Chapter 05 (Syllabus)

Chapter 08 (By Griffin & Pustay)

FOREIGN EXCHANGE AND

INTERNATIONAL FINANCIAL MARKETS
 Outlines
Opening Case

I. The Economics of Foreign Exchange

II. The Structure of the Foreign-Exchange Market
1) The Role of Banks
2) Spot and Forward Markets
3) Arbitrage and the Currency Market
a) Arbitrage of Goods-Purchasing Power Parity
b) Arbitrage of Money
III. The International Capital Market
1) Major International Banks
a) Commercial Banking Services
b) Investment Banking Services
2) The Eurocurrency Market
3) The International Bond Market
4) Global Equity Markets
5) Offshore Financial Centers
Learning Objectives

1) Describe how demand and supply determine the price of foreign

exchange.

2) Discuss the role of international banks in the foreign-exchange market.

3) Assess the different ways firms can use the spot and forward markets
to settle international transactions.

4) Summarize the role of arbitrage in the foreign –exchange market.

5) Discuss the important aspects of the international capital market.

 Opening Case: The Loonie Takes Flight
The increasing value of the Canadian dollar in relation to the U.S. dollar, and the effect that
increase has on U.S. trade and investment with Canada.
The loonie: the nickname given for the Canadian one-dollar coin was sold at a discount
from the US dollar.
In 2007,
The Canadian dollar increased 24 percent against the U.S. dollar.
The increasing value of the Canadian dollar resulted from concerns about the U.S. economy.
Canadian consumers are now paying lower prices for U.S.-made goods and enjoying lower
costs when vacationing in the U.S.
Since Canada’s economy is export oriented, the strengthening Canadian dollar has made
their products more expensive to U.S. consumers.
With the decline of export, Canadian economists are predicting a significant loss in jobs.
Canadian retailers are also suffering as Canadians head south to the U.S. to take advantage of
cheaper American goods.
With the global recession of 2008-2009, commodity prices softened and the loonie fell in
value against the US Dollar.
This then brought about an increase in Canadian exports to the United States, and made
Canadian retailers happy again, as Canadian customers stayed home, and American thought
about heading north to take advantage of cheaper Canadian goods with the increasing value
of the US Dollar.
I. The Economics of Foreign Exchange

By:

ABUL HASNAT PABEL

ID : 13302 131
 The Economics of Foreign Exchange
→ Foreign Exchange

A commodity that consists of currencies issued by

countries other than one’s own
The exchange of one currency for another or the
conversion of one currency into another currency.
For instance, 1$= 85 BDT
 The Economics of Foreign Exchange
→ Theories of Exchange Rate Determination

The Mint Parity Theory

The Purchasing Power Parity Theory
Floating exchange rate
The prices of foreign exchange (under floating
exchange rate) Set by demand and supply in the
marketplace
 The Economics of Foreign Exchange

 Floating exchange rate

Demand & Supply Curve of Foreign Exchange
 The Economics of Foreign Exchange

 Floating exchange rate

Determination of Foreign Exchange through law of Demand
& Supply
 The Economics of Foreign Exchange

Currency Depreciation & Appreciation

Currency depreciation is the loss of value of a

country's currency with respect to one or more foreign
reference currencies.
Currency appreciation in the same context is an
increase in the value of the currency.
 The Economics of Foreign Exchange

 Effects of Currency Depreciation & Appreciation

 The Economics of Foreign Exchange

 Factors that Affect Foreign Exchange Rates

1. Inflation Rates
2. Interest Rates
3. Country’s Current Account / Balance of Payments
4. Public/Government Debt
5. Terms of Trade
6. Political Stability & Performance
 The Economics of Foreign Exchange

 Quotation of Exchange Rate

Direct Quote: The price of the foreign currency in

terms of home country
US Dollar: $0.012/ BDT 1
Indirect Quote: The price of home currency in terms
of the foreign currency
US Dollar: BDT 85 / 1$
II. The Structure of the
Foreign-Exchange Market
The Role of Banks

By:

KOWSHIK BARUA
ID: 13302 109
 The Overview of
Foreign Exchange Market
What Is Forex Market?
 Buy, sell, exchange, and speculation on currencies by participants.
 Global network of computers.
 Working 24 hours in every working day.
Who Are The Participants of Forex Market?

