International Finance : New Players and Global Markets

The landscape of international finance has drastically changed within the last decade. The institutions inherited from the Bretton-Woods conference--the IMF and the WBD-- have become obsolete, in part, due to their lack of reforming. Meanwhile newly created institutions including The New Development Bank and the Asian Infrastructure Investment Bank are increasing their sphere of influence. Developing countries from Africa, Asia, and Latin America are more eager than ever to work with the NDB or the AIIB. Meanwhile, new players such as Sovereign Wealth Funds are reshaping financial markets, through their weights and influence in global markets. The book looks to enhance understanding of the real markets of international finance and proposes ways to bring the old and new players together in this sand-shifting world of international finance. Felix I. Lessambo is Adjunct Associate Professor at Fordham University, USA, where he teaches Corporate Tax and Audit & Assurance Services. He was an Associate Professor at Central Connecticut State University School of Business where he taught Financial Statements Analysis and Global Reporting. He has practiced international tax, transfer pricing, and in alternative investment management groups where he structured and advised on hedge funds and private equity cross-border transactions. He is the author of several books in finance including The International Banking System, The International Corporate Governance System, International Institutions and Their Challenges, International Aspects of US Taxation System, Audit-Assurance Services & Forensics, Financial Statements: Analysis & Reporting, the US Banking System, and Mergers in the Global Markets Acknowledgments 5 Contents 6 Acronyms 12 List of Figures 14 List of Tables 15 List of Cited Cases 16 1 International Finance 17 1.1 General 17 1.2 Features of International Managerial Finance 18 1.2.1 Foreign Exchange Risk 18 1.2.2 Political Risk 18 1.2.3 Market Imperfection 19 1.2.4 Enhance Opportunities 21 1.3 International Financial transactions 21 2 International Institutions of International Finance 22 2.1 General 22 2.2 The Bretton Woods Architecture 23 2.2.1 The Broader Compromise: From 1945 to 1971 24 2.2.2 The Floating-Rate Dollar Standard: 1973–1984 25 2.2.3 The Plaza-Louvre Accords: From 1985 to 1999 26 2.3 The Post-Bretton Woods Era: New Mandates 27 2.4 Reforming the Bretton Woods Institutions 28 2.5 The Relevancy of the Bretton Woods Institutions 29 2.6 The Two Additional Financial Institutions 30 2.6.1 The New Development Bank 30 2.6.2 The Asian Infrastructure Investment Bank (AIIB) 34 2.7 The Dual Framework of International Finance 40 3 The Balance of Payments 43 3.1 General 43 3.2 BoP Key Concepts 44 3.2.1 Double-Entry Recording 44 3.2.2 Net and Gross Recording 45 3.2.3 Time of Recording 45 3.2.4 Valuation 46 3.3 Balance of Payment Accounts 47 3.3.1 The Current Account 47 3.3.2 The Capital Account 51 3.3.3 Financial Account 54 3.4 Statistical Discrepancy 56 3.5 Official Reserves 56 3.6 Significance of the Balance of Payments 57 4 International Corporate Governance 58 4.1 General 58 4.2 The Aim of Corporate Governance 59 4.3 The Agency Approach 61 4.3.1 The Board Fiduciary Duties 61 4.3.2 The Safeguards: The Business Judgment Rules 63 4.3.3 Limited Shareholders’ Rights 64 4.4 The Flaws and Inadequacies of the Agency Approach 65 4.4.1 The Sarbanes–Oxley Act 66 4.4.2 Re-Examination of the Compensation Structure 69 5 Foreign Exchange and Money Markets Transactions 73 5.1 General 73 5.2 Foreign Exchange Market Participants 74 5.2.1 Commercial and Investment Banks 74 