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FINANCIAL SYSTEM
• 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.
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
• 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.
• 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.
• 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.
FINANCIAL INSTITUTIONS
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.
• 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.
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.
ROLE OF FINANCIAL MARKETS
• 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
• 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.
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.
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.