Universidad de las Américas Puebla 

 
 
Finanzas Internacionales 
 

 
Activity 2.1 
An introduction to the International Financial
Markets

 
 Ruiz Yanez Ziania Cristhel – ID 154650 – Master in International Management 
 Financial Markets

The financial market is a marketplace that allows investors and those in need of
capital the means for trading financial instruments, making it possible to transfer
risk, boost commerce and gain profit. This system provides a space for the sale
and purchase of different assets, such as types of bonds, shares in a company,
foreign exchange, raw materials, and derivatives.

These markets include any system that provides buyers and sellers the means to
trade assets. Basically, financial markets allow the interaction between traders who
need capital and traders that are looking to invest. In simple words, buyers and
sellers can use the financial market to raise money in order to expand their
business.

In this essay, we are going to cover the five different markets that constitute the
financial system, and the relationship that exists between them and Basel III.

1. Debt Market

The first financial market that we will cover in this essay is the Debt Market which
constitutes the buying and selling of debt financial instruments. Debt instruments
help the agents acquire a fund when needed. These agents are wide-ranged, from
companies to banks, in other words, this market has two main divisions,
government payment, and private payment.

For example, companies often use debt instruments to pay for projects or
expansion. On the other hand, banks and financial institutions often rely on
deposits and lending business; debt instruments allow banks to accept deposits
from the public with an interest rate, and to lend money while earning a bigger rate
hence earning a big profit.

Regarding the central government, these agents raise money to execute welfare
programs, when the government income is not enough. Once the project is
completed, it can repay the investor's debt.
Instruments

The debt instruments can also be called payment promises and are issued by
national subnational governments and private economic agents (Cruz, 2022), such
as:

 Zero Coupon Bond: This type of bond does not pay interest, as a zero
coupon bond receives the face value of the bond once it has reached
maturity.
 Fixed Coupon Bonds: This bond guarantees an interest rate and has a fixed
term of maturity in which the money can be retrieved with interests,
however, it can not be withdrawn before the maturity date. With a longer
term, they have a higher interest rate.
 Floating Coupon bond: This type of bond will grant a variable interest that
fluctuates with the market interest rate.
 Redeemable Bonds: Also called callable, this bond can be redeemed before
its maturity date; when the bond is paid off, the investors are paid the face
value and the interest to date.
 Convertible Bonds: Convertible bonds are often sold by companies;
eventually the bond can be changed into the form of shares so the lender
can buy a part of the company.
 Eurobonds: Lastly, a Eurobond is a debt instrument in a foreign currency,
sold at a cheaper price which makes it attractive to investors (CFI Team,
2022).

2. Stocks Market

In general terms, companies issue a list of shares of their stock through a public
offering, after which investors buy shares so the company can grow.
Basically, the Stock Market allows economic agents to buy or sell shares in public
companies that grant different types of opportunities, depending on the instrument,
according to what the company wants or needs.

Instruments

There are many instruments in this type of market, such as the following:

 Common stocks: This type of stock gives the right of voting on the board of
directors.
 Preferred stocks: When a company grows and equity is needed, the
company issues extra shares with preferred stocks in order to sell more
shares but not lose power over the company. Dividends are paid before the
stock is taken, and the buyer cannot take decisions regarding the company.
 American Depositary Receipts: With a certain amount of stocks, the owner
can trade them in order to emit a document that can be traded once again
with the company to secure a position.
 Master Limited Partnerships: A business venture that is organized with
limited partnership. Managing partners take the decisions, and general
partners give money but do not vote,
 Special Purpose Acquisition Company: A company that exists in the paper
but has no assets.
 Exchange Trade Fund: Offers a diverse basket of securities easy to trade.
 Real Estate Investment Trusts: A company that operates and earns
dividends from real estate investments without buying properties themselves
(Chen, 2022).
 Mutual and Hedge Fund: This stock is traded as a single asset.

3. Commodities Market

A commodity market is a market where an investor can trade diversified materials.

In general, raw products are sold or bought in this particular market so they can be
used to produce finished goods. A benefit of this market is that these products
must be delivered immediately, so the market has a lot of liquidity. Another
characteristic of these products is that they are unique from other goods, which
means that the quality between producers does not vary.

Instruments

These markets’ products can be perishable or non-perishable but are divided into
two categories: hard and soft commodities.

Hard commodities refer to materials that have to be extracted, such as precious

metals or crude oil. On the other hand, soft commodities refer to livestock or
agricultural products.

