2. International Money Market
• The international money market is a market where international
currency transactions between numerous central banks of
countries are carried on.
• The transactions are mainly carried out using gold or in US
dollar as a base.
• The basic operations of the international money market include
the money borrowed or lent by the governments or the large
financial institutions.
3. • The international money market is governed by the
transnational monetary transaction policies of various nations’
currencies.
• The international money market’s major responsibility is to
handle the currency trading between the countries.
• This process of trading a country’s currency with another one is
also known as forex trading.
4. • Unlike share markets, the international money market sees very
large funds transfer.
• The players of the market are not individuals; they are very big
financial institutions.
• The international money market investments are less risky and
consequently, the returns obtained from the investments are
less too.
• The best and most popular investment method in the
international money market is via money market mutual
funds or treasury bills
5. Some of the major international money market participants are −
• Citigroup
• Deutsche Bank
• HSBC
• Barclays Capital
• UBS AG
• Royal Bank of Scotland
• Bank of America
• Goldman Sachs
• Merrill Lynch
• JP Morgan Chase
6. Limitations of the International Monetary
Market
• Economic, political and geopolitical market conditions
• Legislative and regulatory changes
• Broad or quick changes in the industry and financial markets
• Shifts in price levels, contract volumes and/or volatility in the
derivatives markets, along with underlying markets in equities,
foreign exchange, interest rates and commodities
• Changes in global or regional demand or supply for
commodities
7. International Capital Market
• A capital market is basically a system in which people,
companies, and governments with an excess of funds transfer
those funds to people, companies, and governments that have a
shortage of funds.
• This transfer mechanism provides an efficient way for those
who wish to borrow or invest money to do so.
• For example, every time someone takes out a loan to buy a car
or a house, they are accessing the capital markets.
• Capital markets carry out the desirable economic function of
directing capital to productive uses.
8. • There are two main ways that someone accesses the capital
markets—either as debt or equity.
• While there are many forms of each, very simply, debt is money
that’s borrowed and must be repaid, and equity is money that
is invested in return for a percentage of ownership but is not
guaranteed in terms of repayment.
9. Need and benefits
International capital markets are the same mechanism but
in the global sphere, in which governments, companies, and
people borrow and invest across national boundaries.
In addition to the benefits and purposes of a domestic capital
market, international capital markets provide the following
benefits:
10. 1.Higher returns and cheaper borrowing costs. These
allow companies and governments to tap into foreign markets
and access new sources of funds. Many domestic markets are
too small or too costly for companies to borrow in. By using the
international capital markets, companies, governments, and
even individuals can borrow or invest in other countries for
either higher rates of return or lower borrowing costs.
2.Diversifying risk. The international capital markets allow
individuals, companies, and governments to access more
opportunities in different countries to borrow or invest, which
in turn reduces risk. The theory is that not all markets will
experience contractions at the same time.
11. Major Components of the International
Capital Markets
• International Equity Markets
• Companies sell their stock in the equity markets. International
equity markets consists of all the stock traded outside the
issuing company’s home country. Many large global companies
seek to take advantage of the global financial centers and issue
stock in major markets to support local and regional operations.
12. International Bond Markets
• Bonds are the most common form of debt instrument, which is
basically a loan from the holder to the issuer of the bond.
• The international bond market consists of all the bonds sold by
an issuing company, government, or entity outside their home
country.
• Companies that do not want to issue more equity shares and
dilute the ownership interests of existing shareholders prefer
using bonds or debt to raise capital (i.e., money).
13. Types of International Bonds
• Foreign Bond
• A foreign bond is a bond sold by a company, government, or
entity in another country and issued in the currency of the
country in which it is being sold.
• There are foreign exchange, economic, and political risks
associated with foreign bonds, and many sophisticated buyers
and issuers of these bonds use complex hedging strategies to
reduce the risks.
14. • Eurobond
• A Eurobond is a bond issued outside the country in whose
currency it is denominated.
• Eurobonds are not regulated by the governments of the
countries in which they are sold, and as a result, Eurobonds are
the most popular form of international bond.
• A bond issued by a Japanese company, denominated in US
dollars, and sold only in the United Kingdom and France is an
example of a Eurobond.
15. • Global Bond
• A global bond is a bond that is sold simultaneously in several
global financial centers.
• It is denominated in one currency, usually US dollars or Euros.
By offering the bond in several markets at the same time, the
company can reduce its issuing costs.
• This option is usually reserved for higher rated, creditworthy,
and typically very large firms.
16. Euro Currency Markets
• It is a short term financing option for Euro currency
loans.
• Eurodollar is the deposit of US dollars in any bank outside
the U.S. an extension of this is the Euro Currency, which
is the deposit of any currency outside its country of issue.
• Its appeal lies in the fact that there are no strict
regulations involved and therefore involved lower costs.
