INTERNATIONAL

FINANCE

Jeff Madura
10th Edition
Chapter 3:
International Financial Markets

1 Umar Nawaz (Lecturer UAF)

 Motives for Using
International Financial Markets
Investors invest in foreign markets:
to take advantage of favorable economic conditions;
when they expect foreign currencies to appreciate
against their own; and
to get the benefits of international diversification.
Creditors provide credit in foreign markets:
to capitalize on higher foreign interest rates;
when they expect foreign currencies to appreciate
against their own; and
to get the benefits of international diversification.
 (1) Foreign Exchange Market
The foreign exchange market allows currencies to be
exchanged in order to facilitate international trade or
financial transactions.
The system for establishing exchange rates has
evolved over time.
From 1876 to 1913, each currency was convertible into
gold at a specified rate, as dictated by the gold standard.
The 1944 Bretton Woods Agreement called for fixed
currency exchange rates.
Even then, governments still had difficulties maintaining
exchange rates within the stated boundaries.
 Foreign Exchange Transactions
There is no specific building or location where traders
exchange currencies. Trading also occurs around the
clock.
The market for immediate exchange is known as the
spot market.
The forward market enables an MNC to lock in the
exchange rate at which it will buy or sell a certain
quantity of currency on a specified future date.
 Foreign Exchange Transactions
The following attributes of banks are important to
foreign exchange customers:
1. Competitiveness of quote.
A savings of l¢ per unit on an order of 1 million units of currency is
worth $10,000.
2. Special relationship with the bank.
The bank may offer cash management services or be willing to make
a special effort to obtain even hard-to-find foreign currencies for
the corporation.
3. Forecasting advice.
Some banks may provide forecasts of the future state of foreign investments
 Foreign Exchange Transactions
4. Advice about current market conditions.
Some banks may provide assessments of foreign economies and
relevant activities in the international financial environment that
relate to corporate customers.

5. Speed of execution.
Banks may vary in the efficiency with which they handle an order.
A corporation needing the currency will prefer a bank that conducts
the transaction promptly and handles any paperwork properly.
 Presentations
Group :
International Money Market

Group :
Building blocks of Finance (Finance Theories)