As mentioned before, agricultural products are a big part of the commodities

market. Specifically, this includes grain and livestock, but also materials such as
lumber, oilseeds, and even fertilizer.

Metals and energy count as hard commodities and consist of any raw material that
must be extracted. This includes metals and natural gas, coal, and crude oil.

4. Forex Market

The Forex Market, also known as Foreign Exchange Market, is a currency

marketplace that establishes the currencies' rates all over the world. It is
constituted of banks, commercial companies, investors, and forex dealers, and
allows the buying and selling of currencies traded in pairs so as the value of one is
relative to another. According to FXTM, the forex market is by far the largest and
most liquid financial market in the world, with an estimated average global daily
turnover of more than US$6.5 trillion (2022). This market also enables the
conversion of currencies in international trade settlements and is a highly volatile
market.
Instruments

In the forex market, currencies can be sold or bought in different transactions, such
as:

 Spot: This means that the currency will be delivered in forty-eight hours.
 Swap: Exchange of currencies between two economic agents at a certain
time. The reverse transaction is delivered later.
 Forward: Buyer and seller agree on the exchange rate.
 Futures: The exchange happens on a specific date in the future and
contains a standard amount of the currency.
 Options: The owner can right but is not obligated to do exchange money
denominated in one currency to another at a specific date with a pre-agreed
exchange rate (Cruz, 2022).
 Non-deliverable forward: This type of contract is forwarded but does not
include a real delivery.

5. Derivatives Market

The last market in the financial global system is the Derivatives Market. This
constitutes of a marketplace in which contracts and options depend on underlying
assets or a group of assets in order to transfer risk.

Instruments

 Options: European options refer to options exercised by the expiration date

of the asset. Exotic options are complex derivatives in relation to the
determination payoff of the asset.
  Future: You have the right but are not committed to selling an underlying
asset in the future.
 Swaps: Exchange rate swaps or interest rate swaps.
 Credit Default Obligations: Similar to insurances that can apply to future
payments. A fee is established in case the payment is not completed.
 Creditif Default Swaps: Same restrictions but for swaps.
 Other exotic derivatives.

Relations between markets

Financial markets are connected in positive and negative ways between one
another. These interactions are the foundation of market dynamics.

Positive correlation happens when a financial market is parallel to and with another
market or financial instrument (CenterPoint Securities, 2022). This is both markets
moving towards the same direction. For example, an increase in the price of gas
would increase the prices of bus tickets as the bus would need more money to
operate. In this case, even though we are contemplating a positive correlation
there is no actual benefit for customers as the ticket price goes up; therefore, a
positive correlation does not necessarily make a positive effect, but it works as a
butterfly effect as the markets are approaching in one direction, influenced by the
same external factors.

On the other hand, a negative correlation happens when two markets change in
different directions. For example, stocks and bonds are connected because when a
stock price rises, the bond market goes down.

Another example is the fluctuation of prices in the commodities market. The

commodities market product's prices are determined by the supply and demand,
hence, there is a negative correlation with the stock market if the market drops,
commodity prices may change.
Basel III

Basel III is a set of reforms integrated into the Basel Framework that integrates all
the current standards and measures developed by the Basel Committee after the
financial crisis of 2008. The purpose of these standards is to regulate the risk
management of banks (BIS, 2022). In other words, Basel III aims to reinforce
capital regulation in order to assure safety in the financial system.

The International Financial System sets the rules for each country and the Bank of
International Settlements, under the Basel Committee, created non-mandatory
policies for Central Banks and tax regulators in each country, so they can reinforce
these policies into their law.

Local regulations apply the policies that eventually change the stock exchanges
and the people using stock partners.

One of the most important reforms of Basel III is the Market Discipline reform. This
reform aims to introduce transparency in markets so stakeholders can identify
potential risks related to assets. Therefore, markets should provide financial
statements and annual reports with a specific list of requirements such as capital
adequacy, market risk, and liquidity ratio (among others), so to reinforce market
discipline.

Conclusion

Financial Markets are an essential part of the economy as they, all together with
financial institutions, provide opportunities for investors to focus on specific
markets or services, and to diversify any risk they may face as well. When a
financial market has a lot of trading activity, this will provide more liquidity and
enhance trading opportunities.

In conclusion, we can say that financial markets are essential since it allows
participants to direct the flow of investment in ways that promote the production of
goods and services hence allowing commerce to happen.
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