Financial Markets -the meeting place for people, corp.

and institutions that need money or money to lend or

invest.
-exist as a vast global network of individuals and fin. institutions.
-deal w/ derivative securities whose values are derive from changes in prices of other assets
Public FM include national, state and local gov’t
Corporate FM large corp. raise funds
STRUCTURE AND FUNCTION OF FM
TYPES OF MARKET (PF SF MC PS PP)
1. Physical asset markets (tangible/real asset markets)
are for products such as wheat, autos, real estate, computers and machinery.
Financial asset markets deal with stocks, bonds, notes and mortgages
2. Spot markets markets in w/c assets are bought or sold for -on the spot delivery-
Future markets markets in w/c participants agree today to buy/sell at some future date
3. Money markets f.markets in w/c funds are borrowed or loaned for short periods (< 1 year)
Capital markets f.markets for stocks and for intermediate/long-term debt (1 year or longer)
4. Primary markets markets in w/c corp. raise capital by issuing new securities
Secondary markets markets in w/c securities & other fin. assets are traded among investor after they been issued
5. Private markets markets in w/c transactions are worked out directly btween 2 parties
Public markets markets in w/c standardized contacts are traded on organized exchanges
FINANCIAL INSTITUTIONS
Direct funds transfer are common among individuals and smll businesses and in economies.
CATEGORIES OF FINANCIAL INSTITUTIONS (IC FC PL MEHP)
1. Investment banks an organization that underwrites and distributes new investment securities
2. Commercial banks traditional department store of finance
3. Financial service corporations firm that offers a wide range of fin. services.
4. Credit unions cooperative associations
5. Pension funds retirement funds funded by corp. or gov’t agencies
6. Life insurance companies savings in the form of financial premiums
7. Mutual funds org. that pool investor funds to purchase fin. instruments
money market funds – mutual funds that invest in short term, low risk securities....
8. Exchange trade funds (ETF) similar to regular mutual funds and are often operated by mutual fund companies
9. Hedge funds similar to regular mutual funds b’cause they accept money & use funds to buy various sec.
10. Private equity companies org. that operate much like hedge funds,
THE STOCK MARKETS
Business finance concerned w/ provision of funds for investments in bus. enterprise
The new issue of securities are made available in primary market
The securities that are already outstanding and owned by investors are usually bought and sold through the 2ndary market, which
is known stock market
Gilt edged market the securities of gov’t are traded in stock market as a separate component
Derivatives most modern fin. instrument in hedging the risk
Derivative market common place such transaction take place
KINDS OF STOCK MARKET Two broad segments
1. The organized stock exchange stock exchanges have a physical location where stocks buying and selling location
2. The over-the-counter (OTC) where shares, bonds and money market instruments are traded using computer systems
exchange
REASONS FOR TRANSACTION IN STOCK MARKET
1. Information motivated reason This info. leads them to believe that security is not being correctly priced by the market
2. Liquidity motivated reasons Transact in the 2ndary market b’cause they re currently in position of excess/insufficient liq.
STOCK EXCHANGE -is an organized 2ndary market where securities like shares, debentures of public com. gov’t
securties issued by municipalities, public corp.....
Purpose of stock exchange To facilitate the excjange of securities b’tween buyers and sellers, thus providing a market
place, virtual or real.
Outcry method When brokers assemled in a place called -trading ring- and bought and sold shares
Listing agreement Ensures that company provides all the info. pertaining to its working from time to time
Stock market barometer of the company’s economy
LISTING OF SECURITIES ON STOCK EXCHANGE
Listing Means admission of securities to dealings on a recognized stock exchange of any
incorporated company, cental and state gov’t, quasi gov’tal ....
Principal obj. of listing To provide liquidity and marketability to listed securities and ensure effective monitoring
Recognized stock exchange Means a stock exchange being recognized by the national gov’t through SEC
Brokers Members who bought and sold in recognized stock exchange
Official quotation Price at w/c the securities are bought and sold in recognized stock exchange
The securities of an entity may be - at the time of public issue of shares/debentures
listed at any of the ff: - at the time of rights issue of shares/debentures
- at the time of bonus issued of shares
- shares issued on amalgamation or merger
Seller Person who wishes to sell his security
Buyer Person who is willing to buy the particular stock
The rate of stock depends on the simple law of supply and demand
CHAPTER 8