Participants

Non- Banking Foreign

Banking Entities Exchange
Entities Brokers
Importers Commerci
and al Banks
Exporters
Central
Investors Banks
and
MNC’s
 What Are The Top Tradable
Currencies of Forex Market?
U.S. Dollar (USD), European Euro (EUR), Japanese Yen (JPY), British Pound
(GBP), Swiss Franc (CHF), Canadian Dollar (CAD), Australian/New
Zealand Dollar (AUD/NZD), South African Rand (ZAR)
Market Share

USD
EUR
4.06% 3.00% 2.82% JPY
7.52% GBP
12.71% 51.49% AUD
CAD
18.40% CHF
 The Role of Bank in Shaping
The Structure of Forex Market
The Role of Commercial Banks

 Enabling Commercial Customers :

 To engage in export & import
 To purchase or sell foreign assets and investment
 To hedge for avoiding potential unfavorable changes

 Enabling Speculators :
 To correctly predict changes in the currency’s market value

 Enabling Arbitrageurs :
 To obtain riskless profits
 The Role of Bank in Shaping The
Structure of Forex Market

The Role of Central Banks

 Exchange intervention or pegging

 Multiple exchange rate
 Exchange equalization account
 Regulation of bank interest rate
Spot and Forward Markets
(Currency buying and selling system to settle
international business transactions)

By:

NURUL ALAM
ID: 13302 106
 Spot and Forward Markets
Spot Market
Consists of foreign-exchange transactions that are to be
consummated immediately (Within TWO days after the
trade date)

The spot market is the purchase and sale of commodity,

security or currency for immediate delivery and
payment on the spot date.

This types of transaction called spot transaction.

 Spot and Forward Markets
Spot Market
Example:
A Bangladeshi company is required to pay $10,000 to a US
company today, 13th January 2019. How many TK the
company has to convert in spot market to get the required
USD?
Assumed that, we get that $1 = TK 84 on 13th January 2019.
Since $1 = TK 84, $10,000 must equal TK 8,40,000.00
($10,000*84).
The company must sell TK 8,40,000.00 to get $10,000 to pay
to the US company.
 Spot and Forward Markets
Forward Market
Consists of foreign-exchange transactions that are to occur
sometime in the future.

This involves an agreement today to buy and sell a specific

amount of a foreign currency, commodity at specific
future date.

Prices are often published for foreign exchange that will be

delivered one month, three months, and six months in
the future
 Spot and Forward Markets

Forward Market
Example:
A Bangladeshi company buys Tk 1,00,00,000.00 computer
equipment from a Japanese company and is given 90 days
to pay.
Both parties agreed with a bank who agreed to exchange Tk
for Yen in 90 days at 1.30 Yen for 1 Tk. Now whatever is
the spot rate or future rate, they make transaction at this
agreed upon rate (Forward Rate) after 90 days.
Spot and Forward Markets

38% Spot Transactions

Forward transactions
62%
 Spot and Forward Markets
Forward Market
Swap Transaction: A transaction in which the same
currency is bought and sold simultaneously. But
delivery is made at two different points in time.

Foreign exchange swap transaction consists of two legs:

a foreign exchange spot transaction and a foreign
exchange forward transaction
 Spot and Forward Markets
Swap Transaction
For Example; Today, a company has earned a total of USD
100,000 from the goods sold. The company will have to
pay this amount (USD) to its suppliers after 3 months.
The company usually carries out its daily financial
operations in euros; therefore, it concludes a foreign
exchange swap transaction, i.e. it exchanges the available
US dollars into the euros today (Spot Transaction) and
agrees that it will repurchase this amount after three
months at a pre-agreed rate (Forward Transaction).
By concluding this transaction, the company avoids the risk
related to exchange rate changes.
 Spot and Forward Markets
The forward price of a foreign currency often differs from its spot price.

Forward Discount Forward Premium

 Forward price < Spot price.  Forward price > Spot price.

 It is negative terms.  It is positive terms.

