EECS 3101 Lecture Notes - Lecture 1: Foreign Exchange Market, Financial Intermediary, Futures Exchange
28 Jun 2018
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EECS 3101 Lecture 1 Notes
Introduction
How financial markets serve MNCS
As the European crisis intensified, its effects stretched beyond Europe.
European banks serve as a major financial intermediary for emerging markets in Asia.
The financial problems experienced by banks in Europe caused them to restrict their
credit, which had the effect of limiting the access of some Asian companies to credit.
Thus, economies of some Asian countries were restricted by the limited amount of
credit that their firms could obtain.
As the Asian economies weakened, their demand for products in Europe declined.
These events provide another illustration of contagion effects resulting from the
international integration of economies.
Note also that the weakness in the Asian credit markets caused more uncertainty about
stock values and thus declining stock values.
Exhibit 3.7 illustrates the foreign cash flow movements of a typical MNC.
These cash flows can be classified into four corporate functions, all of which generally
require use of the foreign exchange markets.
The spot market, forward market, currency futures market, and currency options
market are all classified as foreign exchange markets.
The first function is foreign trade with business clients.
Exports generate foreign cash inflows while imports require cash outflows.
A second function is direct foreign investment, or the acquisition of foreign real assets.
This function requires cash outflows but generates future inflows either through
remitted earnings back to the MNC or through the sale of these foreign assets.
A third function is short-term investment or financing in foreign securities, and the
fourth function is longer-term financing in the international bond or stock markets.
Document Summary
As the european crisis intensified, its effects stretched beyond europe. European banks serve as a major financial intermediary for emerging markets in asia. A third function is short-term investment or financing in foreign securities, and the fourth function is longer-term financing in the international bond or stock markets. An mnc may use international money or bond markets to obtain funds at a lower cost than they can be obtained locally. The foreign exchange market allows currencies to be exchanged in order to facilitate international trade or financial transactions. Banks serve as a major financial intermediary for emerging markets in asia. The financial problems experienced by banks in europe caused them to restrict their credit, which had the effect of limiting the access of some asian companies to credit. Thus, economies of some asian countries were restricted by the limited amount of credit that their firms could obtain. As the asian economies weakened, their demand for products in europe declined.
