International Finance Dr.

Angela Ng
FINA 342 HKUST
Class Notes 1
INTRODUCTION: INTERNATIONAL
FINANCIAL MARKETS
I. WHAT IS SPECIAL ABOUT INTERNATIONAL
FINANCE?
Foreign Exchange Risk
Risk o loss !or gain" ro# $noreseen changes in
exchange rates.
%aria&ilit' o exchange rates is (i)el' regar)e) as the
#ost serio$s international inancial *ro&le# acing
*olic'#akers an) cor*orate #anagers.
+olitical Risk
Risk o loss !or gain" ro# $noreseen go,ern#ent action
or other e,ents o *olitical character- s$ch as acts o
terroris#.
.arket I#*erections
The (orl) #arkets are highl' i#*erect- in the sense that a
,ariet' o &arriers still ha#*er ree #o,e#ents o *eo*le-
goo)s- ser,ices- an) ca*ital across national &o$n)aries.
.$ltinational /or*orations !.N/s" are a git o #arket
i#*erections.
0
1 Exa#*le2 Hon)a )eci)e) to esta&lish *ro)$ction
acilities in 3hio #ainl' to circ$#,ent tra)e &arriers.
Ex*an)e) 3**ort$nit' Set
Fir#s can locate *ro)$ction in an' co$ntr' or region to
#axi#i4e their *eror#ance an) raise $n)s in an' ca*ital
#arket (here the cost o ca*ital is the lo(est.
Fir#s can gain ro# greater econo#ies o scale (hen
tangi&le an) intangi&le assets are )e*lo'e) on a glo&al
&asis.
In)i,i)$al in,estors ace a #$ch ex*an)e) o**ort$nit' set
an) can &eneit ro# it i the' are a(are o o,erseas
in,est#ent o**ort$nities an) are (illing to )i,ersi'
internationall'.
2
II. PLAYERS IN INTERNATIONAL FINANCIAL
MARKETS
3
.$ltinational
/o#*anies
Instit$tional
In,estors
+ri,ate
In,estors
Foreign
Exchange
Ex*os$re
5lo&al
Financing
5lo&al
In,est#ents
Financial Inter#e)iation
International Financial .arkets
5o,ern#ents- /entral 6anks-
International Instit$tions
Forex .arket 3*tions- F$t$res-
For(ar) /ontracts
E$roc$rrenc' .arket 3*tions- F$t$res-
FRAs
E$roc$rrenc' De*osits
E$rocre)its
E$ronotes
6on) .arket 3*tions- F$t$res-
S(a*s- /a*s-
Do#estic Floors- S(a*tions
Foreign
E$ro&on)
E7$it' .arket 3*tions- F$t$res
E$roe7$it'
ADRs
.$t$al F$n)s
4
Ite!at"oal
F"a#"al
Ma!$ets
De!"%at"%e
P!o&'#ts
III. TRENDS IN INTERNATIONAL FINANCIAL
MARKETS: INCREASIN( (LOBALI)ATION
8ong9ter# tren) to(ar)s increasing tra)e (ith other
co$ntries. !See Exhi&its 0.0 : 0.2"
/o#*letion o the Ur$g$a' Ro$n) o the 5eneral
Agree#ent on Taris an) Tra)e !5ATT"
/reation o the ;orl) Tra)e 3rgani4ation !;T3"
For#al arrange#ents a#ong co$ntries to *ro#ote
econo#ic integration on the regional le,el- or exa#*le-
the E$ro*ean Union !EU" an) the North A#erican Free
Tra)e Agree#ent !NAFTA"
5lo&ali4ation o inancial #arkets- (ith es*eciall' *roo$n)
changes in the 0<=>s.
The i#*et$s or glo&ali4e) inancial #arkets initiall'
ca#e ro# the go,ern#ents o #a?or co$ntries that ha)
&eg$n to )ereg$late their oreign exchange an) ca*ital
#arkets.
1 @a*an )ereg$late) its oreign exchange #arket in 0<=>.
1 The 8on)on Stock Exchange &egan a)#itting oreign
ir#s as $ll #e#&ers in Fe&r$ar' 0<=A.
Ra*i) gro(th o international in,est#ent an) &orro(ing
6eneits2 international )i,ersiication re)$ces risk
A))itional Risks2 exchange rate risk- co$ntr' risk
B
Ne( an) so*histicate) inancial instr$#ents
1 Exa#*les2 c$rrenc' $t$res an) o*tions- #$ltic$rrenc'
&on)s- international #$t$al $n)s- co$ntr' $n)s-
oreign stock in)ex $t$res an) o*tions.
1 Across9&or)er listing o stocks (hich allo(s in,estors
to &$' an) sell oreign shares as i the' (ere )o#estic
shares- acilitating international in,est#ents.
Declining relati,e i#*ortance o the US inancial #arkets
1 Exa#*le2 ;hat ca$se) the 0<=C #arket crashD
Increase) *ri,ati4ation
1 Thro$gh *ri,ati4ation- a co$ntr' )i,ests itsel o the
o(nershi* an) o*eration o a &$siness ,ent$re &'
t$rning it o,er to the ree #arket s'ste#.
1 3ne &eneit o *ri,ati4ation or #an' less9)e,elo*e)
co$ntries is that the sale o state9o(ne) &$sinesses
&rings to the national treas$r' har)9c$rrenc' oreign
reser,es.
A
E*+","t 1.1
US .erchan)ise Tra)e
E*+","t 1.-
8ong9Ter# 3*enness in +ers*ecti,e
!.erchan)ise Ex*orts *er 5D+- at 0<<> +rices- in E"
C
92>>
>
2>>
4>>
A>>
=>>
0>>>
0<CB 0<=> 0<=B 0<<> 0<<B
F &illions
U.S. I#*orts
U.S. Ex*orts
Net Ex*orts !Ex*orts9I#*orts"