• Much of modern international finance revolves around foreign exchange.
• There are specifically international markets, such as the Eurocurrency and Eurobond markets.
Growing 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.)

1.Never 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.)

Key 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 between them.

Interest-rate parity

(I$ - I£)/(1 + I£) = [(F- S)/S] (365/n)100