 Spot and Forward Markets
Annualized forward premium or discount

Annualized forward premium or discount = {(P f – Ps)/Ps}n

= {($1.5203 – $1.5212)/$1.5212}4 = – 0.0024 = – 0.24% (Forward Discount Rate)

Here (assumed),
Exchange Rate = 1 British pound to US Dollar
Pf = three month forward price = $1.5203
Ps = spot price = $1.5212
n = the number of periods in a year = 4 (as 12 month/3 month = 4
month)
 Spot and Forward Markets
Annualized forward premium or discount

Let’s Practice –

What will be the annual forward premium or discount rate if you want to pay
your US supplier after 180 days?

Assumed following exchange rate information is available –

Currency TK
1 USD (Today) 82.00
1 – month Forward 84.10
3 – month Forward 83.60
6 – month Forward 83.80
Two Other Mechanisms Of
Foreign-Exchange Market

By:

MAHABUB ALAM
ID: 13302 102
 Two other mechanisms of
foreign-exchange market
To allow firms to obtain foreign exchange in the future
1. Currency future
2. Currency option

Currency future:
A contract that resembles a forward contract
For a standard amount on a standard delivery date
A firm must complete the transaction by buying or selling
the specified amount of foreign currency at the specified
price and time Firms can make an offsetting transaction
 Two other mechanisms of
foreign-exchange market
Currency future:
Example:

Assume hypothetical company XYZ, which is based in

the United States, is heavily exposed to foreign
exchange risk and wishes to hedge against its projected
receipt of 125 million euros in September. Prior to
September, the company could sell futures contracts on
the euros they will be receiving. Euro FX futures have a
contract.
 Two other mechanisms of
foreign-exchange market
Currency Option:

Allows but not require.

A firm to buy or sell a specified amount of a foreign currency at
a specified price at any time up to a specified date.
Grants the right
Publicly traded on organized exchanges worldwide
But international banks often are willing to write currency
options customized as to amount and time for their commercial
clients due to the inflexibility of publicly traded options.
 Two other mechanisms of
foreign-exchange market
Types of Currency Options:

Call Option
Grants the right to buy the foreign currency in
question

Put Option:
Grants right to sell the foreign currency in question.
 Two other mechanisms of
foreign-exchange market

An example of Call Option:

Let’s say an investor is bullish on the euro and believes it will
increase against the U.S. dollar. The investor purchases a
currency call option on the euro with a strike price of $115,
since currency prices are quoted as 100 times the exchange
rate.
Assume the euro's spot price at the expiration date is $118.
Consequently, the currency option is said to have expired in the
money. Therefore, the investor's profit is $300, or (100 * ($118
- $115)), less the premium paid for the currency call option.
 Two other mechanisms of
foreign-exchange market
An example of Put Option:
Assume an investor owns one put option on hypothetical stock
XYZ with a strike price of $25 expiring in one month. For this option
they paid a premium of $1, or $100 ($1 x 100 shares).
The investor has the right to sell 100 shares of XYZ at a price of $25
until the expiration date in one month, which is usually the third
Friday of the month.
If shares of XYZ fall to $20 and the investor exercises the option, the
investor could purchase 100 shares of XYZ for $20 in the market and
sell the shares to the option's writer for $25 each. Consequently, the
investor would make $500 (100 x ($25-$20)) on the put option
 Two other mechanisms of
foreign-exchange market
The forward market, currency options and currency futures facilitate
international trade & investments and allow firms to hedge, or reduce,
the foreign-exchange risks inherent in international transactions.

Suppose,
Best Buy purchases Sony PlayStation 3 game consoles for ¥ 800
million for delivery three months in the future
Best Buy can go to its bank and contract to buy the ¥ 800 million in
three months
Buy the yen based on the yen’s current price in the three-month
forward wholesale market
The firm is able to protect itself from increases in the yen’s price
 Why knowing forward price is important?
Represents the marketplace’s aggregate prediction of
the spot price of the exchange rate in the future

Helps international business people to forecast future

changes in exchange rates

These changes can affect ;

1. The price of imported components
2. The competitiveness and profitability of the firm’s
exports
 Why knowing forward price is important?
Signals the market’s expectations regarding that country’s
economic policies & prospectus

If, Forward discount (forward price < spot price)

Then, the foreign exchange market believes that the currency
will depreciate over time.

