Topic 1: International Financial Market & Capital Raising Flashcards
Why do we study international finance?
We are living in a highly globalised and integrated world economy.
What are the opportunities presented by international finance?
- Market Imperfections
- Expanded Opportunities
What are money markets?
It refers to the market that allows for borrowing and lending of funds for periods shorter than 1 year.
What are some examples of money market instruments?
Deposits and short term securities.
Eg.
- Certificate of deposits
- Commercial paper
What are capital markets?
It refers to the market that allows for borrowing and lending for long term (2 - 30 years)
What are some examples of capital market products?
2 main instruments
- Debt & Equities
Example:
- Common Stock & Ordinary Stock
- Preferred shares
- Bonds
What is Foreign Exchange Market?
It allows for one currency to be exchanged for another
What are Derivatives Market?
It is a complex instrument whose price is based on the value of the underlying financial asset.
What is hedging?
A hedge is a transaction undertaken to reduce potential losses or cancel out the risk of undesirable outcome.
What is the Domestic Market?
It is when a local currency instrument is issued by local issuers.
eg. UOB issues SGD bonds in Singapore
International markets; what makes it attractive?
- Size and liquidity
- Wide range of currencies & maturities
- Freedom from domestic regulations
What is Eurocurrency?
A eurocurrency deposit is any freely convertible currency deposited in a bank outside its country of origin
What are the Eurocurrency Interest Rates?
LIBOR
- London Interbank Offered Rate
Why is the Eurocurrency market attratcive?
- It is large and liquid
- It is not subjected to domestic banking regulations.
- Its competitiveness & efficiency
What does Globalisation enable countries to do?
It allows countries to produce and consume at more optimal levels through increased specialisations, improved capital allocation, and greater competition.
What does International Trade impact countries?
It helps to foster healthy competition, thus spurring technological progress and productivity growth
What does Foreign Exchange Risk refer to?
foreign currency profits may evaporate in terms of local currency due to unanticipated unfavourable exchange rate movements
What does Political Risk refer to?
governments can regulate the movement of goods, capital, and people across their borders
What are the opportunities from International Finance?
- Market Imperfections
- Expanded Opportunities
What are some threats from International Finance?
- Exchange Rate Risk
- Political Risk
What are the goals for International Financial Management?
Manage Foreign Exchange Risk, Political Risk. Deal with market imperfections, and benefit from expanded investment and financing opportunities.
What is the Goals of Financial Managers?
Maximise the wealth of shareholders
What is Global Integration driven by?
- Technology
- Transportation
- International Cooperation
How have countries benefited from comparative advantage?
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)
The Emergence of Globalised Financial Markets
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.
What are the 4 main financial markets?
- Money Market
- Capital Market
- Foreign Exchange Market
- Derivatives market
What is money market?
It is the borrowing an lending of funds for periods shorter than 1 year
What is Capital Market?
Borrowing and lending of long-term funds (2–30 years)
- 2 main instruments: debt & equity (common stock, ordinary shares, bonds)
What is foreign exchange market?
Allows one currency to be exchanged for another
Facilitates international trade & investments
Spot market & Forward market
What is derivatives maket?
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
What is hedging?
A hedge is a transaction undertaken to reduce potential losses or cancel out the risk of an undesirable outcome.
What is FX risk?
Companies involved in exports & imports or have foreign currency assets/liabilities are exposed to the risk of fluctuating exchange rates.
What is interest rate risk?
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.
What is a Eurocurrency Deposit?
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)
