Global financial market

The following definitions are important with regard to Global financial

markets:

 Federal Reserve Bank: Responsible for regulating the growth of the economy,
which is accomplished by the increase or decrease of money supply
 Inflation: Decreases a consumer’s purchasing power by making goods and
services more expensive, which leads to wage price spirals because too much
money is circulating Consumers attempt to offset inflation by exchanging the
lower-value currency for something that is perceived to hold a value better such
as property, gold, or foreign currencies

The economies of the world have become highly interdependent because of

improvements in communication and transportation technologies and the lowering of
barriers to trade Businesses react to increase spending by ordering more raw
materials to increase the production of goods. This stimulation of business activity
increases the demand for labor and raises the demand for capital goods.

Global financial market is a broad term describing any marketplace where buyers and
sellers participate in the trade of assets such as equities, bonds, currencies and
derivative s. Financial markets are typically defined by having transparent pricing,
basic regulations on trading, costs and fees and market forces determining the prices
of securities that trade. In the global financial markets, the price of goods and services
exchanged is based on supply and demand in the global markets.

Importance of global financial markets:

 Mobilization of Savings and their Channelization into more Productive

Uses: Financial market gives impetus to the savings of the people. This market
takes the uselessly lying finance in the form of cash to places where it is really
needed.
 Facilitates Price Discovery: The price of any goods or services is determined
by the forces of demand and supply. Like goods and services, the investors also
try to discover the price of their securities. The financial market is helpful to
the investors in giving them proper price.
 Provides Liquidity to Financial Assets: It means that the investors can invest
their money, whenever they desire, in securities through the medium of
financial market. They can also convert their investment into money whenever
they so desire.
 Reduces the Cost of Transactions: The financial market makes available
every type of information without spending any money. In this way, the
financial market reduces the cost of transactions.
 Free flow of international capital
 Rapid spreading of technology advancement in mode of payments
  Has led to increased methods of measuring market risk exposures.
 Facilitates smooth consumption by borrowing or diversifying abroad .Broad
ownership also increases issuer’s products.
 Importance to borrowers .i.e. Expand the supply of money & reduce the cost of
money
 Importance to lenders , that is , has expanded lending opportunities thus
reducing risk because of diversification

INTEGRATION AND GLOBALIZATION OF FINANCIAL SERVICES:

 Changing customer needs, more knowledgeable and demanding customers, new
technology, liberalization, deregulation, and a combination of other forces are
blurring the lines between financial products, institutions, sectors, and
countries. Regulators are responding to market pressures by allowing more
inter-sectoral competition.
 Banks, securities firms, insurance companies, and other financial
intermediaries increasingly compete with each other by offering similar
products and services and by entry into fields previously reserved for one sector
only.
 Financial services integration occurs when financial products and services
traditionally associated with one class of financial intermediaries and
distributed by another class of financial intermediaries.
 Financial services convergence is the tendency of financial products and
services traditionally one sector to take on characteristics traditionally observed
with financial products and services of another financial services sector.
 Convergence occurs through customer demand across traditional sector lines.
Examples include the introduction by insurance companies of variable (unit
linked) life and annuity products that contain both insurance and securities
features. Another burgeoning area is the banking industry’s creation of
securitized mortgage and corporate debt portfolios, which involves packaging a
group of mortgages or other loans into marketable securities that are sold to
investors.
 As banks, securities firms, and insurers construct products and offer services
that resemble the features of their competitors, product convergence will be an
important driving force toward financial services integration.
 This integration gave birth to financial services conglomerates. A Financial
service conglomerate is a firm or group of firms under common control which
offers financial services that extend beyond the traditional boundaries of any
one sector. The two most commonly discussed arrangements are bank
assurance and universal banks.
 Bank assurance describes arrangements between banks and insurers for the
sale of insurance through banks, wherein insurers are primarily responsible for
production and banks are primarily responsible for distribution.
THE FOREIGN EXCHANGE MARKET:
The foreign exchange market is the market in which currencies of various countries
are bought and sold against each other. The foreign exchange market is an over-the-
counter market.

