International financial system elements

1. INTERNATIONAL
FINANCIAL SYSTEM

2. • International finance is an important part of financial
economics.
• It mainly discusses the issues related with monetary
interactions of at least two or more countries.
• International finance is concerned with subjects such as
exchange rates of currencies, monetary systems of the world,
foreign direct investment (), and other important issues
associated with international financial management.

3. INTERNATIONAL FINANCIAL SYSTEM
MEANING
In finance, the financial system is the system that allows the transfer of money
between savers (and investors) and borrowers. A financial system can operate
on a global, regional or firm specific level.
Gurusamy, writing in financial services and systems has described it as
comprising "a set of complex and closely interconnected financial institutions,
markets, instruments, services, practices, and transactions."

4. • A financial system can be defined at the global,regional or firm
specific level.
• The firm's financial system is the set of implemented procedures
that track the financial activities of the company.
• On a regional scale, the financial system is the system that
enables lenders and borrowers to exchange funds.
• The global financial system is basically a broader regional system
that encompasses all financial institutions, borrowers and lenders
within the global economy.

5. • The Global Financial System (GFS) is
• The financial system consisting of institutions and regulators that act
on the international level, as opposed to those that act on a national
or regional level.
• The main players are the global institutions, such as international
monetary fund and bank for international settlements, national
agencies and government departments, e.G., Central banks and
finance ministries, private institutions acting on the global scale, e.G.,
Banks and hedge funds, and regional institutions, e.G., The euro
zone.

6. ELEMENTS OF FINANCIAL SYSTEM
• MONEY.
• BANKING AND FINANCIAL INSTITUTIONS.
• FINANCIAL MARKETS.
• FINANCIAL INSTRUMENTS.
• FINANCIAL SERVICES.
• MONEY:-
• Money is defined as anything that is generally accepted in payment for goods
and services or in the repayment of debt.
• Monetary theory ties changes in the money supply to changes in aggregate
economic activity and the price level.

7. • MONEY AND RECESSION
• The periodic but irregular upward and downward movement of aggregate output
produced in the economy is referred to as the business cycle.
• Sustained (persistent) downward movements in the business cycle are referred
to as recessions.
• Sustained (persistent) upward movements in the business cycle are referred to
as expansions.
• Recessions (unemployment) and booms or expansion (inflation) affect all of us
• Evidence from business cycle fluctuations in many countries indicates that
recessions may be caused by steep declines in the growth rate of money.

8. • MONEY AND INFLATION
• The aggregate price level is the average price of goods and services in
an economy.
• Inflation is a continual rise in the price level. It affects all economic players.
• There is a strong positive association between inflation and growth rate of
money over long periods of time. A sharp increase in the growth of the
money supply is likely followed by an increase in the inflation rate.
• Countries that experience very high rates of inflation have rapidly growing
money supplies.

9. FINANCIAL INSTITUTIONS

16. FINANCIAL MARKET
• Financial markets are mechanisms that allows people to easily buy and sell
(trade) financial securities (such as stocks and bonds), commodities (such
as precious metals or agricultural goods), and ther fungible items of value
at low transaction costs and at prices that reflect.
• Financial markets such as stock market and bond market are essential to
promote greater economic efficiency by channeling funds from who do not
have productive use of fund (savers) to those who do (investors).
• While well-functioning financial markets promote growth, poorly performing
financial markets can be the cause of poverty.

17. • Thus, activities in financial markets may increase activities in financial
markets affect business cycle.
• A financial market is a market in which financial assets (securities) can
be purchased or sold.
• Financial markets facilitate financing and investing by households, firms,
and government agencies.
• Participants that provide funds are called surplus units – e.G., Households
• Participants that enter markets to obtain funds are deficit units – e.G., The
government.

21. FUNCTIONS OF FINANCIAL MARKET
• It provides facilities for interaction between the investors and the
borrowers.
• It provides pricing information resulting from the interaction between
buyers and seller in the market when they trade the financial assets.
• It provides security to dealings in financial assets.
• It ensures liquidity by providing a mechanism for an investor to sell the
financial assets. Efficient payment mechanism.
• It ensures low cost of transactions and information.
• Providing portfolio management services.

