1. FOREX market for immediate exchange - traded at spot rate 2. US Dollar commonly accepted medium of exchange 3. Liquidity increases with more buyers and sellers

1. Introduction Flashcards by Lucy Murray

New Zealand’s Largest Trade Partners (Top 5 Exports/Imports)

China
Australia
USA
South Korea
Japan (Exports), Singapore (Imports)

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New Zealand’s Largest Export Industry

Dairy

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History of Foreign Exchange (2)

Gold Standard - each currency convertible into gold at a specified rate, country with the most gold = most valuable, gold standard suspended in 1914 (start of WWI)
Floating Exchange Rate System - widely traded currencies able to fluctuate in accordance with market forces (determined by supply/demand)

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Global FOREX Market

Trades 24hr a day - active hours for major cities occur at different GMT (Greenwich Mean Time)

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Foreign Exchange Transactions occur…

Over the counter (OTC) - telecommunications network where companies exchange one currency for another

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Spot Market (3)

FOREX market for immediate exchange - traded at spot rate
US Dollar commonly accepted medium of exchange
Liquidity increases with more buyers and sellers

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Bid Rate

Banks BUY/my sell

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Ask Rate

Banks SELL/my buy

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Bid Ask Spread

Ask - Buy

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Bid Ask Percentage

Ask-Buy/Ask

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Bid-Ask Spread covers…

Banks cost of conducting FOREX transactions

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NZD in AUD

NZD/AUD

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CNY in NZD

CNY/NZD

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Japanese yen always quoted in…

100JPY

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Direct Quotation

Cost of one unit of foreign currency is given in units of local currency

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Indirect Quotation

Cost of one unit of local currency given in units of foreign currency

Indirect Quotation =

1/Direct Quote

Cross Exchange Rates

Exchange rate between currency A and B, given the values of A and B with respect to a third currency

Currency Derivatives

Contracts with a price that is partially derived from the value of the underlying currency

Forward Contract

Agreement between FOREX dealer and MNC that specifies:
- Currencies to be exchanged
- Forward exchange rate
- Date at which the transaction will occur

Futures Contract

Sold on an exchange, specifying:
- Standard volume of particular currency to be exchanged
- Stated futures rate
- Specific settlement date

Currency Call (Put) Options

Contract that gives the holder the right to buy (sell) currency at a specified strike price within a specified period

Cryptocurrencies

Digital currencies in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds.

Advantages of Crypto (5)

Facilitates payments of any value
Cannot be faked
Safe money for the poor
Faster, cheaper transfers

International Money Market (IMM)

Provides corporations or government with short-term funds denominated in a currency different from home currency

IMM has grown as firms may: (3)

- Need to borrow funds to pay for imports in foreign currency - Choose to borrow in a currency in which the interest rate is lower - Choose to borrow in a currency that is expected to depreciate against their home currency

London Interbank Offer Rate (LIBOR) (2)

- Rate for very short-term loans (1 day) between banks - Varies based on supply and demand of currencies

International Credit Market

Source of medium-term funds for MNC's through: - Term loans from local financial institutions - Issuance of notes (med-term debt obligations) in local markets

To avoid interest rate risk in the International Credit Market banks commonly...

use floating rate loans with rates tied to the LIBOR

Syndicated loans are formed in the international credit market when...

No single bank can provide all the funding

Regulations in the Credit Market (4)

- Single European Act - Capital can flow freely throughout Europe with any one bank in the EU able to expand into any or all of the other EU countries - Basel Accord - banks must maintain capital equal to at least 4% of their assets - Basel II Accord - improve controls for operational risk - Basel III Accord - required banks to maintain higher levels of capital

International Bond Market

- Bond Market Yields are highly correlated - Demand for borrowed funds fluctuates with economic conditions

Risks in International Bond Market (4)

Interest rate - rising long-term interest rates Exchange Rate Risk - bond denomination currency depreciates against home currency Liquidity - no consistently active market for bonds Credit - default (govt debt is not always risk free)

International Stock Markets

US firms may issue stock in foreign markers, foreign firms may issue stock in US markets

Yankee Stock Offerings

Non-US firms that issue shares in the US (NYSE or NASDAQ)

American Depository Receipts (ADRs)

Certificates representing bundles of stock, can be traded like shares

Sarbanes-Oxley Act (SOX)

Many new issues of stock were listed in the UK rather than US to avoid compliance with new law)

International Stock and Credit Markets are integrated!...

INTEGRATED!