International Financial Markets.docx

International Financial Market The International Financial Market is the place where financial wealth is traded between individuals (and between countries). It can be seen as a wide set of rules and institutions where assets are traded between agents in surplus and agents in deficit and where institutions lay down the rules. International financial markets consist of mainly international banking services and international money market. The banking services include the services such as trade financing, foreign exchange, foreign investment, hedging instruments such as forwards and options, etc. All these banking services are provided by international banks. International markets are accessed by multinational corporations more than anybody else. Traders or businesses having import and export transaction also have frequent access to these markets. Major types and instruments traded in International Financial Markets are as follows: 1. 2. 3. 4. 5.

Foreign Exchange Market International Money Market International Credit Market International Bond Market International Stock Market

1. Foreign Exchange Markets International businesses have frequent transactions in foreign currencies and therefore have payables or receivables in those currencies. To close such transactions the businesses need foreign exchange which is provided by international banks and institutions. These institutions have their bid and ask rates for such currency buying and deposits. They buy or accept currencies at a bid price which is less than their ask price at which they sell. These banks have the privilege to trade foreign exchange in international markets.

The foreign exchange market allows currencies to be exchanged in order to facilitate international trade or financial transactions. The system for establishing exchange rates has evolved over time. From 1876 to 1913, each currency was convertible into gold at a specified rate, as dictated by the gold standard. This was followed by a period of instability, as World War I began and the Great Depression followed. The 1944 Bretton Woods Agreement called for fixed currency exchange rates. By 1971, the U.S. dollar appeared to be overvalued. The Smithsonian Agreement devalued the U.S. dollar and widened the boundaries for exchange rate fluctuations from ±1% to ±2%. There is no specific building or location where traders exchange currencies. Trading also occurs around the clock. The market for immediate exchange is known as the spot market. The forward market enables an MNC to lock in the exchange rate at which it will buy or sell a certain quantity of currency on a specified future date. Hundreds of banks facilitate foreign exchange transactions, though the top 20 handle about 50% of the transactions. At any point in time, arbitrage ensures that exchange rates are similar across banks. Trading between banks occurs in the interbank market. Within this market, foreign exchange brokerage firms sometimes act as middlemen.

2. International Money Market International money market mainly deals in Eurocurrency deposits, Euro credits, Euro notes, Euro commercial Papers etc. All these involve foreign currencies. Eurocurrency deposits are deposits of foreign currency in a bank situated in a country which is different from the country of that foreign currency. An Indian depositing US dollars in Chinese bank situated in China is called Eurocurrency deposit.

Euro credits are a kind of loan extended to corporations in a currency other than the home currencies. These are normally short term to the medium term loan and are extended by a syndicate of banks because the quantum of loan is too big and the risk cannot be assumed just by one bank. Likewise, the other money market instruments include euro notes, euro commercial papers etc. In essence, the international financial market is even bigger a market available for multinational and other domestic companies. A growing business when reaches international heights also has a lot of services to be offered by international banks and financial institutions. These markets provide a business with a platform to take their businesses to a different height.

3. International Credit Market The international credit market are: commercial banks, corporations, financial intermediaries, nonbank financial institutions (insurance companies and pension funds), central banks and other public bodies, governments, regional international banks of development, international financial institutes. However, in most cases the crediting is carried out by the international banks.

International banks are classified according to the share of international transactions and incomes in the general volume of transactions and incomes on the followings groups: • National banks, having a small foreign branch, which provided an insignificant share of assets and Incomes; • Banks, the international transactions of which are accounted from 5 to 10 percent of their incomes; • Transnational banks, wherein the level of international concentration and centralization of capital Allows them to take part in the economic distributing of world market of debt obligations; • Offshore banks, incorporated in offshore zones and using the special tax and other privileges in the Carrying out of financial and credit transactions. None of transactions of TNBs are carried out Without them. The Bank for International Settlements includes such specific types of activities of banks in the sphere of international credit transactions.

4. International Bond Market There is no single international bond market as such. The international bond market is divided into three separate types of bond markets: Domestic Bonds, Foreign Bonds, and Eurobonds. Domestic Bonds the market for domestic bonds is a part of the international bond market. Domestic bonds are brought out on a local basis and domestic borrowers are responsible for issuing the local bonds. Domestic bonds are normally designated in the local currency.

Foreign Bonds the foreign bond market is that in which bonds are brought out by foreign borrowers. The foreign bonds are normally designated in the local currency. The local market authorities look after the issuing and selling of foreign bonds. Eurobonds Eurobonds differ from the others in that they are not sold in any particular national bond market. Eurobonds are issued by a group of multinational banks. If a Eurobond is designated in any currency, it would be sold outside the country which uses that currency. For example if a Eurobond is denominated in the United States dollar, it would not be sold in the United States.

5. International Stock Market This market allows companies to raise a larger amount of capital than a single market and investors to hold stocks in a number of different countries simultaneously. MNCs and domestic firms commonly obtain longterm funding by issuing stock locally. Yet, MNCs can also attract funds from foreign investors by issuing stock in 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. 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 an MNC’s operations 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. investor’s easy access to some U.S. stocks. MNCs need to have their stock listed on an exchange in any country where they issue shares. Investors in a foreign country are only willing to purchase stock if they can easily sell their holdings of the stock locally in the secondary market. The stock is denominated in the currency of the country where it is placed. For example, Coca-Cola stock issued to investors in Germany is denominated in euros. Investors in Germany can easily sell their shares of Coca-Cola stock locally in the German secondary market.

MONEY MARKET AND CAPITAL MARKET INSTRUMENTS In the international money market, short-term notes, bankers’ acceptances including, Euro commercial paper are traded. The assets created and traded have relatively short maturities. The outstanding amount at end2000 was $ 333.8 billion consisting of commercial paper ($ 223.3 billion) and other short term paper ($ 110.5 billion). International capital markets deal in assets with maturities above one year or those which lack definite maturities. These instruments consist of Euro medium term notes ($ 879.3 billion at end 2000), bonds ($ 6,049.7 billion at end-2000); and Euro loans ($ 7,878 billion at end-2000). The secondary markets are important for securities and negotiated debt instruments. The securities consist of certificates of deposits and bankers acceptances.