22. ROLE OF FINANCIAL MARKETS
• TRANSFER OF RESOURCES FROM ONE PERSON TO ANOTHER
• GROWTH IN INCOME (INTEREST/ DIVIDEND)
• PRODUCTIVE USAGE OF FUNDS
• CAPITAL FORMATION
• PRICE DISCOVERY (TRADED FINANCIAL ASSETS THROUGH DIFFERENT
PARTICIPANTS
• SALE MECHANISM
• INFORMATION AVAILABILITY

23. FINANCIAL INSTRUMENTS
• “Securities” is a name that commonly refers to financial instruments that are
traded on financial markets.
• A security (financial instrument) is a formal obligation that entitles one party to
receive payments and/or a share of assets from another party; e.G., Loans,
stocks, bonds.
• Even an ordinary bank loan is a financial instrument.
• Financial instruments are assets that can be traded.
• Most types of financial instruments provide an efficient flow and transfer of
capital all throughout the world's investors.
• These assets can be cash, a contractual right to deliver or receive cash or
another type of financial instrument, or evidence of one's ownership of an entity.

24. TYPES OF FINANCIAL INSTRUMENTS
Financial instruments may be divided into two types:
CASH INSTRUMENTS:
The values of cash instruments are directly influenced and determined by the markets.
These can be securities that are easily transferable. Cash instruments may also be
deposits and loans agreed upon by borrowers and lenders.
DERIVATIVE INSTRUMENTS:
A derivative is a security with a price that is dependent upon or derived from one or more
underlying assets the derivative itself is a contract between two or more parties based
upon the asset or assets.
The value and characteristics of derivative instruments are based on the vehicle’s
underlying components, such as assets, interest rates or indices. These can be over-the-
counter (OTC) derivatives or exchange-traded derivatives.

25. • Financial instruments may also be divided according to asset class,
which depends on whether they are Debt-based or Equity-based.
• Equity-based ( reflecting the ownership of the issuing
authority).
• Debt-based ( reflecting a loan the investor has made to the
issuing authority)
• If debt they are further categorized into:
• Short term debt-based financial instruments
• Long-term debt-based financial instruments
•

26. • Short-term debt-based financial instruments last for one year or less.
• Securities of this kind come in the form of t-bills and commercial paper.
• Cash of this kind can be deposits and certificates of deposit (cds). Exchange-
traded derivatives under short-term debt-based financial instruments can be
short-term interest rate futures. OTC derivatives are forward rate agreements.
• Long-term debt-based financial instruments last for more than a year.
• Under securities, these are bonds. Cash equivalents are loans.
• Exchange-traded derivatives are bond futures and options on bond futures.
OTC derivatives are interest rate swaps, interest rate caps and floors, interest
rate options, and exotic derivatives.

27. FINANCIAL SERVICES
• Financial service is part of financial system that provides different types of
finance through various credit instruments, financial products and services
• Financial services is a term used to refer to the services provided by the
finance market.
• Financial services is also the term used to describe organizations that deal
with the management of money. Examples are the banks, investment banks,
insurance companies, credit card companies and stock brokerages.
• These are the types of firms comprising the market, that provide a variety of
money and investment related services.
• Financial services are the largest market resource within the world, in terms
of earnings.

28. COMMERCIAL BANKING SERVICES
Commercial bank is a financial institution that is authorized by law to receive money from
businesses and individuals and lend money to them. Commercial banks are open to the
public and serve individuals, institutions, and businesses.
Functions include:
• Safe custody of money , with withdrawals when required
• Issuance of cheque books
• Providing various types of loans(personal, mortgage, home, property or business)
• Issuance of credit/ debit cards and processing their transaction and billing
• Allowing financial transactions at branches or by ATM’s
• Provide wire and electronic transfers of fuds between banks
• Facilitation of standing orders

29. • Providing overdraft agreements
• Provide charge and card advances of banks own money for
customers wishing to settle credit advances monthly
• Provide internet banking services
• Notary services for financial and other documents
• Sell investment products like mutual funds

30. INVESTMENT BANKING SERVICES
Investment banking is a specific division of banking related to the creation of
capital for other companies, governments and other entities.
Capital market services: Underwrite new debt and equity securities for all types
of corporations, aid in the sale of securities, and help to facilitate mergers and
acquisitions, reorganizations.
Private banking: Pvt banks provide banking services exclusively to high net
worth individuals, also provide personal services like wealth management and
tax planning.
Broker services : Broker trades for both institutions and private investors.
Investment banks also provide guidance to issuers regarding the issue and
placement of stock.

