1 Chapter 2 The Domestic and International Finance Marketplace © 2001 South-Western College Publishing

2 Credit Unions Primary and Secondary Markets Sole Proprietorship Partnership Corporations Net Savers Become Investors Financial Markets Savings Institution Mutual Funds Pension Funds Insurance Companies Financial Institutions Financial Companies Banks Supply Funds Money Markets Capital Markets First Comes the National Financial System

Investment Banking  Help corporations sell new security issues  Underwrite Guarantee sale at a fixed price  Best effort No guarantee

Secondary Market  Listed exchanges Designated place of business Requirements of securities listed or traded  Over-the -counter ( OTC ) market Networks connected by communications Dealers post prices to buy and sell  Stock market indexes DJIA DJTA S & P 500 NASDAQ

Regulations  State Blue sky laws  Federal Securities Act of 1933 &1934 Securities & Exchange Commission (SEC) Ethical issues  Insider trading SEC attempts to prevent profiting from unpublished information

Global Financial Transactions Import Export Foreign Branch Licensing Arrangements Joint Ventures Multinational Corporations Manufacturing Distribution International Finance

Global Risks  Fluctuating Exchange Rates  Government Regulations  Tax Laws  Business Practices  Political Environment

Eurocurrency  Currency deposited outside of the country of origin  Eurodollars are dollars deposited outside of the US  A new currency called the Euro has been created by many European countries The Euro is not the same as Eurocurrency

Some Important Terms  Exchange Rate  Direct Quote  Indirect Quote  Spot Rate  Forward Exchange Rate

Forward Exchange Rates  Exchange rates for currencies delivered at some future date, i.e., 30, 90, or 180 days  Premium: where spot rate is expected to increase in the future  Discount: where spot rate is expected to decrease in the future

Standard amount of currency Standard future time ( maturity date) At a price set at the present time Foreign currency futures contrast Contracts traded on Chicago Mercantile Exchange ( CME ) Delivery

Remember Options: A call is the right to buy a currency A put is the right to sell a currency

13 Market Efficiency “Glue” that bonds the PV of a firm’s net cash flow to shareholder’s wealth

Market Efficiency Capital markets are efficient if prices instantaneously and fully reflect all the risk and economically relevant information about a security’s prospective returns.

3 Degrees of Market Efficiency  Weak-form  Semistrong-form  Strong-form

Weak-form Security prices fully reflect all historical information No investor can earn excess returns using historical prices or returns

Semistrong-form Security prices fully reflect historical and publicly available information No investor can earn excess returns based on an investment strategy using public information

Strong-form Security prices fully reflect all historical, public and private information Markets are quite efficient!