CHAPTER 9. INTERNATIONAL TRADE

HISTORICAL PERSPECTIVE OF INTERNTIONAL FREE TRADE
Before 1800 The scope of of international free trade was limited and countries pursued narrow domestic
economic goals.
16th – 17th centuries Mercantilists emphasized the power of national economy, favoring state intervention to maximize
wealth by building huge export.
18th – 19th centuries Classical economists – the classical school favored free trade b’tween nation based on
comparative advantage and w/o gov’t interference.
20th – 21st centuries Essentially remains the dominant theory of international free trade
General Agreement on -was the first framework to establishe worldwide free trade based on a commitment by 23 nations
Tariffs and Trade (GATT) (Austalia, Belgium, Brazil, Canada, China, India, UK, US, Phil.)...
-converted it into World Trade Organization (WTO) w/ 150 members and better procedure
GAINS FROM INTERNATIONAL TRADE (L Ac Nr Gm Ni)
Why do countries trade? There must be big enough gains from trade to justify the expenses and challeges of foreign trade
1. Lower prices of goods and services
2. Access to natural resources
3. Access to global markets
4. Access to new ideas
Absolute advantage There is an incentive for that country to produce more than its citizen need to export the good to
countries with higher production costs.
Comparative advantage Means that country has no alternate uses of its resources that would involved a higher return
OBSTACLES TO FREE TRADE (It Iq Tr)
Import tariff Tax on an imported product
Import quota Restriction on the amount of good to be imported
Trade restrictions -advocated by labor unions and firms making products that are more inexpensively produced in
other nations.
-generally impose a burden on society as a whole
Arguments in favor of trade 1. To protect domestic labor against inexpensive foreign labour
restrictions: 2. To reduce domestic unemployment
3. To protect young or infant industries
4. To protect industries important to the nation’s defense
FOREIGN EXCHANGE RATES
Exchange rates Relationship among the values of currencies
FACTORS INFLUENCING EXCHANGE RATES (Inf Int BGO)
Major reasons for ExR
1. Inflation Deflate the value of a currency b’cause holding the currency results in reduced purchasing power
2. Interest rates Higher relative to other countries to invest in that country
3. Balance of payments Used to refer to a system of accounts that catalogs the flow of goods btwn the residents of 2 cntrs
4. Government intervention The central bank of a country may support or depress the value of its currency
5. Other factors Are political and economic stability, extended stock market rallies and significant declines.
INTERACTION IN FOREIGN CURRENCY MARKETS
Exchange Rate Determination
Equillibrium exchange rates are determined by the supply and demand for the currencies
Fixed Exchange Rate
An exchange rate set too high tends to create a deficit Phil. balance of payments
-effect- short term because the country will deplete its foreign reseves
-a country might change its trade policies/implement exchange control/exchange rationing
An exchange rate set too low create a surplus Phil. balance of payments
Trade deficit Greater quantity of peso is supplied by Phil. int. than demanded by foreign int.
Trade surplus Samller quantity of peso is supplied by Phil. int. than demanded by foreign int.
Manage float
Is the current method of exchange rate determination
SPOT RATES > FR (discount)
the exchange rate at w/c the currency is traded for immediate delivery
FORWARD RATES > SR (premium)
the exchange rate at w/c the currency for future delivery
Forward market transaction The trading of currencies for future delivery
CROSS RATES
the currency exchange rate b’tween 2 currencies
MANAGING FOREX RISK
Foreign exchange risk Refers to the possibility of a drop in revenue/increase in cost in international transaction due to
change in forex rates.
Exchange rate rate at w/c 1 currency unit is converted into another
AVOIDANCE OF EXCHANGE 1. The firm may hedge its risk by purchasing/selling forward exchange comtracts
RATE RISK IN FOREIGN 2. The firm may choose to minimize receivables and liabilities denominated in foreign currencies
CURRENCY MARKETS 3. Maintaining a monetary balance b’tween receivables and payables
4. Trigger pricing – foreign funds are supplied at an indexed price but w/an option to convert to....
5. Diversification
6. Speculative forward contract
FOREIGN INVESTMENT DECISION
Foreign direct investment – usually quite large in size and many of them are exposed to enormous political risk
One of the most important differences b’tween domestic and international investments is the information in foreign investments
is generally less complete and often less accurate.
ANALYSIS OF FOREIGN INVESTMENT
Direct foreign investment Involves buying equipment and buildings for a new company
Advantages 1. Lower taxes in foreign nation
2. Annual depreciation allowances for the amount invested
3. Access to foreign capital resources
Disadvantages 1. Exchange rate risk
2. Sovereignity risk arising from possible expropriation
3. There mmay be various laws requiring financing from certaion sources
FUNDING OF FOREIGN INVESTMENT
Foreign investments are 1. Parent company resources
funded by 2. Common stock sales in foreign currency
3. Band sales in foreign currency
4.Borrowing in world financial markets
Finanancial international another important area of international finance that one must undersatnd to raise funds at the
trade and investments lower cost possible.
The financial executive must carefully locate and use the proper means to finance international busines operations
BALANCE OF PAYMENTS
Includes all international payments made by on enation to another.
Principal accounts
1. Current Account Records exports and imports of goods
Records exports and imports of services
Balance of trade Difference between total export and total import of goods
Trade deficit Occurs when country imports more goods than its exports
2. Capital Account Records capital flows resulting from the purchase and sale of fixed or financial assets.
Official reserves account Keeps tract of transactions involving the central bank and ORAssets (gold, foreign currency)
INTERNATIONAL INSTITUTIONS AND AGREEMENTS
International Monetary A system of fixed exchange rates based on a modified gold standard
System. Its purpose is to provide credit for development purpose to underdeveloped countries
The Jamaica Agreement Developed by noncommunist nation
(1976) Moved the world to a system of managed floating exchanges.
Multinational Corporations Better able to obtain scarce resources than domestic corp.
Tends to benefit everyone
International trade Provide regulatory authority for business in international trade
Agreements General Agreement on Tariffs and Trade (GAAT) – broadest and most important agreement
GAAT replaced by WTO (World Trade Organization)
World Trade Organization -is a permanent set of commitments by more than 120 nations.
(WTO) Agreement -applies to trede in services and intellectual property as well as goods
-provides for a multilateral dispute settlement apparatus