Lesson 5: International Financial Markets

Basics: International financial markets?Definition: International financial markets are places where financial products traded

Examples: capital markets, commoditymarkets, insurance markets, foreign exchange markets, etc..

Who does the trading? companies, individuals, governments

For what purpose?-Raise money for expansion or even just to provide every-day services-Make more money than just storing funds/profits in a bank account

Role of International Financial Markets

The international financial market is meant to:expand the supply of capital to borrowers lower interest rate to borrowerslower risks to lenders.

How?- The more financial products that are being bought/sold on these markets – the greater the choice to those who want to buy/sell and to those who want to raise money by buying/selling.-Those who need to borrow money (let’s say from a bank) – may have a lower interest rate if the bank has a larger pool of investments available to them to grow their funds-The larger the choice of investments, the lower the risk because they can spread out the investments into many different types of categories.

Role of International Financial MarketsGrowth in the international financial markets is due mainly to: Advances in information technology

Information and transactions can flow quickly across borders

E-trade and other systems allow anyone to trade online Deregulation of capital markets

Examples include lowering the mandatory reserves requirements (so more money can be invested at a given time by banks)

Allowing savings and loans to make loans up to 10 percent of their assets

Innovation in financial markets New types of financial products

International bond marketThe international bond market consists of all bonds sold by issuers outside their own countries. This market is growing.

Entities that issue bonds: governments (at all levels), supranational bodies (i.e. World Bank) and large corporations (i.e GE)

Why? -Raise money for roads, to make loans, to grow the business etc?

Why might this market be growing? More entities issuing bonds.Can you think of other reasons?

International equity marketsThe international equity market consists of all stocks bought and sold outside the home country of the issuing company.

For example, an Israeli start-up company lists their stock in the New York Stock Exchange so that American investors can buy/sell shares. Many companies are listed in multiple markets around the world.

Currency MarketsThe Eurocurrency market consists of all the world’s currencies banked outside their currencies of origin. The foreign exchange (also calledcurrency) market is the market in which currencies are bought and sold and in which currency prices are determined.

The main functions of the currency market are:allows currency conversions hedgingearn a profitspeculation.

Exchange rateThe exchange rate is defined as the price of one currency in terms of another currency.

For example $1 = .7893 Euros. Spot exchange rate is the exchange rate on the spot (current).

Pegged currencies are currencies that are tied the price of another countries currency. So the exchange rate is artificially controlled by the government.Floating exchange rate is an exchange rate that is allowed to change (not controlled by the government), based on the foreign exchange market.

Leadership in World Financial Markets (Truman and Cooper)Europe and the U.S. have shared responsibility to provide

leadership role in the financial markets. At least 80 percent of all financial instruments are in dollars

and Euros. For example: bonds, bank loans and deposits, and foreign exchange reserves

In simple terms, this means that countries hold reserves in another currency. For example, China holds a lot of U.S. dollars, or U.S. saving bonds.

China is now stuck with a huge amount of dollar holdings for foreseeable future; there is no low-cost way for China to disgorge them at its own initiative.

The dollar will continue to be the lead currency in international transaction. International use of the euro will grow, but it is not likely to displace the dollar.