Terms used in the foreign exchange market

 Hedging: measures taken by a company or corporation to protect itself from the
loss that may occur because of fluctuations in the exchange rate of currency.
 Arbitrage: Buying a commodity when its price is low and then reselling it after
prices rise in order to make a profit
 Currency arbitrage: Buying a currency in one market at a low price and
reselling moments later in another market at a higher price
 Speculation: traders who speculate are taking risks (staying open) because
they buy and sell currencies based on the predicted rise and fall in price of a
given currency.
 Reuters: largest informational platform that international traders use to
communicate FX exchange rates.
 Spot Rates: indicate the exchange rate of one currency in units of another
currency immediately and “on the spot
 Forward Exchange Rate: Represents the rate at which a currency can be
purchased in the future
 Law of One Price: Similar goods or commodities in different countries should
remain at the same price after conversion of currencies according to current
exchange rates
 Purchasing Power Parity: States that the difference in currency values
between countries is related, if the currency of one country has more
purchasing power than the currency of another country, the level of imports
and exports is expected to change. It has an impact on exchange rates and
indicates the current level of inflation of one currency against another. It
compare the price of a “standard” good that is identical across countries
 Devaluation: A deliberate downward adjustment in the official exchange rate
reduces the currency’s value. It Can help a country reduce its current trade
deficit
 Revaluation: An upward change in the currency’s value. It Makes the currency
of a country more expensive compared to other currencies
 Direct inverse effect on exports and imports respectively
 Stable Exchange Rates: a currency with Sign of less volatility, thus the risk of
conducting business with a stable foreign currency is reduced. It serves as a
straightening factor for a country’s economy by encouraging domestic
production while keeping imports and exports under control. It also attracts
investors and allow foreign capital to flow in a country
 Unstable Exchange Rates: indicates signs of a struggling economy or an
economy in crisis.
Functions Foreign Exchange market
 Hedging of currency for protection from unexpected fluctuations in exchange
rates
 Exchanging of currency and international investments
 Stabilization of weak currencies by purchasing more stable or “strong”
currencies
 Permit speculators to acquire profit by speculating the movements of exchange
rates between different currencies
 A nation with a large and stable economy is able to trade freely and possess
hard or reserve currency in addition to non-restricted currency. Smaller
nations that have limitations and restrictions on their currencies are
considered to possess weak currencies

Foreign Exchange Exposures

 Foreign exchange exposures arise from many different activities. A traveler
going to visit another country has the risk that if that country’s currency
appreciates against their own the trip will be more expensive.
 An importer who buys goods priced in foreign currency has the risk that the
foreign currency will appreciate thereby making the local currency cost greater
than expected.
 An exporter who sells his product in foreign currency has the risk that if the
value of that foreign currency falls then the revenues in the exporter’s home
currency will be lower.
 Fund Managers and companies who own foreign assets are exposed to fall in
the currencies of the countries where they own the assets. This is because if
they were to sell those assets there and repatriate the money, the exchange rate
would have a negative effect on the home currency value.

Markets that allow exchange of currencies and flow of capital across countries
facilitate international business. These markets are known as international
financial markets, which may take any of the following form:

 Eurocurrency Markets :
Eurocurrency market consists of banks that accept deposits and make loans in foreign
currencies outside the country of issue
 Euro Credit Market:
Euro credit or Euro Loans are the loans extended for one year or longer. The market
that deals in such loans is called Euro Credit Market.
 Euro Bond Market:
This market caters to the long term financial needs of the international players.

 International Commodity Market:

It is a market where major primary commodities are traded including price forecasts,
regional price indices, transportation costs etc.
International Banking
International banking has grown with the unprecedented expansion of economic
activity since the world war. International banks perform many vital tasks to help the
international transactions of multinational companies. They finance foreign trade and
foreign investment, underwrite international bonds, borrow and lend in the Eurodollar
market, organize syndicated loans, participate in international cash management,
solicit local currency deposits and loans and give information and advice to clients.

International Monetary Fund (IMF) :The International Monetary Fund (IMF) is

an organization of 190 countries, working to foster global monetary cooperation,
secure financial stability, facilitate international trade, promote high employment and
sustainable economic growth, and reduce poverty around the world. Its main roles
are:
 Role is to supervise the exchange rate practices of member countries and to
encourage the free convertibility of any national money into the monies of other
countries
 Created to maintain order in the global monetary system
 Assists nations in their development through capital loans to underdeveloped
nations
 Purpose was to achieve higher standards of living among its citizens resulting
in an increased market for more go.

The World Bank.

Resulted from the Bretton Woods Agreement (An agreement that established a system
through which a fixed currency exchange rate could be created using gold as the
universal standard). World Bank was established to:
 Established to help finance economic development in poor countries
 Also provides loans at more favorable terms than commercial lenders