FINANCIAL

MARKETS

Joanna Błach
International financial
management (3) 2022
 Content

 Classification of financial markets

 International and euromarkets
Classification of
financial markets
 FINANCIAL MARKETS AS A
PART OF FINANCIAL SYSTEM

FINANCIAL SYSTEM

FINANCIAL FINANCIAL FINANCIAL FINANCIAL

MARKETS INSTITUTIONS INSTRUMENTS REGULATIONS
 FINANCIAL MARKET

 Factor market where financial

instruments (securities) are traded

 Issuers of the financial instruments

create the supply side of the market

 Investors buying financial instruments

create the demand side of the market
 FUNCTION

 To transfer funds from the surplus units to

the deficit units

 To provide investment opportunities to the

surplus units
 QUALITIES OF
FINANCIAL MARKETS
 Reliability  Innovativness

 Transparency  Efficiency:
1) of transaction
 Liquidity 2) of allocation
3) of information
 Integrity
 Efficient market
Efficiency Description Efficient market
Type hypothesis (EMH)
Allocative Capital is channelled efficiency Sensitivity of prices
to its highest and best
Weak Public information
use
Actual results
Economic resource
allocation is optimised
Semi-strong Weak sensitivity +
Operational Low transaction costs
(most of the publicly disclosed
(transactional) Ease of changing
markets) expectations
investments
Information Accurate and timely Strong Semi-stron sensitivity
pricing decisions + privately disclosed
Market intelligence expectations
utilised
Specutaltion or
uncertainty minimised
 Structure of Financial Markets

FINANCIAL MARKET
Money Capital Foreign Derivatives Credit-
market market exchange market deposit
market market

Interbank Shares Currency Forwards Bank loans

deposits Treasury, Futures Bank
Treasury municipal Swaps deposits
bills and Options Bank credits
Commercial commercial
papers bonds
Bills of Depositary
exchange receipts
 Types of Financial Markets

Criteria Financial markets

Financial claim Debt market
Equity market
Maturity Money market
Capital market
Type of transaction Primary market
Secondary market
Types of regulation Exchange
OTC market
Geographic area National market (Domestic market &
Foreign market)
Global market
 MONEY MARKET VS
CAPITAL MARKET
Capital market
Money market  long-term market
 short-term market  financial instruments
 maturities of financial with maturities of over
instruments do not one year
exceed one year  it is utilised to transfer
 their main aim is to cash surpluses or
provide liquidity (adjust deficits to future years
cash flows on a short-
term basis)
 FINANCIAL
MARKET

CAPITAL
MONEY MARKET
MARKET

BANK
INTERBANK
INSTRUMENTS
MARKET
MARKET

SHORT-TERM
DEBT SECURITIES
INSTRUMENTS MARKET
MARKET
 SPOT & FORWARD MARKET

Forward market
Spot market
 Market dealing in
 Market where securities currencies and
are sold for cash and securities for future
delivered immediately (forward) delivery at
 The transaction is prices agreed-upon
effective on the date of today (date of making
making the contract the contract)
 Spot date - two  The transaction is
business days after effective on specified
the date the order is date in the future
placed
 PRIMARY MARKET VS
SECONDARY MARKET

Secondary market
Primary market
 market where the
 serves to raise funds via
outstanding
new issues of
securities are traded
securities
 investors can resell
 the first sale of a
securities that have
security is called
been previously issued
placement
 the issuer does not get
 the issuer obtains new
any additional funds
funds from the initial
buyers (investors)
 PUBLIC AND OTC MARKET

OTC markets
Stock Exchanges
 over-the-counter
 organized, public
market
markets where buyers
 dealers at different
and sellers of securities
meet to conduct trades locations stand ready to
buy and sell securities
 many regulations and
 easier access to the
requirements
market
 restricted market
 less regulated
 DEBT MARKET VS
EQUITY MARKET

