International Financial Markets

International Financial Markets serve as links between the financial markets of each
individual country and as independent markets outside the jurisdiction of any one country.
The market for currencies is the heart of this international financial market. International
trade and investment are often denominated in a foreign currency, so the purchase of the
currency precedes the purchase of goods, services, or assets.

This part of assignment provides some kind of detailed guide to the structure and
functions of the foreign currency markets, international money markets, international
capital markets and international securities markets.

The Foreign Currency Markets

The market for foreign currencies is a world wide market that is informal in structure.
This means that it has no central place, pit, or floor of the New York exchange, where the
trading takes place. The “market” is the actually the thousands of telecommunications
like among financial Institutions around the globe, and it is open 24 hours a day. Some
one, some where, is nearly always open for business.

Market size & Composition

Until recently there was little data on the actual volume of trading on world foreign
currency markets. Starting in the spring of 1986, however, the Federal Reserve Bank of
New York, along with other industrial countries’ central banks through the auspices of the
bank for International Settlements (BIS), started surveying the activity of currency trading
every three years.

Growth of foreign currency trading has been nothing less than astronomical. The survey
results for the month of April 1998 indicate that daily foreign currency trading on worlds
markets exceeded $1,500,000,000,000 (a trillion with a t). In comparison, the annual (not
daily) U.S. government budget deficit has never exceeded $300 billion, and the U.S
merchandize trade deficit has never topped $200 billion.

The majority of the world’s trading in foreign currencies is still taking place in the cities
where international financial activity is centered: London, New York, and Tokyo. A recent
survey by the U.S Federal Reserve of currency trading by financial institutions and
independent brokers in New York reveals additional information of interest.
Approximately 66% of currency trading occurs in the morning hours (Eastern Standard
Time), with 29% between noon & 4 p.m., and the remaining percent between 4 p.m., and
8 a.m. the next day.

The reasons typically given for the enormous growth in foreign currency trading are:

1. Deregulation of International Capital Flows: it is easier than ever to move

currencies and capital around the world without major governmental restrictions.
 Most of the deregulation that has characterized government policy over the past
10 to 15 years un the United States, Japan and the now European Union has
focused on financial deregulation.

2. Gains in Technology and Transaction Cost Efficiency: it is faster, easier, and

cheaper to move millions of dollars, yen or marks around the world than ever
before. Technological advancements not only in the dissemination of information,
but also in the conduct of exchange or trading, have added greatly to the ability of
individuals working on these markets to conduct instanteous arbitrage (some
would say speculation).

3. The World is a Risky place: Many argue that the financial markets have become
increasingly volatile over recent years, with larger & faster swings in financial
variables such as stock values and interest rates adding to the motivations for
moving more capital as faster rates.

International Money Markets

A money market traditionally is defined as a market for deposits, accounts, or securities

that have maturities of one year or less. The international money markets, often termed
the Euro currency markets, constitute an enormous financial market that is in many ways
out side the jurisdiction and supervision of world financial and governmental authorities.

Euro Currency Markets

And Euro currency market is any money market for depositing and borrowing money
located outside the country where that money is legal tender. Eurocurrencies are bank
deposits and loans residing outside any single country,

• Floating rate pricing: Usually with maturities less than five years

• Few regulatory restrictions: Because they are outside the jurisdiction of any single
government

• Competitive pricing: More than $2.5 trillion outstanding

For example, U.S. Dollars that are held on account in a bank in London are termed
Eurodollars. Similarly, Japanese Yen held on account in a Parisian financial institution
would be classifies as Euroyen. The euro prefix does not mean these currencies or
accounts are only European, as German marks on account in Singapore would also be
classified as a Euro currency, a Euro account.

The Eurocurrency market uses floating rate pricing, and

• Low interest rate risk: Interest rates tied to a variable rate base such as the London
Interbank Offer Rate (LIBOR)
 • Low default risk: Traded between large commercial banks, investment banks, and
multinational corporations

• Relatively short maturities: Typically less than 5 years

The Eurocurrency market has few regulations. Typically, there are

• No reserve requirements

• No interest rate regulations or caps

• No withholding taxes

• No deposit insurance requirements

• No credit allocation regulations

• Less stringent disclosure requirements

International Capital Markets

Just as with the money markets, the international capital markets serve as links among the
capital markets of individual countries, as well as constituting a separate market of their
own, the capital market that flows in to the euro markets. Firms can now raise capital,
debit or equity, fixed or floating interest rates, in any of a dozen currencies, for maturities
ranging from one month to thirty years, in the international capital markets. Although
international capital markets traditionally have been dominated by debt instruments,
international equity markets have shown considerable growth in recent years.
International Security Markets
Although banks are continuing to provide a large portion of the international financial
needs of government and business, it is the international debt securities markets that have
experienced the greatest growth in the past decade. The International Security Markets
include bonds, equities, and private placements.