5.2.2 Multinationals or Big Corporations 75 5.2.3 Brokers 75 5.2.4 Noncommercial Banks 75 5.2.5 Central Banks 75 5.3 Management of Foreign Exchange Risk 76 5.3.1 Hedging 76 5.3.2 Foreign Exchange Gap Analysis 76 5.3.3 Foreign Exchange Rate Duration Analysis 77 5.3.4 Foreign Exchange Rate Simulation Analysis 77 5.3.5 Foreign Exchange Rate Volatility Analysis 77 5.4 Taxation of FOREX 78 5.5 The International Money Markets: Role, Functions, and Features 82 5.5.1 Roles and Functions 82 5.5.2 The IMM Features 82 5.6 Money Market Interest Rates 83 5.7 Market Participants 83 5.7.1 Commercial Banks 84 5.7.2 Governments 84 5.7.3 Corporations 84 5.7.4 Government-Sponsored Enterprises 85 5.7.5 Money Market Mutual Funds and Other Short-Term Investment Pools 85 5.7.6 Dealers and Brokers 85 5.7.7 Central Banks 86 5.8 Types of Instruments Traded in the Money Market 86 5.8.1 Treasury Bills 87 5.8.2 Certificate of Deposit 87 5.8.3 Commercial Paper 87 5.8.4 Banker’s Acceptance 87 5.8.5 Repurchase Agreements 88 5.8.6 Discount Window 88 5.8.7 Bankers Acceptances 88 5.8.8 Backup Line of Credit 89 5.8.9 Municipal Notes 89 5.9 Interest Rates in FX and IMM 89 5.9.1 Interest Rates Determination 89 5.9.2 Low-Interest Rates and Risk Concerns 89 6 International Equity Markets 91 6.1 General 91 6.2 Equity and Diversification 91 6.3 Top 10 Stock Markets Around the Globe 92 6.3.1 Equity Markets in the United States 92 6.3.2 The New York Security Exchange 93 6.3.3 The Nasdaq 94 6.3.4 The Better Alternative Trading System 94 6.3.5 The Chicago Board Options Exchange 95 6.4 Equity Markets in the EU 95 6.5 Equity Markets in Asia 100 6.6 Equity Markets in Emergingi Economies 102 7 International Bond Markets 103 7.1 General 103 7.2 Types of Bond Markets 104 7.2.1 Domestic Bonds 104 7.2.2 Foreign Bonds 105 7.2.3 Eurobonds 105 7.3 International Bond Market Participants 106 7.4 International Bond Market Volatility 107 7.5 Bond Interest Rates 107 8 International Derivative Markets 109 8.1 General 109 8.2 Forward Contracts 112 8.3 Futures Contracts 113 8.4 Options 114 8.5 Swaps 119 8.5.1 Interest Rate Swaps 120 8.5.2 Currency Swaps 121 8.5.3 Credit Swaps 121 8.5.4 Commodity Swaps 123 8.5.5 Equity Swaps 123 8.6 Credit Derivatives 126 8.6.1 Credit Index 126 8.6.2 Credit Index Tranche 127 9 Exchange Traded Funds (ETF) 128 9.1 General 128 9.2 Differences Between ETFs and Mutual Funds 129 9.3 Purchase and Redemption of ETFs 129 9.4 Regulatory Requirements 129 9.5 ETFs in the Global Markets 129 9.6 Types of ETFs 130 9.6.1 Index-Based ETFs 130 9.6.2 Actively Managed ETFs 130 9.6.3 Leveraged and Inverse ETFs 134 10 International Securitization Markets 136 10.1 General 136 10.2 Benefits or Securitization 137 10.3 Securitization Process 139 10.3.1 The Borrower 140 10.3.2 The Originator/Servicer 140 10.3.3 The SPV 141 10.3.4 The Investors 141 10.4 Securitization Tranches 143 10.5 Securitized Assets 144 10.6 Types of Securitization 147 10.7 Conclusion 149 11 Sovereign Wealth Funds 150 11.1 General 150 11.2 Types of SWFs 151 11.2.1 Stabilizations Funds 152 11.2.2 Saving Funds 153 11.2.3 Reserve Investment Corporation 153 11.2.4 Strategic Development Funds 154 11.2.5 Contingent Pension Reserve Funds 154 11.3 The Dominant Petrodollar-Oil SWFs 154 11.3.1 Oil Funds of the Persian Golf 154 11.3.2 Kuwait 155 11.3.3 The United Arab Emirates 156 11.3.4 Iran 157 11.3.5 Qatar 158 11.3.6 Saudi Arabia 159 11.3.7 Norway Oil Fund 160 11.3.8 The Stabilization Fund of the Russian Federation 161 11.4 Conclusions and Policy Implications 163 Glossary of Terms 167 A 167 B 167 C 168 D 168 E 168 F 169 G 169 H 170 L 170 M 170 O 170 P 171 S 171 U 172 V 172 W 173 Bibliography 167 Index 176