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International Financing and National Capital Markets

International Financing and National Capital Markets. International Financing and National Capital Markets. International Financing National Capital Markets. Content:. „Definition“ Exchange Rates Foreign Investment Theories. Definition.

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International Financing and National Capital Markets

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  1. International Financing and National Capital Markets

  2. International Financing and National Capital Markets International Financing National Capital Markets

  3. Content: • „Definition“ • Exchange Rates • Foreign Investment • Theories

  4. Definition “International finance is the branch of economics that studies the dynamics of exchange rates, foreigninvestment, and how these affect international trade”

  5. Content: • „Definition“ • Exchange Rates • Foreign Investment • Theories

  6. Exchange Rates • how much one currency is worth in terms of the other • direct vs. indirect quotation (€-Zone) • Direct quotation  $/€ : 1,3625 • Indirect quotation  €/$ : 1/1,3625 = 0,7339 • Free or pegged? • USD($)  EUR(€) is free-floating, it can vary (supply-demand) • Litas (LTL) is pegged to the Euro(€) since February 2nd 2002 (3,453)

  7. Whyareexchangeratesimportantforeconomics?Example: Twomarkets, onegood ,(Purchasing Power ParityTheory) USA Europe Currency: Dollar $ Exchange Rate €/$: 0,7339 Price(US): 10 $ (7,7339 €) Currency: Euro € Exchange Rate $/€: 1,3625 Price(EU): 7,5 € • US-Americans will buy the good in Europe because it‘s cheaper for them. Until the Dollar increases to >0,75 (€/$)

  8. Content: • „Definition“ • Exchange Rates • Foreign Investment • Theories

  9. Foreign Investment(1) • In this case we‘re talking about Foreign Direct Investment (FDI) • refers to long term participation by country A into country B • Two Types: • inward foreign direct investment • outward foreign direct investment • Outward FDI-Inward FDI = Net FDI inflow (positive or negative)

  10. Foreign Investment(2) • Example: US International Direct Investment Flows Net=Net FDI inflow

  11. Content: • „Definition“ • Exchange Rates • Foreign Investment • Theories

  12. Theories • Most important theories • Mundell-Fleming model • The optimum currency area (OCA) theory • The purchasing power parity (PPP) theory  Big Mac Index

  13. PPP Theory-Big Mac Index(1) • The PPP exchange-rate calculation is using the baskets of goods(veggies, meat, bread etc.) • Big Mac as an indicator(Bread,meat,veggies,labor(!))  If a Big Mac costs 4 $ in the United States and 3 £ in the United Kingdom, the PPP exchange rate would be £3 for $4 = 1,33 $/£ But in reality it’s about 1,50 $/£ In this case the dollar is undervalued/pound overvalued

  14. PPP Theory-Big Mac Index(2)

  15. International Financing and National Capital Markets International Financing National Capital Markets

  16. Content: • Definition • Where are we? • Financial regulatory authorities by country • Bond market • Stock market

  17. Definition “A capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place on other markets (e.g. the money market)”

  18. Content: • Definition • Where are we? • Financial regulatory authorities by country • Bond market • Stock market

  19. Where are we? Financial Market Market forloanablefunds Capital Market Money Market Bond Market Stock Market

  20. Content: • Definition • Where are we? • Financial regulatory authorities • Bond market • Stock market

  21. Financial regulatory authorities • They are regulating the market(„Police of capital markets“) • Some Examples -France: Autorité des marchés financiers -Germany: Bundesanstalt für Finanzdienstleistungsaufsicht -United Kingdom: Financial Services Authority -Hong-Kong: Securities and Futures Commission -Lithuania: Securities Commission of the Republic of Lithuania

  22. Content: • Definition • Where are we? • Financial regulatory authorities • Bond market • Stock market

  23. Bond market(1) • a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest • Bond market is also known as the debt, credit, or fixed income market • a financial market where participants buy and sell debt securities, usually in the form of bonds • with New York Stock Exchange (NYSE) as the largest centralized bond market

  24. Bond market(2)

  25. Content: • Definition • Where are we? • Financial regulatory authorities • Bond market • Stock market

  26. Stock market(1) • A stock market / share market is a public market for the trading of company stock and derivatives at an agreed price • Stocks are traded on the stock-market, normally they are listed in different indizes • A stock market index is a method of measuring a section of the stock market

  27. Stock market(2) • Stock market indizes, some examples: -France: CAC 40 (BNP Paribas, Carrefour) -Germany: DAX (Adidas, BMW) -Japan: Nikei225 (Honda Motor, Sony) -Lithuania: OMX Vilnius (Bankas Snoras)

  28. Stock market(3) • an example: - In January 2007 Mr. Smart buys 100 stocks(Price: 20 €,dividend: 40 cents/stock per year) of Company A. In May 2008 he sells them for 23,5 €. So what‘s his total profit?(dividend is payed in december)  200*0,4 €+200*3,5 € = 80+700 = 780 € (=39%/year)

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