Favorable economic conditions in a foreign county Foreign currency is expected to strengthen over time Portfolio diversification Recently, firms outside the U.S. have been issuing stock more frequently, which has led to the growth of non-U.S. stock markets.
38 Exhibit 3.5 Comparison of Stock Exchanges (2013)
39 International Stock Markets How Market Characteristics Vary among Countries Stock market participation and trading activity are higher in countries where managers are encouraged to make decisions that serve shareholder interests and where there is greater transparency. Factors that influence trading activity: Shareholder Rights (vary by country) Legal protection of shareholders Government enforcement of securities laws Accounting laws
40 Exhibit 3.6 Impact of Governance on Stock Market Participation and Trading Activity
41 International Stock Markets Integration of Stock Markets Stock market conditions reflect the host country’s conditions. If the country is integrated, the stock market will be as well. Integration of International Stock Markets and Credit Markets The key link is the risk premium, which affects the rate of return required by financial institutions who provide credit or invest in securities.
42 How Financial Markets Serve MNCs (Exhibit 3.7)Corporate functions that require use of foreign exchange markets: Foreign trade with business clients.Direct foreign investment, or the acquisition of foreign real assets.Short-term investment or financing in foreign securities.Longer-term financing in the international bond or stock markets.
43 Exhibit 3.7 Foreign Cash Flow Chart of a Multinational Corporation (MNC)
Chapter Questions 44 1.Why firms may issue stock in foreign markets?2.Why would a bank want to participate in a syndicated Eurocredit loan?3.What is LIBOR, and how is it used in the Eurocredit market?4.Assume Poland’s currency (the zloty) is worth $.17 and the Japanese yen is worth $.008. What is the cross rate of the zloty with respect to yen?
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