International

Financial
Markets
Chandra Shekar BM, SJR College for Women, Bangalore

Financial Markets
A market which provides a mechanism for
transferring money from where it is required to
where it is required with a promise of return

Provides interaction between buyer and seller

thereby Price discovery
Liquidity
Reduce transaction and Information costs

International Financial Markets

Motives : IFM
The markets for real or financial assets are prevented
from complete integration by barriers such as

Tax differentials
Tariffs
Quotas
Labour immobility

Communication costs
Cultural differences and
Financial reporting
differentials

At times these barriers can also create unique

opportunities for special geographical markets that
will attract foreign investors

Motives : IFM
Investors Invest in Foreign Markets
To take advantage of favourable economic conditions
When they expect foreign currencies to appreciate
against their own: and
To reap the benefits of international diversification

Creditors provide credit in Foreign Markets

To capitalise on higher foreign interest rates
When they expect foreign currencies to appreciate
To reap benefits of international diversification

Motives : IFM
Borrowers borrow in foreign markets
To capitalise on lower foreign interest rates
When they expect foreign currencies to depreciate
against their own
Other advantages

Efficient allocation of economic resources

Higher levels of international trade
Higher income

Evolution: IFM
International trade is the driver
1876-1913 currencies convertible into gold at specified rate
dictated by Gold standards
2 world wars and great depression resulting in restrictions on
capital flows and fragmented markets
1944 Bretton woods agreement fixed exchange rates
1950-60 Higher restrictions on Capital mobility
Financial innovations Euro Currency Markets
Technological innovations
1971 undervaluation of US dollar

Evolution: IFM
1973-Floating rate system
Oil shocks in 1973-74 encouraged financial innovations Surplus in opec countries invested in deficit countries
1990s Pvt capital introduced in international markets
Countries were forced to L. P.. Open markets and
enhance macro economic stability
Mexican Peso crisis
2001 US crisis
2008 - Sub prime crisis
2010 Euro Zone crisis

Structure of International Financial Markets

1

Markets for Foreign Exchange

Lending by Financial institutions

Issue and Trading of negotiable instruments of debt

International equity markets

Internationally arranged swaps

Foreign Exchange Markets

Allows conversion of currencies among the countries to
facilitate international trade, investment and payment
requirements
No specific building or location
Largest in terms of Turnover and activity
Trading occurs round the clock

Banks also facilitate forex transactions

Highest volatility and Speculation
Dominated by electronic trading

Terminologies : Forex Markets

Foreign Exchange

Direct quote and Indirect

quote

Ask Price and Bid price

Spreads
Broker
Forward exchange rates
Cross currency quotes
Arbitrage
Spot Markets - Markets for
immediate exchange

Forward markets Enables

users to lock in prices for
future delivery
Hedging
Speculation

Major Participants : Forex Markets

Commercial banks
Central banks
Institutional investors
Currency speculators
Corporations
Governments
Retail traders

Retail and Wholesale trades

Forex Markets : Financial Centres

London, New York, Tokyo, Singapore, Hong kong,
Bahamas
Pre-requisites for a
Financial Centre
1. Political stability
2. Minimal government
intervention
3. Legal infrastructure
4. Financial infrastructure

Rank

Financial
Centre

% of
Total

UK

41

2
3
4

US
Singapore
Japan

19
5.7
5.6

Hong
Kong

4.1

Forex Markets : Top 10 Traders

Rank

Name

Market Share

Citi

16.04

2
3
4

Deutsche Bank
Barclays Investment Bank
UBS AG

15.67
10.91
10.88

5
6
7
8
9
10

HSBC
JP Morgan
Bank of America Merril Lynch
Royal Bank of Scotland
BNP Paribas
Goldman Sachs

7.12
5.55
4.38
3.25
3.10
2.53

Forex Markets : Top 10

Rank

Name

USD

2
3
4

Euro
Japanese Yen
Pound Sterling

5
6
7
8
9
10

Australian Dollar
Swiss franc
Canadian Dollar
Mexican Peso
Chinese Yuan
Newzealand Dollar

Currencies

Factors influencing Forex Markets

Rank

Name

1
2

International Parity conditions

Balance of Payments Model

Asset Market model

Economic Factors
1. Economic policy
2. Economic indicators
3. Govt. budget deficits
surpluses
4. BOP
5. Inflation levels
6. Economic growth and
trends
7. Productivity

Market psychology
1. Flights to quality
2. Long term trends
3. Buy the rumour and sell the
facts
4. Economic numbers
5. Technical Trading

Political conditions
1. Internal
2. Regional and
3. International

Euro Dollar Markets

US dollar deposits placed in banks in Europe and other
continents are called Eurodollars
In 1960s and 70s the Eurodollar market, or what is now
referred to as the Euro currency market, grew to accommodate
increasing international business and to bypass stricter US
regulations on banks in the US
Currently this market is made up of several large banks called
Euro banks that accept deposits and provide loans in various
currencies
Usually large volume transactions and at times on syndication
basis

Euro Dollar History

Post World War II - increasing quantity of US $ outside US due to
Marshall Plan and larger imports into US
Many foreign countries including Soviet Union had deposited in US
$ banks in US
During Cold War especially after invasion of Hungary in 1956,
Soviet Union feared its deposits in North American banks be frozen
as a retaliation
So transferred holdings to Mosco Narodny Bank (Soviet owned
bank with British Charter) British bank deposited that in US
banks.
First Euro dollar created in 28-Feb-1957 by transfer of $800,000.
Major role played by Midland bank now HSBC and its holdings
Marshall Plan / European Recovery program was an US initiative to rebuild war ravaged Europe,
remove trade barriers, modernize industry and re-lift European prospects. Cost of initiative in
1947 was $17 Billion equivalent to $160 Billion in 2014

Asian Dollar Markets

The Eurocurrency market in Asia
Primary function of banks to channel funds from depositors to
borrowers
Other functions is interbank lending and borrowing

Euro Credit Markets / Loans

Loans of one year or longer period extended by euro banks to
MNCs or government agencies in Euro markets
Floating rates are commonly used in these markets

Euro Bond Markets

Foreign Bonds / Parallel Bonds
Bonds denominated in the currency of the country where
they are placed but issued by foreign borrowers
Euro bonds
Bonds that are sold in countries other than the country
represented by the currency they are denominated

Euro Bond Markets

Emerged due restrictive investment policies of US
government in Mid of 20th century
Interest equalisation Tax imposed in US in 1963
Tax discouraged US investors from investing in
foreign securities so non-US borrowers looked
elsewhere for bonds
In 1984 US corporations were allowed to issue bearer
bonds directly to non-US investors and withholding tax
on bond purchases was abolished

Euro Bond Markets

Features

Typically have few protective

Usually issued in bearer form

Carry annual coupons

May be convertible
May have variable rates -

Structure

covenants
70% bonds denominated in USD
Underwriters deal primary &
secondary markets

Level

Entity

Multi-national Syndicate of Investment Banks

National level Investment Banks

Underwriters

Types of Forex Markets

Spot Markets
Forwards
Currency Futures Contracts
The contract to buy or sell a specific currency at a specific
price within a specified period of time. Unlike forwards,
futures are traded in exchanges
Currency Options Contracts
The contract gives the right (not the obligation) to buy or sell a
specific currency at a specific price within a specified period of
time. They are traded in exchanges
Swaps