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Meaning of international financial market: The international financial market is the
worldwide marketplace in which buyers and sellers trade financial assets, such as stocks,
bonds, currencies, commodities and derivatives, across national borders
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Definition of international financial market: According to Garbbe, international financial
markets consists of international markets for foreign exchange, Euro currencies and Euro bonds
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The tendency of investment funds and businesses to move beyond domestic and national markets
to other markets around the globe, thereby increasing the interconnectedness of different
markets
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Creates employment/ employment opportunities: This happens due to the emergence
of new companies and new markets, where lots of skilled and unskilled labor is required
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Multiple choice: Consumers to get much wider variety of products to choose from
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As the market has widened, the scope and demand for a
product has increased
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It becomes important for the companies to focus on quality goods and
services, in order to have a strong foothold in the market
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Goods and people are transported with
more easiness and speed
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Increased investment: It has made it easier for countries to attract short term and long
term investment
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This grater specialization enables lower average costs and lower prices
for consumers
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 Country Specific: A Japanese might like a product to have a traditional touch, whereas
an American might like to have a retro modern look to it
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Thus the overseas laws may conflict with the company policies
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 The Seek For Cheap Labor: Globalizations increases of non-skilled and skilled jobs
from developing nations to well developed countries as huge corporations seek for cheap
labor
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 Decrease Environmental Integrity: Globalization has the potential to decrease the
environmental integrity as polluting corporations from well developed countries can take
advantage of developing nations weak regulatory rules
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 Developed countries can stifle development of undeveloped and under-developed
countries
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The conversion of currency is done by the banks
who deal in foreign exchange
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Operations of foreign exchange market:
Spot Market: (Current Market) Spot market for foreign exchange is that market which handles
only spot transaction or current transactions
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It does not trade in
future deliveries
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Exchange Rate:
Fixed Exchange Rate: Fixed rates provide greater certainty for exporters and importers
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International money market (IMM): A division of the Chicago Mercantile Exchange (CME)
that deals with the trading of currency and interest rate futures and options
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The international money market is the market that handles the international currency transactions
between the various central banks of the nations
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European money market: the origins of the European money market can be traced to the Euro
currency market
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Currency deposited
by national governments or corporations in banks outside their home market
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Example - US dollar banked in England is known as euro currency
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 Euro-currency market is a market principally located in Europe for lending and
borrowing the World’s most important convertible currencies, namely Dollar,
Sterling, French franc, yen, etc
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S
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To conduct international
trade with European countries, corporations in the United States deposited U
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dollars in
European banks
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 These dollar deposits in banks in Europe (and other continents) came to be known as
Euro dollars
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Asian money market: Asian money market originated as a market involving mostly dollardenominated deposits
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The Eurocurrency market in Asia is sometimes referred to separately as the Asian dollar market
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The primary function of banks in the Asian dollar market is to channel funds from
depositors to borrowers
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Operations of IMM:
1
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2
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3
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International credit market: MNC’s and domestic firms sometimes obtain medium term funds
through term loans from local financial institutions or through the issuance of notes, debt
instruments in the local market and also have access through bank located in Foreign markets
Loans of one year or longer extended by banks to MNS’s or government agencies in Europe are
called Euro credits or euro credit loans
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Banks who make and receive loans in currencies outside the jurisdiction of the issuing central
bank
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g
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"
Eurocredit loans are usually large and long-term
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Banks participating in the eurocredit market generally also participate in the euro currency market
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There are two types of international bonds
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 Bonds that are sold in countries other than the country represented by the currency
denominating them are called Eurobonds
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Other types:
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Straight fixed-rate bonds pay an annual coupon at a rate that is fixed for the term of the
bond
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Zero-coupon bonds pay no interest but are issued at a discount
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Convertible bonds: Convertible into equity shares
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Dual currency bond: A debt instrument in which the coupon and principal payments are
made in two different currencies
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The principal
currency and amount are fixed when the bond is issued
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This will enhance the firm’s image and name recognition, and diversify the
shareholder base
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Stock issued in the U
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by non-U
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firms or governments are called Yankee stock
offerings
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Non-U
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firms may also issue American depository receipts (ADRs), which are
certificates representing bundles of stock
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The locations of the MNC’s operations can influence the decision about where to place
stock, in view of the cash flows needed to cover dividend payments
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Electronic communications networks (ECNs) have been created to match orders
between buyers and sellers in recent years
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Globalization of capital markets: Globalization of capital markets has received new
momentum and it will continue to be of major importance for the years to come
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Effects of globalization on capital markets:
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Deregulation of markets includes eliminating foreign exchange controls, reducing
taxes imposed on foreign investors and the involvement of foreign investment banks in
underwriting bonds and stocks in domestic stock markets
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Maximizing investment return has become a global pursuit
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Capital raising has also become a global endeavor
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Equity markets have become more global
Markets are becoming more dominated by financial institutions such as mutual
funds, pension funds, insurance companies etc
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Advantages to the host country:
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Increase in national income and per capital income of the host country
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Help in solving the trade deficit through export promotion and import substitution
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Marketing skills of MNC’s are impressive in marketing infrastructure
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Disadvantages to home country:
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May operate against the interest of the host country
The head office of the MNC’s may force overseas branches to buy supplies from them
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Exploit the economy of the host nation by playing low wages/salaries, exporting
natural resources or by adversely interfering with the development of local business
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Privatization
DFI has also been stimulated by the selling of government operations
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Potential Economic Growth
Countries that have higher potential for economic growth are more attractive
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Exchange Rates
Firms typically prefer to invest in countries where the local currency is expected
to strengthen against their own
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In short it is a combination o
financial assets
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Portfolio management: The art of selecting the right investment policy for the individuals
in terms of minimum risk and maximum return is called as portfolio management
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Foreign portfolio investment: it is the entry of funds into a country where foreigners make
purchases in the country’s stock and bond markets, sometimes for speculation
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Interest Rates
Money tends to flow to countries with high interest rates
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Objective of international portfolio management:
 Security of principal investment: The motive of Portfolio management is to ensure that
investment is absolutely safe
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It helps to yield steady returns
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 Marketability: portfolio consists of such investment, which can be marketed and traded
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Difference between direct foreign investment and foreign portfolio investment:
Point of
difference
Returns