Then firms may want to;-

1. Reduce their holdings of assets
2. Increase their liabilities denominated in the in the currency.
Arbitrage and the Currency Market
(Arbitrage of Goods-Purchasing Power
Parity)

By:

ABDUL KARIM
ID: 13302 090
 Arbitrage

The riskless purchase of a product in one market for

immediate resale in a second market.
In order to profit from a price discrepancy.

Two types of arbitrage activities:

1. Arbitrage of Goods.
2. Arbitrage of Money.
 Arbitrage of goods

The arbitrage of goods is a simple notion: If the price of

good differs between two markets
Buy the good in the “cheap” market (that offers the
lower price)
Resell it in the “expensive” market (that offers the higher
price
Under the low of one price, such arbitrage activities will
continue until the price of good is identical in both market
(excluding transaction costs, transportation cost, taxes and
so on).
 Arbitrage of Goods-Purchasing Power Parity(PPP)
Purchasing Power Parity(PPP) is a theory states that the
price of a tradable goods, when expressed in a common
currency, will tend to equalize across countries as a result of
exchange rate change.

When does PPP occur?

the process of buying goods in the cheap market.
 Reselling them in the expensive market affects the
demand for, and the price of, the foreign currency & the
market price of the good itself.
Arbitrage of Goods-Purchasing Power Parity
 Arbitrage of Goods-Purchasing Power
Parity

And now the New exchange rate between US & Canadian

dollars 　 US$ 0.60 = Can $1 (PPP no longer exist)

U.S residents could cross the border, exchange US$ 36 for

Can $60 　 buy Levi’s in Canada Saving US $12.
 Who Uses the PPP & Why?
1. International economists use PPP to help them compare
standard of living across countries.
2. Foreign-exchange analysts also use the PPP theory to
forecast long term changes in exchanges rate.
 Purchasing power imbalances between countries signal
possible changes in exchange rates.
Provides helpful signals showing whether a currency is
overvalued or undervalued in the foreign-exchange
market.
Arbitrage and The Currency
Market (Arbitrage of Money)

By:

MOHAMMAD SAIFUL ISLAM

ID- 13302 132
 Arbitrage of Money

Arbitrage of money short-term gaining

Much of the $4.0 trillion in daily trading of Forex stems from
financial arbitrage
Whenever the Forex is not in equilibrium, professional traders can
profit through arbitraging money

Three common forms of foreign-exchange arbitrage

Two-point arbitrage (geographic arbitrage)
Three-point arbitrage
Covered interest arbitrage
 Two-point arbitrage (Geographic Arbitrage)
Two-point arbitrage
Profiting from price differences in two geographically distinct markets E.g. currency price
differences

New York Foreign- London Foreign-exchange

exchange Market Market
1 £ = US$ 2.00 1 £ = US$ 1.80

Arbitrage Opportunity - JP Morgan Chase

 Take US$ 1.80 and buy 1 £ in London Forex, and resell it in New York Forex
 No Risk!
Other banks will also note for the opportunity for quick profits
 US$ value in London will fall; £ value in New York will rise until there will be no
opportunity to arbitrage
 The same price for both markets and the Forex will be in equilibrium
Arbitrage transaction costs
 Cost of arbitrage ↑↑ the differences in exchange rates in the two markets
 Three-point arbitrage

Three-point arbitrage
The buying and selling of the three different currencies to
make a riskless profit E.g. New York, Tokyo, and London
Forex market (same exchange rates for all market)
 £ 1 = US$ 2.00; US$ 1= ¥ 120; £ 1 = ¥ 200
 No opportunity of two-point arbitrage (all the markets sell at the
same price)
 Opportunity for three-point arbitrage
 Riskless profit of £ 0.20
 Three-point arbitrage
 Able to make profits through three-point arbitrage
 whenever the cost of buying a currency directly differs from the cross rate of
exchange
 Cross rate
 An exchange rate between two currencies calculated through the use of a third
currency
 Usually the US $ is the primary third currency used in calculating cross rates
 Direct quote between ponds and yen = £ 1 /¥ 200
 Cross rate between ponds and yen = £ 1 US/$ 2 * US$ 1 /¥ 120= £ 1 /¥ 240
 The difference between the exchange rate & cross rate Opportunity for
arbitrage
 The market for the three currencies will be in equilibrium No arbitrage profit

