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International Financial Markets

International Financial Markets


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Published by: suslms3904 on Jan 11, 2009
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International Financial Markets International Financial Markets serve as links between the financial markets of each individual country

and as independent markets outside the jurisdiction of any one country. The market for currencies is the heart of this international financial market. International trade and investment are often denominated in a foreign currency, so the purchase of the currency precedes the purchase of goods, services, or assets. This part of assignment provides some kind of detailed guide to the structure and functions of the foreign currency markets, international money markets, international capital markets and international securities markets.

The Foreign Currency Markets The market for foreign currencies is a world wide market that is informal in structure. This means that it has no central place, pit, or floor of the New York exchange, where the trading takes place. The “market” is the actually the thousands of telecommunications like among financial Institutions around the globe, and it is open 24 hours a day. Some one, some where, is nearly always open for business. Market size & Composition Until recently there was little data on the actual volume of trading on world foreign currency markets. Starting in the spring of 1986, however, the Federal Reserve Bank of New York, along with other industrial countries’ central banks through the auspices of the bank for International Settlements (BIS), started surveying the activity of currency trading every three years. Growth of foreign currency trading has been nothing less than astronomical. The survey results for the month of April 1998 indicate that daily foreign currency trading on worlds markets exceeded $1,500,000,000,000 (a trillion with a t). In comparison, the annual (not daily) U.S. government budget deficit has never exceeded $300 billion, and the U.S merchandize trade deficit has never topped $200 billion. The majority of the world’s trading in foreign currencies is still taking place in the cities where international financial activity is centered: London, New York, and Tokyo. A recent survey by the U.S Federal Reserve of currency trading by financial institutions and independent brokers in New York reveals additional information of interest. Approximately 66% of currency trading occurs in the morning hours (Eastern Standard Time), with 29% between noon & 4 p.m., and the remaining percent between 4 p.m., and 8 a.m. the next day. The reasons typically given for the enormous growth in foreign currency trading are: 1. Deregulation of International Capital Flows: it is easier than ever to move currencies and capital around the world without major governmental restrictions.

Most of the deregulation that has characterized government policy over the past 10 to 15 years un the United States, Japan and the now European Union has focused on financial deregulation. 2. Gains in Technology and Transaction Cost Efficiency: it is faster, easier, and cheaper to move millions of dollars, yen or marks around the world than ever before. Technological advancements not only in the dissemination of information, but also in the conduct of exchange or trading, have added greatly to the ability of individuals working on these markets to conduct instanteous arbitrage (some would say speculation).
3. The World is a Risky place: Many argue that the financial markets have become

increasingly volatile over recent years, with larger & faster swings in financial variables such as stock values and interest rates adding to the motivations for moving more capital as faster rates. International Money Markets A money market traditionally is defined as a market for deposits, accounts, or securities that have maturities of one year or less. The international money markets, often termed the Euro currency markets, constitute an enormous financial market that is in many ways out side the jurisdiction and supervision of world financial and governmental authorities. Euro Currency Markets And Euro currency market is any money market for depositing and borrowing money located outside the country where that money is legal tender. Eurocurrencies are bank deposits and loans residing outside any single country,
• •

Floating rate pricing: Usually with maturities less than five years Few regulatory restrictions: Because they are outside the jurisdiction of any single government Competitive pricing: More than $2.5 trillion outstanding

For example, U.S. Dollars that are held on account in a bank in London are termed Eurodollars. Similarly, Japanese Yen held on account in a Parisian financial institution would be classifies as Euroyen. The euro prefix does not mean these currencies or accounts are only European, as German marks on account in Singapore would also be classified as a Euro currency, a Euro account. The Eurocurrency market uses floating rate pricing, and

Low interest rate risk: Interest rates tied to a variable rate base such as the London Interbank Offer Rate (LIBOR)

Low default risk: Traded between large commercial banks, investment banks, and multinational corporations Relatively short maturities: Typically less than 5 years

The Eurocurrency market has few regulations. Typically, there are • • • • • • No reserve requirements No interest rate regulations or caps No withholding taxes No deposit insurance requirements No credit allocation regulations Less stringent disclosure requirements

International Capital Markets Just as with the money markets, the international capital markets serve as links among the capital markets of individual countries, as well as constituting a separate market of their own, the capital market that flows in to the euro markets. Firms can now raise capital, debit or equity, fixed or floating interest rates, in any of a dozen currencies, for maturities ranging from one month to thirty years, in the international capital markets. Although international capital markets traditionally have been dominated by debt instruments, international equity markets have shown considerable growth in recent years. International Security Markets Although banks are continuing to provide a large portion of the international financial needs of government and business, it is the international debt securities markets that have experienced the greatest growth in the past decade. The International Security Markets include bonds, equities, and private placements.

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