is issued by local issuers.

eg. UOB issues SGD bonds in Singapore

Question 11

International markets; what makes it attractive?

Answer 11

1. Size and liquidity
2. Wide range of currencies & maturities
3. Freedom from domestic regulations

Question 12

What is Eurocurrency?

Answer 12

A eurocurrency deposit is any freely convertible currency deposited in a bank outside its country of origin

Question 13

What are the Eurocurrency Interest Rates?

Answer 13

LIBOR
- London Interbank Offered Rate

Question 14

Why is the Eurocurrency market attratcive?

Answer 14

• It is large and liquid
• It is not subjected to domestic banking regulations.
• Its competitiveness & efficiency

Question 15

What does Globalisation enable countries to do?

Answer 15

It allows countries to produce and consume at more optimal levels through increased specialisations, improved capital allocation, and greater competition.

Question 16

What does International Trade impact countries?

Answer 16

It helps to foster healthy competition, thus spurring technological progress and productivity growth

Question 17

What does Foreign Exchange Risk refer to?

Answer 17

foreign currency profits may evaporate in terms of local currency due to unanticipated unfavourable exchange rate movements

Question 18

What does Political Risk refer to?

Answer 18

governments can regulate the movement of goods, capital, and people across their borders

Question 19

What are the opportunities from International Finance?

Answer 19

1. Market Imperfections
2. Expanded Opportunities

Question 20

What are some threats from International Finance?

Answer 20

1. Exchange Rate Risk
2. Political Risk

Question 21

What are the goals for International Financial Management?

Answer 21

Manage Foreign Exchange Risk, Political Risk. Deal with market imperfections, and benefit from expanded investment and financing opportunities.

Question 22

What is the Goals of Financial Managers?

Answer 22

Maximise the wealth of shareholders

Question 23

What is Global Integration driven by?

Answer 23

1. Technology
2. Transportation
3. International Cooperation

Question 24

How have countries benefited from comparative advantage?

Answer 24

Specialising in what they do best as participants in the global economy by producing more goods at lower prices that lower-income households can afford, thus raising their living standards.

(Not only in their country but also other countries that they export to)

Question 25

The Emergence of Globalised Financial Markets

Answer 25

The deregulation of financial markets, coupled with advances in technology has greatly reduced information and transaction costs, which has led to financial innovations such as currency futures and options, multi-currency bonds, cross-border stock listing, and international mutual funds.

Question 26

What are the 4 main financial markets?

Answer 26

1. Money Market
2. Capital Market
3. Foreign Exchange Market
4. Derivatives market

Question 27

What is money market?

Answer 27

It is the borrowing an lending of funds for periods shorter than 1 year

Question 28

What is Capital Market?

Answer 28

Borrowing and lending of long-term funds (2–30 years)

• 2 main instruments: debt & equity (common stock, ordinary shares, bonds)

Question 29

What is foreign exchange market?

Answer 29

Allows one currency to be exchanged for another
Facilitates international trade & investments
Spot market & Forward market

Question 30

What is derivatives maket?

Answer 30

It is a complex instrument Complex instruments whose price is based on the value of the underlying financial asset

Derived from more basic instruments, such as stocks or bonds

Eg. Futures & Options, Currency & Interest rate swaps
Used for hedging/risk management

Question 31

What is hedging?

Answer 31

A hedge is a transaction undertaken to reduce potential losses or cancel out the risk of an undesirable outcome.

Question 32

What is FX risk?

Answer 32

Companies involved in exports & imports or have foreign currency assets/liabilities are exposed to the risk of fluctuating exchange rates.

Question 33

What is interest rate risk?

Answer 33

Floating rate borrowers are exposed to the risk of a rise in interest rates. (US subprime mortgage: for the first 3 years: 4% p.a, from the 4th year onward: 10% p.a.

Question 34

What is a Eurocurrency Deposit?

Answer 34

It is any freely convertible currency deposited in a bank outside its country of origin

Eg. Euroyen: JPY deposits outside Japan (eg. in US or any other country)