Involvement direct or
indirect

FDI

FPI

tends to yield more returns
on investment as a direct
result of investors’
controlling position in the
investment
Involved in management
and ownership control;
long-term interest

although there’s a lot of
flexibility to adjust to short
term environmental
changes, there’s generally
less returns realized
No active involvement in
management
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It is fairly easy to sell
securities and pull out
because they are liquid
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g
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Sell off

It is more difficult to sell
off or pull out
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g
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Having smaller in net
Having larger net inflows
Volatility
inflows
Diversification: A risk management technique that mixes a wide variety of investments within a
portfolio
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E
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you work for Company XYZ--a beverage company--and you have $1 million to invest
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Methods of diversification:
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Randomness in selection of companies and industries: Reducing risk can happen with
a random selection
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Optimization of selection process: optimum number of companies must be chosen for a
given amount of investment
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Markowitz diversification: the need for a right number of securities not too many or too
less and securities which negatively correlated or not correlated at all
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International diversification: The attempt to reduce risk by investing in more than one nation
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The Advantages of International Portfolio Diversification
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Spreading risk: (Correlations between national asset markets): Because of different
industrial structure in different countries, and because different economies do not trace
out exactly the same business cycle, there are reasons for smaller co-relations of expected
returns between investments in numerous different countries than between investments
within any one country
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ii)
That the countries have different industries in their stock market indexes
Reduced risk from exchange rates: While there are gains from international
diversification because of the independence between foreign and domestic stock returns,
there is a possibility of added risk from unanticipated changes in exchange rates when
foreign stocks are held
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Gain from International Portfolio Diversification In Case of Bonds: Including bonds
as well as stocks in an internationally diversified portfolio provides an opportunity to
reduce risk for a given return vis-à-vis a stock only portfolio
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