 Links together individual foreign exchange markets

 Changes in direct quote of one currency market affects the other
 Covered interest arbitrage
Covered interest arbitrage
Arbitrage that occurs when the difference between two
countries’ interest rates is not equal to the forward
discount/premium on their currencies
 The most important form of arbitrage in Forex
Occurs because international bankers, insurance
companies, and corporate treasurers are continually
scanning money markets worldwide to obtain
 the best returns on their short-term excess cash balances & the
lowest rates on short-term loans
 They are trying to cover themselves from exchange rate risks
 Covered interest arbitrage example
Annual interest rate for three-month deposits: London 12% New York 8%

New York investors would want to earn higher returns available in London
 They must convert their dollars to pound to invest in London
 They will get the return on investment in three-month BUT exchange rate risk
What if the pound’s value were to fall during that three-month period?
Possibility of wiping out the gains earned by higher interest rate

NY investors can avoid exchange rate risk by using the forward market
If an investor has;-
 Investment money = $ 1,000,000
 Spot exchange rate of 1 pound = US$ 2
 Three-month forward rate of 1 pound = US$ 1.99
 Covered interest arbitrage example

Choices that NY investor has:-

 Invest their money in NY @ 8% p.a. interest rate (2% for three months)
$1, 000,000 x 1.02 = $1,020,000 $20,000 return.
 Exchange their currency to pound, invest in London @ 12 % interest today, & in three
months liquidate their London investment & convert it back to dollars.
 Convert $1 million to British pounds @ spot rate of $2.00/ £1 £ 500,000
 Invest the money- @ 12 % p.a. interest rate (3% for three months) in three month period £
500,000 x 1.03 = £ 515,000.
 [To avoid currency risk] Sell the £ 515,000 today in the three-month forward market at the
current three-month forward rate of $1.99/ £1
£ 515,000 x $1.99/ £1 = $ 1,024,850 $24,850 return
 The NY investor can earn more money by investing in London Covered-interest arbitrage
allows to capture higher interest rate in London while covering exchange rate risk by using
the forward market.
 Short-term investment money will flow from NY London (seeking higher covered return).
 Covered interest arbitrage example
What happens in the two lending markets (NY & London) and the Forex when
such arbitrage occurs?
 Funds are transferred from NY to London
 The supply of lendable money in NY will decrease and so Interest rates in NY will
increase
 The supply of lendable money in London will increase Interest rates in London will
decrease
 [The spot market] the demand for pounds will increase Spot price of pounds will also
increase.
 [The three-month forward market] the supply of pounds will increase but Forward price
of pounds will decrease.
 Lendable funds will continue to flow from NY to London until the return on the covered
investment is the same in London and NY
 The short-term interest rate differential between two countries determines the forward
discount or premium on their currencies IMPORTANT to Forex.
 International Fisher Effect

Why should interest rates vary among countries in the first place?
 The question was answered by Yale economist, Irving Fisher in 1930
 Country’s nominal interest rate = the real interest rate + expected inflation in that country
 National differences in expected inflation rates yield differences in nominal interest rates
among countries
International Fisher effect & covered-interest arbitrage
 An increase in a country’s expected inflation rate implies higher interest rates in that
country.
 This will lead to either A shrinking of the forward premium or a widening of the forward
discount of a country’s currency in the Forex market.
 Because of this linkage between inflation and expected change in exchange rate IBERS
carefully monitor countries’ inflation trends.
E.g. a fixed exchange rate system functions poorly if inflation rates vary widely among
countries
 Importance of arbitrage activities

1. Constitutes a major portion of the $4.0 trillion in

currencies traded globally each working day
2. Affects the supply and demand for each of the
major trading currencies
3. Ties together the foreign exchange markets
Overcoming differences in geography (two-point
arbitrage)
Overcoming currency type (three-point arbitrage)
Time (covered-interest arbitrage)
 Carry Trade
Tries to exploit differences in the interest rates between countries
Japan has lowest interest rates among the major trading nations.
Borrow yen at a low interest rate use the borrowed yen to buy bonds, notes,
or certificates of deposit denominated in currencies that are paying higher
interest rates (e.g. NZ$ or AU$)
Risky because : If the yen raises in value relative to the second currency the
carry trader will lose a lot

