International Institute of Financial Market:
Due to growth in international business over the last 30 years, various international financial markets have been developed. Financial managers of MNCs must understand the various international financial markets that are available so, that they can use those markets to facilitate their international business transactions.
Corporate world use of the following international financial markets:
- Foreign Exchange Market
- International Money Market
- International Credit Market
- International Bond Market
- International Stock Markets
Foreign Exchange Market:
The foreign exchange market allows for the exchange of one currency for another. Large commercial banks serve this market by holding inventories of each currency, so that they can accommodate requests by individuals or MNCs. Individuals rely on the foreign exchange market when they travel to foreign countries. People from the United States exchange dollars for Mexican pesos when they visit Mexico or Euros when they visit Italy or Japanese yen when they visit Japan.
For one currency to be exchanged for another currency there needs to be an exchange rate that specifies the rate at which one currency can be exchanged for another.
International Money Market:
In most countries, local corporations commonly need to borrow short term funds to support their operations. Country governments may also need to borrow short term funds to finance their budget deficits. Individual or local institutional investors in those countries provide funds through short term deposits at commercial banks. In addition, corporations and governments may issue short term securities that are purchased by local investors. Thus, a domestic money market in each country serves to transfer short term funds denominated in the local currency from local surplus units (savers) to local deficits (borrowers)
International Credit Market:
Multinational corporations and domestic firms sometimes obtain medium term funds through term loans from local financial institutions or through the issuance of notes in their local markets. However, MNCs also have access to medium term funds through banks located in foreign markets. Loans of year or longer extended by banks to MNCs or government agencies in Europe are commonly called Euro credits or Euro credit loans. These loans are provided in the so called Euro credit market. The loans can be denominated in dollars or many other currencies and commonly have maturity of 5 years.
The international credit market is well developed in Asia and is developing in South America. Periodically some regions are affected by an economic crisis, which increases credit risk. Financial Institutions tend to reduce their participation in those markets when credit risk increases.
International Bond Market:
Although MNCs, like domestic firm, can obtain long term debt by issuing bonds in their local markets, MNCs can also access long term funds in foreign markets. MNCs may choose to issue bonds in the international bond markets for three reasons. First, issuers recognize that they may be able to attract a stronger demand by issuing their bonds in a particular foreign country rather than in their home country. Some countries have a limited investor base, so MNCs in those countries seek financing elsewhere. Second, MNCs may prefer to finance a specific foreign project in a particular currency and therefore may attempt to obtain funds where that currency is widely used. Third, financing in a foreign currency with a lower interest rate may enable an MNC to reduce its cost of financing, although it may be exposed to exchange rate risk.
International bonds are typically classified as either foreign bonds or Euro bonds. A foreign bond is issued by a borrower foreign to the country where the bond is placed.
International Stock Markets:
MNCs and domestic firms commonly obtain long term funding by issuing stock locally. Yet, MNCs can also attract funds from foreign investors by issuing stock international markets. The stock offering may be more easily digested when it is issued in several markets. In addition, the issuance of stock in a foreign country can enhance the firm’s image and name recognition there.
Issuance of Stock in Foreign Markets
Some U.S. firms issue stock in foreign markets to enhance their global image. The existence of various markets for new issues provides corporations in need of equity with a choice. This competition among various new issues markets should increase the efficiency of new issues.
The locations of MNCs corporations can influence the decision about where to place its stock. As the MNC, may desire a country where it is likely to generate enough future cash flows to cover dividend payments. The stocks of some U.S. based MNCs are widely traded on numerous stock exchanges around the world. This enables non U.S. investors easy access to some U.S. stocks.