31. FOREIGN EXCHANGE SERVICES
Asset management : The direction of a client's cash and securities by a financial
services company, usually an investment bank. The institution offers investment services
along with a wide range of traditional and alternative product offerings that might not be
available to the average investor.
Hedge Fund Management: A hedge fund is an investment fund that pools capital from
accredited individuals or institutional investors and invests in a variety of assets,
often with complex portfolio-construction and risk-management techniques. It is
administered by a professional investment management firm.
Hedge funds often employ the services of “prime brokerage” divisions at major investment
banks to execute their trades.
Custody services: The safe keeping and processing of the worlds securities trades and
servicing the associated portfolios.

32. INSURANCE SERVICES
Insurance brokerage: Insurance brokers shop for insurance ( corporate
property and casualty insurance) on behalf of customers. Various
websites for comparison are available.
Insurance underwriting: Insurance underwriters evaluate the risk and
exposures of potential clients. They decide how much coverage the
client should receive, how much they should pay for it, or whether even
to accept the risk and insure them. Underwriting involves measuring risk
exposure and determining the premium that needs to be charged to
insure that risk.

33. F& I Finance and Insurance: A service still offered primarily at
asset dealerships. The F&I manager encompasses the
financing and insuring of the asset which is sold by the dealer.
Reinsurance: Insurance sold to insurers themselves to protect
them from catastrophic losses.

34. OTHER FINANCIAL SERVICES
• Bank cards: includes credit and debit cards. Bank of America is the largest issuer
of bank cards.
• Credit card machine services and networks: Companies which provide credit
card machine and payment networks call themselves “merchant card providers”
• Intermediation or advisory services: Stock brokers , Discount brokers (Internet
based companies)
• Private Equity
• Venture Capital
• Angel Investment
• Conglomerates

35. • Financial market utilities: Financial market utilities (FMUs) are
multilateral systems that provide the infrastructure for transferring,
clearing, and settling payments, securities, and other financial
transactions among financial institutions or between financial institutions
and the system.
• Debt Resolution: A customer service that assists individuals that have
too much of debt to pay off as requested, but do not want to file
bankruptcy and wish to pay off their debts owed. The debt resolution
company attorney works with you one on one to establish a debt
repayment program that fits you. He then negotiates with each creditor to
accept a lower payment.

36. MAJOR PARTICIPANTS AND PLAYERS IN FINANCIAL
MARKETS
In the financial markets, there is a flow of funds from one group of parties (funds-
surplus units) known as investors to another group (funds-deficit units) which
require funds.
However, often these groups do not have direct link. The link is provided by
market intermediaries such as brokers, mutual funds, leasing and finance
companies, etc.
The individuals: These are net savers and purchase the securities issued by
corporates. Individuals provide funds by subscribing to these security or by
making other investments.
The firms or corporates: The corporates are net borrowers. They require funds
for different projects from time to time. They offer different types of securities to
suit the risk preferences of investors.

37. Government: Government may borrow funds to take care of the budget
deficit or as a measure of controlling the liquidity, etc. Government may
require funds for long terms or for short-terms in the money market.
Government makes initial investments in public sector enterprises.
Regulators: Financial system is regulated by different government
agencies. The relationships among other participants, the trading
mechanism and the overall flow of funds are managed, supervised and
controlled by these statutory agencies. Reserve bank of India, maintaining
liquidity in the money market. SEBI regulating and supervising the capital
market has issued guidelines and rules for the control and supervision of
capital market and investors’ protection

38. Market intermediaries: There are a number of market intermediaries
known as financial intermediaries or merchant bankers, operating in
financial system. These are also known as investment managers or
investment bankers.
The objective of these intermediaries is to smoothen the process of
investment and to establish a link between the investors and the
users of funds. Market intermediaries help investors to select
investments by providing investment consultancy, market analysis and
credit rating of investment instruments. To operate in secondary market, the
investors have to transact through the share brokers.