E.g. 2007 – Japanese private investors (non-professionals) carry trade;
subprime crisis in 2007 increase in volatility of currency market Japanese
yen rose 4% against US$; 9% against AU$; 11% against NZ$

A lot of carry trader lost

III. The International Capital Market
Major International Banks

By:

RISHA CHAKMA
ID: 13302 079
 Major International Banks
International Banking
Correspondent relationship:
o An agent relationship whereby one bank acts as a
correspondent or agent for another bank in the first bank’s
home country.
o E.g. a U.S. bank could be the correspondent for a Danish
bank in the United States by Paying or collecting foreign
funds, providing credit information, honoring letters of
credit.
o Each bank maintains accounts at the other bank
denominated in the local currency
 Major International Banks
Ways of establishing overseas banking operations:

 Subsidiary bank:
If it is separately incorporated from the parent

 Branch bank:
If it is not separately incorporated from the parent

 Affiliated bank:
An overseas operation in which it takes part ownership in
conjunction with a local or foreign partner
 Major International Banks
Commercial Banking Services

 Exchanging home currency

 Financing and facilitating everyday commercial
transactions
 Short-term financing of the purchase
 international electronic funds transfer
 forward purchase of currency
 advise about proper documentation for importing and
paying for the goods
 Major International Banks

 Investment Banking Services

 Corporate clients hire investment bankers to package and

locate long-term debt and equity funding.

 To arrange mergers and acquisitions of domestic and

foreign firms.
The Eurocurrency Market

By:

QUAZI FARIHA SULTANA

ID:13302 001
 The Eurocurrency Market

Originally called the Eurodollar market

The money market for borrowing and lending

currencies that are held in the form of deposits in
banks located outside the countries where the
currencies are issued as legal tender.
 The Eurocurrency Market
The Eurocurrency Market originated in the early
1950s
 When the communist-controlled governments of Central
Europe and Eastern Europe needed dollars to finance their
international trade but feared that the US government would
confiscate or block their holdings of dollars in US banks for
political reasons
 The communist governments solved the problem by using
European banks that were willing to maintain dollar accounts
for them.
 The Eurocurrency Market

Eurodollars

US dollars deposited in European bank accounts

As other banks worldwide began offering dollar-denominated
deposit accounts , the term Eurodollar evolved to mean US
dollars deposited in any bank account outside the US.
Other currencies became stronger in the post-World War II era
-the term included other currencies like Euroyen, Europounds etc.

 Today a Eurocurrency is defined as a currency

on deposit outside its country of issue.
 The Eurocurrency Market
The Euroloan Market

 Extremely competitive, and lenders operate on razor-thin margins.

 Euroloans are often quoted on the basis of LIBOR, the interest rate
that London banks charge each other for short-term Eurocurrency
loans.
 The Eurocurrency Market
The Euroloan Market
Euroloan market is the low-cost source of loans for
large, creditworthy borrowers (such as Governments
& large MNEs)

Reasons:
1. Free of costly government banking regulations
2. Large transactions
3. Lower risk premium
 The Eurocurrency Market
International Banking Facility (IBF)
An entity of a US bank that is legally distinct from the
bank’s domestic operations that may offer only
international banking services
 Created in response to complaints of US banks
about reserve requirements and regulations
imposed by the Federal Reserve Board
 Which caused suffering from competition with
European and Asian banks in issuing dollar
denominated international loans
 Do not need to observe the numerous US domestic
banking regulations
International Bond Market

By:

KAZI ROMANA AKTER

ID: 13302 010
 International Bond Market

Represents a major source of debt financing for the

world’s governments, international organizations and
larger firms.
Two types of international bonds

International Bond

Foreign
Eurobond
bonds
 International Bond Market
Two types of international bonds
1)Foreign bonds

A bond issued by a foreign borrower in the currency of the country in which it is

sold.
Example:
 Yankee Bonds (issued in the US in US dollar)
 Samurai Bonds (issued in the Japan in Yen)
 Bulldog Bonds(issued in the UK in Sterling)

Foreign Bonds can be affected by;