17. Offshore Centers
• They are territories that have a few financial regulations
and are essentially, tax havens.
• They are of two types – Operational centres (where
extensive financial activities occur) and Booking Center
(favourable tax/secrecy laws).
18. Foreign Exchange Market
• The foreign exchange market (also known as forex, FX, or the
currencies market) is an over-the-counter (OTC) global
marketplace that determines the exchange rate for currencies
around the world.
• Participants in these markets can buy, sell, exchange, and
speculate on the relative exchange rates of various currency
pairs.
• Foreign exchange markets are made up of banks, forex
dealers, commercial companies, central banks, investment
management firms, hedge funds, retail forex dealers, and
investors.
19. Function of Foreign Exchange
Department
Financing exports
The financial needs of the exporter right from the moment he
conceives of the project and till he realizes export proceeds are
provided by banks.
The credit extended to the exporter to procure raw materials, process
them and prepare them for shipment to the importer is known as
packing credit or pre-shipment credit.
On shipping the goods the exporter would draw a bill of exchange,
with or without a letter of credit and discount it with the bank.
The credit extended to the exporter after shipment is made is known
as post-shipment finance. The exporter may be eligible to receive
cash incentives from the Government on exports.
20. Financing imports:
• Letters of credit are issued by banks on behalf of their importer
customers.
• The opening of the letter of credit by the bank, whereby, it
undertakes to make payment to the exporter on shipment,
enables the importer to conclude the deal with case.
• The importer may be financed by the bank for the imports This
finance may take any form, cash credit or loan, as the case may
be, and against hypothecation or pledge or mortgage of the
stem imported.
21. Remittance facilities:
• An importer in Australia has to pay the overseas exporter.
• Similarly, an Australian exporter has to receive payment from
abroad.
• A person in Australia may like to subscribe to a magazine
published abroad.
Dealing in foreign exchange:
• Banks buy and sell foreign exchange from and to the public.
• To carry out this function banks have to keep sufficient stock of
foreign exchange.
• These are kept in the form of bank accounts abroad. Banks
maintain accounts with banks in important financial centers
abroad through which all sales and purchases of foreign
exchange are routed.
22. • Furnishing credit information:
• With a network of correspondent relationships with banks
abroad, a bank in India is in a position to furnish business
information to exporters and importers in India.
• The information may relate to the credit report on the
prospective seller/buyer, market conditions, exchange control
regulations in different countries, etc.
• The bank is also in a position to advise the customer of such
other matter as the currency in which the transaction is to be
designated, avoidance of exchange risk, etc.
23. Exchange rate regime
• An exchange rate regime is a way a monetary authority of a
country or currency union manages the currency about other
currencies and the foreign exchange market.
• It is closely related to monetary policy and the two are generally
dependent on many of the same factors, such as economic
scale and openness, inflation rate, the elasticity of the labor
market, financial market development, capital mobility ,etc.
24. Types of exchange rate regime
The Fixed Exchange Rate regime
• When the exchange rate between the domestic and foreign currencies is fixed
by the monetary authority of a country and is not allowed to fluctuate beyond a
limit, it is called fixed exchange rate.
• Under the IMF system, the monetary authority of a member nation fixes the
official value of its currency in terms of a reserve currency (usually the US
dollar) or a basket of 'key currencies.' The exchange rate so determined is
known as currency's par value. It is also called 'pegged' exchange rate.
25. • Floating exchange rate regime
• A floating (or flexible) exchange rate regime is one in which a
country's exchange rate fluctuates in a wider range and the
country's monetary authority makes no attempt to fix it against
any base currency. A movement in the exchange is either
an appreciation or depreciation.
1$=72.12 INR(07.09.21) - appreciates
1$ = 73.56 INR (08.09.21)
1$=71.12 INR(09.09.21) – depreciates
26. Types of floating exchange rate
• Free float (Floating exchange rate)
Under a free float, also known as clean float, a currency's value
is allowed to fluctuate in response to foreign-exchange market
mechanisms without government intervention.
• Managed float (or dirty float)
Under a managed float, also known as dirty float, a government
may intervene in the market exchange rate in a variety of ways
and degrees, in an attempt to make the exchange rate move in a
direction conducive to the economic development of the country,
especially during an extreme appreciation or depreciation.
27. • Intermediate rate regime
The exchange rate regimes between the fixed ones and the floating ones
Types:
• Band (Target zone)
There is only a tiny variation around the fixed exchange rate against another
currency, well within plus or minus 2%.
• Crawling peg
A crawling peg is when a currency steadily depreciates or appreciates at an
almost constant rate against another currency, with the exchange rate
following a simple trend.
• Currency basket peg
A currency basket is a portfolio of selected currencies with different
weightings. The currency basket peg is commonly used to minimize the risk
of currency fluctuations. For example, Kuwait shifted the peg based on a
currency basket consists of currencies of its major trade and financial
partners.
