Professor Ian Giddy's Foundations of Finance

International Financial Markets

International finance is concerned with the global dimensions of financial markets, institutions, instruments and techniques, and with the public policy issues arising from the markets and techniques:
Two maxims:

1.Never try to forecast exchange rates. Instead, try to understand what influences currency values. (One fundamental reason for fluctuating currencies is that different governments pursue different domestic monetary policies. Some place a high priority on price stability whereas others find themselves politically unable to resist inflationary pressures.)

2.Remember that most aspects of global finance follow exactly the same principles as domestic finance. The rule is, assume it's the same and then focus on the question, What, if anything, is different about this so-called international market?

Key markets and terms include:

Interest-rate parity

(I$ - IŁ)/(1 + ) = [(F- S)/S] (365/n)100

= Forward premium or discount

If IŁ is small, then, to a close approximation, (I$ - IŁ) = [(F - S)/S] (365/n) 100

That is, interest-rate differential = forward premium or discount

See also


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