Week 4: Global Capital Markets, Oct 3 Flashcards
how do businesses manage currency risk
-understanding their exposure to currency changes and making strategic decisions which consider that exposure
-anticipating shifts in currency values
-hedging their exposure
-identify where/how they are exposed
–transaction, translation, and economic exposure
— quantify the exposure
—-make strategic hedging choices
ways to hedge exposure to currency risk
-forward contracts
-currency options
-lead or lag strategies
-diversification
-matching debt and income currencies
forward contracts
-a contract to buy/sell foreign currency at a fixed price in the future
forward exchange rates
exchange rate for a defines forward period
forward premium
(forward discount) is the proportion by which a country’s forward exchange rate exceeds (falls below) its spot rate
forward contract to purchase currency
-a forward contract to purchase a currency is beneficial if the spot rate at the date of transaction is more expensive that that offered by the contract (spot > forward)
forward contract to sell a currency
is valuable if spot < forward
call option
the right to buy a specified amount of foreign currency for a specific price any time up to a specified date
-gives you the option to buy, but not the obligation
put option
the right to sell a specified amount of foreign currency for a specific price any time up to a specified date
gives you the option to sell, but not the obligation
lead strategy **
lag strategy ***
diversification
-exposure to multiple currencies can act as a hedge
-flexibility in locations can also act as a hedge
matching debt and income currencies
hedges risk if payables and receivables are in the same currency
capital markets
stock and bond markets
consists of both primary and secondary markets
stocks
equities - a form of ownership
businesses can use to raise capital
bonds
debt - a loan which must be repaid (to lenders by borrowers)
businesses can use to raise capital
global capital markets
-facilitates financing in a variety of currencies
-investors: offers opportunities and diversification
–more investment opportunities
–portfolio diversification
-borrowers: cost and avail of capital
–search for lower cost of capital
growth of global capital markets: tech improvement
-processing of large volumes of stock and bond transaction info (eg, real time updates)
-trade info on a number of exchanges can be accessed from anywhere in the world
growth of global capital markets: deregulation
-traditionally financial services have been highly regulated
-restriction have rapidly decreased (eg, foreign ownership of domestic assets and domestic capital investment abroad)
global capital market risks
-forex risk
-nations more vulnerable to speculative capital flows
–lack of quality info; and regardless of quality, investors react quickly to news events, which may encourage speculation
–capital seeking short term gains
–potential destabilization of economies
eurocurrency
a currency banked outside its country of origin
-eg, Japanese currency held in Victoria TD is a euro-yen
why eurocurrency
-absence or near absence of research reqs make euro loans and euro deposits attractive
-lower cost of capital
global bond market
bonds are important means of financing for global firms
-two types of bonds
–foreign bonds
–eurobonds
foreign bonds
bond issued by a resident of country A but sold to residents of country B, denominated in the currency of country B and subjected to country B’s regulations
-eg, British bank sells Japanese yen denominated bonds in Japan (under Japanese regulations)
-has names like Maple, dim sum, panda, masala, samurai
eurobonds
bond denominated in currency A but sold outside of country A
-eg, American Airlines borrows $500m USD to finance new aircraft purchases by selling eurobonds denominated in USD to residents of Germany and France
why are eurobonds appealing
regulatory costs
-outside the regulatory domain of any single nation
–avoid most domestic regulations
–avoids tight controls often places on foreign bond issues
disclosure costs
-if want to offer USD bonds in Us, must comply with SEC
-if you offer USD bonds in Japan, do not have to comply with SEC
global stock (equity) market
-many stocks are listen on multiple exchanges and stock ownership is increasingly international
-why list on foreign market?
–liquidity of foreign markets - lowers the cost of capital (where to IPO? (higher share price))
–satisfy the demand for local ownership
–visibility with local employees, customers, suppliers, and bankers
–stock options in compensation
–facilitate future acquisitions
borrowing on the global capital market
-may save money
-lower interest rates, fewer regulations, higher share prices
