Class Notes

Chapter 3

International Financial Markets

International Financial Markets

Key Points

The International Financial Markets:

* Foreign exchange market

* International money market

* International credit market

* International bond market

* International stock markets

Foreign Exchange Market

1. Allows for the exchange of one currency for another.

2. Exchange rate specifies the rate at which one currency can be exchanged for another, either now (spot rate) or in the future (future rate).

History of Foreign Exchange

1. Gold Standard (1876 – 1913)

* Currencies are convertible into gold at a specified rate.

-When World War I began in 1914, the gold standard was suspended.

2. Agreements on Fixed Exchange Rates

a. Bretton Woods Agreement 1944 - 1971

b. Smithsonian Agreement 1971 - 1973

3. Floating Exchange Rate System

Widely traded currencies fluctuate with market forces

Foreign Exchange Transactions

1. The over-the-counter (OTC) market is the telecommunications network where companies exchange one currency for another.

* Foreign currencies are also traded on the exchange

2. Foreign exchange dealers (not as brokers) serve as intermediaries in the foreign exchange market

3. A foreign exchange transaction for immediate exchange is said to trade in the spot market. The exchange rate in the spot market is the spot rate.

Spot Market

1. The U.S. Dollar is the commonly accepted medium of exchange in the spot market.

* Historically true, but USD dominance is on the wan.

* Role of reserve currencies.

2. Spot market time zones - Foreign exchange trading is normally conducted during business hours

* But somewhere around the world, a bank is open and ready to accommodate foreign exchange requests.

* Hence, currency trading “follows the sun”

3. Spot market liquidity: More buyers and sellers means more liquidity....