Multinational Finance

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International Financial Markets UCR-X Dr.
Francisca Beer
2006
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Objectives

• To describe the background and corporate use of
  the following international financial markets
• Foreign exchange market,
• Eurocurrency market,
• Eurocredit market,
• Eurobond market, and
• international stock markets.

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Motives for Using International Financial Markets

• Several barriers deter the complete integration
  of the markets for real or financial assets.

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Motives for Using International Financial Markets

• Motives for investing in foreign markets
• economic conditions
• exchange rate expectations
• international diversification
• Motives for providing credit in foreign markets
• high foreign interest rates
• exchange rate expectations
• international diversification

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Motives for Using International Financial Markets

• Motives for borrowing in foreign markets
• low interest rates
• exchange rate expectations

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Foreign Exchange Market

• The foreign exchange market allows currencies to
  be exchanged to facilitate international trade or
  financial transactions.

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Foreign Exchange Market

• The system for establishing exchange rates has
  changed over time
• 1876-1913 gold standard
• WWI Great Depression period of instability
• 1944 Bretton Woods Agreement
• 1971 Smithsonian Agreement
• 1973 Some official boundaries were eliminated

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Foreign Exchange Market

• 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.

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Foreign Exchange Market

• Trading between banks makes up what is often
  referred to as the interbank market.
• The forward market for currencies enables an MNC
  to lock in the exchange rate (called a forward
  rate) at which it will buy or sell a currency.

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Foreign Exchange Market

• Banks provide foreign exchange transactions for a
  fee the bid (buy) quote for a foreign currency
  will be less than its ask (sell) quote.

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Foreign Exchange Market
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Foreign Exchange Market

• Some MNCs involved in international trade use the
  currency futures and options markets to hedge
  their positions.

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Eurocurrency Market

• U.S. dollar deposits placed in banks in Europe
  and other continents are called Eurodollars and
  are not subject to U.S. regulations.
• In the 1960s and 70s, the Eurodollar market, or
  what is now called the Eurocurrency market, grew
  to accommodate increasing international business.
• The market is made up of several large banks
  called Eurobanks that accept deposits and provide
  loans in various currencies.

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Eurocurrency Market

• Although the market focuses on large-volume
  transactions, at times no single bank is willing
  to lend the needed amount. A syndicate of
  Eurobanks may then be composed.

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Eurocredit Market

• Loans of one year or longer extended by Eurobanks
  to MNCs or government agencies are called
  Eurocredit loans. These loans are provided in the
  Eurocredit market.
• Eurocredit loans often have a floating rate.
• Syndicated Eurocredit loans are popular among big
  borrowers too.

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Eurobond Market

• There are two types of international bonds
• A foreign bond.
• Eurobonds

• Eurobonds are underwritten by a multi-national
  syndicate of investment banks and simultaneously
  placed in many countries. They are usually issued
  in bearer form.

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Eurobond Market

• Interest rates for each currency and credit
  conditions change constantly, causing the
  markets popularity to vary among currencies.
• In recent years, governments and corporations
  from emerging markets have frequently utilized
  the Eurobond market.

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Why Interest Rates Vary Among Currencies

• Interest rates, which can vary substantially for
  different currencies, are crucial because they
  affect the MNCs cost of financing.
• The interest rate for a specific currency is
  determined by the demand for and supply of funds
  in that currency.

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Why U.S. Dollar Interest Rates Differ from
Brazilian Real Interest Rates

• The curves are further to the right for the
  dollar because the U.S. economy is larger.
• The curves are higher for the Brazilian Real
  because of the higher inflation in Brazil.

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Global Integration of Interest Rates

• Many investors shift their savings around
  currencies to take advantage of higher interest
  rates.
• Borrowers sometimes also borrow a currency
  different from what they need to take advantage
  of a lower interest rate.
• Ultimately, the freedom to transfer funds across
  countries causes the demand and supply conditions
  for funds to be integrated, which in turn causes
  interest rates to be integrated.

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International Stock Markets

• MNCs can obtain funds by issuing stock in
  international markets, in addition to the local
  market.
• By having access to various markets, the stocks
  may be more easily digested, the image of the MNC
  may be enhanced, and the shareholder base may be
  diversified.

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International Stock Markets

• The locations of the MNCs operations may affect
  the decision about where to place stock, in view
  of the cash flows needed to cover dividend
  payments in the future.

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International Stock Markets

• Stock issued in the U.S. by non-U.S. firms or
  governments are called Yankee stock offerings.
• Non-U.S. firms can also issue American depository
  receipts (ADRs), which are certificates
  representing bundles of stock.

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Questions???