Debt market Equity market

 market for securities
 comprises debt
representing ownership
instruments
 equities give dividends or
 covers both the money capital gains
and the capital market  part of the capital market
 debt instruments  equities are perpetual (no
carry interest redemption)
 debt instruments have
fixed maturities and
redemption is
obligatory
INTERNATIONAL FINANCIAL
MARKETS AND
EUROMARKETS
 International financial markets
Traditional international
financial markets: Euromarkets:
 Foreign exchange market  Eurocurrency market
 Money market  Eurobond market
 Capital market:  Euroequity market
 Bond market  Eurocredit market
 Equity market
 Derivatives market
 International money market

The market in which funds are borrowed and lend for less than one
year

Provides liquidity for the world financial system

Facilitates borrowing, lending, exchange of money between countries

to enable those with surplus short-term funds to lend and those with
the need for short-term financing to borrow money
 Instruments of international money market
 Instruments are often
benchmarked to the
 Bank deposits London Interbank
Offered Rate (LIBOR) –
 T-bills
the interest rate at which
 Bills of exchange large international banks
 Repurchase contracts are willing to lend each
other substantial
 Certificates of deposit unsecured funds on a
 Commercial papers short-term basis in the
London wholesale money
 Fixed-time deposits
market
International capital market

It is a market where securities with the maturity

longer than one year are traded among
investors coming from various countries

Foreign equities – issued by foreign companies

in the domestic equity market, in the domestic
market currency

Foreign bonds – issued in a domestic market by

a foreign entity, in the domestic market currency
 International derivatives market
Market in which different kind of dervatives are traded

Derivatives are based on different underlying assets: securities,

commodities, currencies, interest rates, stock market index, other
derivaties, credit, etc.

Main types: forward and futures contracts, options, swaps, warrants

Types of markets: exchange traded derivatives and OTC markets

 Euromarkets

Euromarkets – different types of offshore, OTC, supranational financial

markets operated by international banks and other financial institutions

Eurobanks – international banks, which aim is a direct or indirect

participation in the Euromarkets

Types: eurocurrency market, eurosecurities market, eurocredit market

Enable borrowers and lenders to avoid variety of monetary authority

regulations, controls and taxes
The origin of the Euromarket
• It took off in the 1950s as a reaction to the cold war
between the US and the Soviet Union

• Soviet Union was anxious about holding dollars in the US

banks

• At the same time, US banks were operating under

restrictions

• Soviet Union withdrew the US dollars and placed them in

the European banks, mainly in London

• London was the first Euromarket centre and still is the

largest and the most important
Determinants of the Euromarket development

Rising demand for dollars in 1950s and 1960s

Rapid development of the world trade

Oils crises in the 1970s (petrodollars)

Internationalisation

Financial liberalisation

Limitation in dollar loans in the USA and loans in pounds in the UK

Attractive interest rates and conditions of providing credit on Euromarket

 Eurocurrency market
 Eurocurrency – currency deposit held by nationals outside
their home market
 This applies to any currency and to banks in any country
e.g. dollar deposited outside of the US is an Eurodollar
 Eurocurrency market – a market on which Eurobanks accept
short-term deposits and make short-term loans in the
Eurocurrency
 Large, efficient, well-organised
 Operate at the interbank and wholesale level
 The reference rate is LIBOR
 Instruments: eurocertificate of deposit, eurocommercial
papers, euronote
 Eurocurrency market

 https://www.youtube.com/watch?v=R3rDS
Y2VmSI
 Eurocredit market
 Eurocredits – medium to long-term loans in eurocurrency
 Loans are denominated in currencies other than the home
currency of the Eurobank
 They are in large amounts, for long periods
 Main type – syndicated loan (banks form syndicate to offer
such loan)

 Eurocredits market – market for loans in currencies which are not

native to the bank office locations
 Main borrowers: large international corporations, governments
 Types of banks in the loan syndicate: lead banks, managing
banks, participating banks
 They may use also: euronotes and eurocommercial papers
Thank you!