 Political Turmoil
 Interest Rate Fluctuations
 Currency Exchange Rates
 Inflation
 International Bond Market
Two types of international bonds
2) Eurobond
A bond issued in the currency of country A but sold to residents of
other countries.
E.g. American Airlines borrow $500 million to finance new aircraft
purchases by selling Eurobonds denominated in dollars to residents
of Denmark & Germany

Several Factors to Target a Country for Denomination

Favorable Interest Rates
Regulations
Stable Market
Presence of Likely Investors
 International Bond Market

Dominant Currencies in the International Bond Market

The Euro
The US Dollar
Syndicates of international banks, securities firms, and commercial
banks put together complex packages of international bonds to
serve the borrowing needs of large, creditworthy borrowers
 International Bond Market
Global bond
A large, liquid financial asset that can be traded anywhere at
any time
Pioneered by the World Bank
Sold $1.5 billion of US dollar-denominated global bonds in
North America, Europe and Japan and Succeed in lowering
its interest costs on the bond issue by 0.225 percentage point.
　 0.225 percentage point X $1.5 billion = the bank reduced its
annual financial costs by $3,375,000

International bond market is highly competitive and borrowers are often

able to obtain funds on very favorable terms
Global Equity Markets

By:

URMI CHOWDHURY
ID: 13302 125
Global Equity Markets
 Global Equity Markets

Globalization of equity markets

The growing importance of multinational operations

Improvements in telecommunications technology
Facilitated by the globalization of the financial services
industry
 Global Equity Markets
Start-up companies:
No longer restricted to raising new equity solely from domestic
sources
E.g. Swiss pharmaceutical firms major source of equity capital for
new US biotech firms

Established firms:
When expanding into a foreign market, a firm may choose to raise
capital for its foreign subsidiary in the
foreign market
E.g. The Walt Disney Company – initially sold 51% of its
Disneyland Paris project to French investors
 Global Equity Markets

Country Funds:

A mutual fund that specializes in investing in a given

country’s firm
Global Equity Markets
Offshore Financial Centers

By:

ATAUL ALIM
ID: 13302 110
 Offshore Financial Centers

Offshore financial centers: offshore financial

centers or OFC is defined as a country or
jurisdiction/legal entity (company) that provides
financial service to nonresident customer.
 How Offshore Financial Center Works?
Consult an international corporate service provider.
Choose offshore jurisdictions and devise the right plan
(choose the right strategy).
Documentation
1.KYC Processing.
2.Proof of address, existing bank account details.

Get your company registered: required 2 days to 3 weeks

(depends on your document validation process and typical
processing time of the offshore jurisdictions)
 Formation of Offshore Companies

International business company (IBC)

1.Share holders from different countries.
2.Three directors (from any country)

Limited liability company (LLC)

1.Formed with a minimum of 2 partners (name and
participation will appear publically)
2.Minimum 1 administrator is required.
 Attributes of Offshore:

The June 2000 IMF paper then listed three major attributes of
offshore financial centre.

Jurisdictions that have relatively large numbers of financial

institutions engaged primarily in business with non-residents.
Financial systems with external assets and liabilities out of
proportion to domestic financial intermediation designed to
finance domestic economies.
More popularly, centers which provide some of the following
services: low or zero taxation; moderate or light financial
regulation; banking secrecy and anonymity; asset protection.
 Investment and Users

Offshore investment: Users of offshore facilities:

Real estate holding Individuals and
Inter-company borrowing, organization: to avoid the
lending, leasing. tax and other financial
regulation.
MNEs (Global
Multinational Enterprises)
often use offshore financial
centers to obtain low-cost
Eurocurrency loans.
 How MNEs Use Offshore Facility?

MNEs locate financial subsidiaries (part of large

MNEs) in offshore financial centers to take advantage
of low-cost loans.

Then the subsidiaries use their legal, accounting,

financial, and other expertise to collect large loans.
 Offshore financial centers:
Bahamas, Bahrain, Barbados, Bermuda.
Cayman Islands, Cyprus.
Hong Kong.
Ireland.
Latvia, Luxembourg.
Malta, Mauritius.
Netherlands.
Panama.
Singapore.
Switzerland. Etc.
 Regulatory Calm Down

Money laundering

Tax avoidance

Financial and other banking problems .

???
Thank You!