Professor Ian Giddy's Foundations of Finance
International Financial Markets
finance is concerned with the global dimensions of financial markets, institutions,
instruments and techniques, and with the public policy issues arising from
the markets and techniques:
Much of modern international finance revolves around foreign exchange.
There are specifically international markets, such as the Eurocurrency
and Eurobond markets.
cross-border use of national money and capital markets. (National financial
markets have different conditions, leading to an incentive to profit by
arbitrage between the markets. The markets are, to some degree, linked,
allowing such arbitrage to occur; but they are also partially segmented,
as regulations, taxes, and exchange controls prevent perfect arbitrage.)
try to forecast exchange rates. Instead, try to understand what influences
currency values. (One fundamental reason for fluctuating currencies is
that different governments pursue different domestic monetary policies.
Some place a high priority on price stability whereas others find themselves
politically unable to resist inflationary pressures.)
that most aspects of global finance follow exactly the same principles
as domestic finance. The rule is, assume it's the same and then focus on
the question, What, if anything, is different about this so-called international
markets and terms include:
The foreign-exchange market. This market links prices in different countries,
and governments waver between floating and fixing their exchange rates
to manage this interdependence.
Spot and forward foreign exchange contracts.
The Eurocurrency market, which permits the separation of currency of denomination
from country of jurisdiction.
Domestic financial markets are today linked through the Euromarkets. National
interest rates each reflect the time value of their own money, and the
forward foreign-exchange market reflects the time value of the exchange
rate between the two monies.
The foreign-exchange market links Eurocurrency interest rates, and national
inflation rates and monetary policies.
Currency swaps, used in connection with international bond financing or
investment, are the long-term counterparts of the forward-exchange market.
Both allow the separation of the currency and interest-rate risks of an
asset from the asset itself.
Eurobonds, which may be the most innovative instruments of the global financial
market—because they are subject to fewer constraints than the new
derivative instruments, they are frequently packaged with future- and option-like
features to match investor and issuer needs in the international capital
market. This exemplifies a recurring theme of international finance—that
because national markets are constrained, international markets evolve
to intermediate between them, creating partial but not perfect linkages
(I$ - IŁ)/(1 + IŁ) = [(F- S)/S] (365/n)100
= Forward premium or discount
If IŁ is small, then, to a close approximation,
(I$ - IŁ) = [(F - S)/S] (365/n) 100
That is, interest-rate differential = forward premium or discount
Go to Giddy's Web Portal • Contact Ian Giddy