Topic 3: International Financial Markets

Question 1

What is a forex market?

Answer 1

A market where one curency is traded for another. Not a centralized or organised market - just wherever such trades occur. According to Moosa, the largest market in the world.

Question 2

Who participates in the forex market?

Answer 2

• Customers (price takers)
• Financial Institutions
  
  • Banks (the largest players, and the prices setters. Make profits by offering a spread)
  • NFBI (Non Bank Financial Institution). Not price setters, though they sometimes swap between each other around bank rates.
    
    • Investment Companies
    • Insurance
• Foreign Exchange Brokers (Why?)
  
  • Find the best rate
  • Anonymity
• Central Banks
  
  • Conducts FX operations for the government in some countries
  • Might intervene in the market

Question 3

How has the volume of forex transactions changed over the last 30 years?

Where are most transactions made?

Answer 3

• Has grown at a 10% compound rate from 1980-2007.
• 1/3 of all transactions in the UK, mostly London.
• The Au dollar turnover has grown at about the same rate.

Question 4

What kind of internation borrowing / lending markets does this course examine?

Answer 4

Money Markets (Short Term)

• International Banking.
  
  • Eurocurrency.
    
    • Interbank Market.
    • Other.
  • Other.
• Euro commercial paper.
• Euro notes.

Capital Markets (Long Term [>5 yr])

• International Bonds.
• Equity (stocks).

Question 5

What is the Eurocurrency market?

Answer 5

Nothing to do with the Euro, and not exclusively currency.

It is in fact, short term borrowing/lending by banks in a currency other then that banks currency of the country of domicile (of the bank). (i.e. the currency of the bank’s location).

< 3 months

Question 6

What is international banking?

Answer 6

When banks loan / accept deposits from foriegners in any currency, including the home currency, or when they lend/accept money from residents in a foriegn currency.

Question 7

What are the top four eurocurrency currencies?

Answer 7

Mainly the USD, then EURO, JPY, GBP

Question 8

Why is the eurocurrency market big?

Answer 8

Typically quarantined from domestic regulation because they don’t care bout’ foreigners. This reduces borrowing costs.

Question 9

What is a Euro Commercial paper?

Answer 9

Short term unsecured promisery note issued in a non domicile currency to the country of issue. i.e. the market.

• 60-180 days
• A bearer instrument, the issuer does not keep track of it.
• Interest paid on maturity.

Question 10

Who are the issuers of the commercial paper & note market?

Answer 10

Issuers:

• Government
• Government Institutions
• Large Corporations
• Large NBFI’s

Mostly big players, because the idea is to eliminate the middle man

Question 11

Who are the holders of commercial papers & notes?

Answer 11

• Commercial banks
• Central banks
• NBFI
• Investment funds

Question 12

What are euro notes?

Answer 12

• Unsecured promisery notes
• Bearer instruments
• Maturity is 2-4 years
• Interest usually paid semi-annually

Question 13

What is a bond?

Answer 13

• Fixed interest security
• Interest paid periodically
• Maturity: Normally 5-10 years

Question 14

How to we categorize bonds?

Answer 14

We consider International bonds, which incorporate:

• Foreign bonds
• Eurobonds

Question 15

What are foreign bonds? Give an example.

Answer 15

Bonds which are:

• Issued in a foreign market to the firm, in the currency of the country of issue. (i.e. of the market it is issued in).

Telstra wants to borrow $US, so it issues US$ bonds and sells them in a US market.

Question 16

What is a Eurobond?

Answer 16

Issued (usually, but not necessarily) in a foreign market, but issued in a currency other then that of the country of issue. (i.e. not the currency of the market).

e.g. Telstra issuing US$ bonds in the Australian market.

Question 17

Why Eurobonds?

Answer 17

• Less regulation, disclose requirements,
• more favourable tax treatment

Question 18

Why borrow internationally?

Answer 18

• Domestic market is smaller then foriegn
• Overseas costs lower

Question 19

Two sentance summation equity market history

Answer 19

• Almost completely segmented till the 1980’s.
• There is still a strong home bias in portfolios

Question 20

Is there a central market for stocks?

Answer 20

Nope.

• Stockmarkets are still basically seperate beasts, and few companies issue on multiple stockmarkets, because it’s very costly to do so - you need to comply with two different sets of regulations.
• There is a push in europe to start to integrate stockmarkets but there is still a long way to go.