Globalization has led to various changes to how business is carried out. One of the areas that have experienced tremendous changes in the financial market.
In the recent past, there has been unprecedented growth in the international finance market. The market has become large with many individuals and institutions participating in the international financial trade. Globalization has opened up borders allowing free trade in the global economy. Many organizations and institutions have transformed from the national level to the international level. To participate in international trade, the organization requires huge capital, which may not be easy to obtain. This has raised more demand for capital. As demand for capital increases, the international financial market has become a key source of capital.
An international financial market is relatively new. Before, financial trade was based at the national level.
However, a revolution in the financial market has led to a lot of changes in the global financial market. Before, financial markets in various countries were operated in isolation. Individuals and organizations could only trade in securities only on their individual countries. The phenomenon today is different as organizations can acquire capital from international financial markets other than the financial market at its country of origin.
The objective of the financial market is to enable the transfer of capital from individuals with a surplus to those with a deficit. The financial market thus facilitates the transfer of capital, helping organizations or individuals to have a way to raise capital (Fischer par 3). An individual with surplus resources intends to make the best use of their savings though trade. The borrower, on the other hand, intends to reduce the cost of capital through a financial market. A good financial market enables betters ways to invest surplus funds by offering various alternatives to a saver.
Capital markets have become a significant institution in the development of any economy. The term, capital market, is common with many individuals. It refers to a market where finances such as equity, mortgage, or bonds are traded. The main objective of the capital market is to facilitate the transfer of capital. The capital market facilitates individuals with more than enough to invest their surplus enabling those in need of capital to have an easy way to acquire capital. The capital market was set up to address the imbalance in the capital. It opens up opportunities for people to invest and help people opportunity to transfer ownership.
Capital markets offer a short-term and long-term solution to capital transfer. Financial markets are mostly responsible for the short-term fund transfer while capital markets dealing with long-term financial instruments (Fischer par 5).
Capital markets have an important role in an economy.
The capital market enables resources to be channeled to areas where they desired most. Savers have the opportunity to invest their surplus instead of keeping them. On the other hand, borrowers are able to get capital from various sources. By buying securities or bonds, savers assume the risks associated with these instruments. Returns from their investments are a major motivation that motivates savers to take the risk. Savers may invest in stocks or bonds in a financial market hoping to get a good return on the investment.
International Financial Market
An international financial market is a financial market that operates at an international level. It constitutes financial market transactions that are transacted at the international dimension.
An international financial market is not made up of a single where financial instruments are bought. However, it is made up of a number of financial markets that are integrated and that have an international mechanism. The international financial market started as a way to solve the imbalance in the capital between nations.
It was intended to facilitate the flow of capital between countries and enable individuals to invest in countries that were not their country of origin. For a long time, foreign exchange has been the most important activity in the international financial market. In essence, international financial markets trade similar products are national financial institutions but with the difference, those international financial markets trade the products internationally (Fischer par 4). International bonds and stocks are some of the other instruments in the international financial market.
Globalization and technological advancement have promoted the international financial market. Globalization has motivated the flow of capital across countries. Capital for international investment and desire to invest in international companies have motivated savers and borrowers to participate in international financial markets. Advancement in communication has contributed highly to the growth of international financial markets. With the advancement in communication, individuals can participate in the market despite the distance (Fischer par 7).
A bond or securities qualify to be international by being traded at an international level. This happens when the bonds or securities are traded in more than one country. Globalization has allowed the internationalization of financial markets. Some of the popular instruments in the international financial market include international securities, Eurobonds, and Foreign bonds. For example, a bond belonging to an English company but is sold in a financial market in the United States qualifies as a foreign bond. Eurobond, bonds in foreign currency, constitutes a big portion of the international financial market.
Purpose of international Financial Market
The international financial market has an important contribution to the global economy. The financial market allows for the free trade of securities and bonds at the international level. This enables organizations and institutions to acquire the direly needed capital for development (Lipsky par 7). International financial markets free the flow of capital from places where there is excess to places where there is a deficit. By so doing, the international financial market facilitates in distributing economic development in the world.
The international financial market allows for the movement of capital across borders. The development of international financial markets enables international risk sharing. Vesting through the markets helps to minimize the risks involved in the trade. They change the level and equilibrium of investment production and consumption in international trade. They create investment opportunities and enable more people to participate in international economic activities. Reduction in the cost of communication across the globe enables more people to participate in international economic activities.
Expanding the Money Supply for Borrows
Capital is required for economic activities. Without capital, an investor may not be able to invest in available opportunities. An organization or institution with a capital deficit has various options to obtain capital. The individual can borrow from financial institutions, sell some assets, or asks for additional contributions from other shareholders. However, the international financial market offers additional ways of obtaining capital. An international financial market is not limited to a certain country or region, investors to this market can come from any part of the world. Advancement in communication has simplified trading in the international financial market. Individuals from any part of the world can be able to sell or buy bonds and securities in a short duration of time.
The ability of any individual, organization, or institution to participate in the international financial market gives borrows as expanded supply of money. The borrower can be able to access funds from different sources and be able to use the funds for important economic activities.
Reducing the cost of money for Borrows
Financial markets offer unique opportunities to obtain capital. Capital can be obtained in the international financial market by setting securities or bonds. Unlike other ways of obtaining capital such as loans from financial institutions. However, loans from a financial institution are a form of credit and have to be paid. On the other hand, the borrower can obtain funds from the international financial market (Fischer par 9). Funds from a financial market are cheaper as compared to conventional methods. In the case of selling securities, the funds will be obtained in form of equity. Unlike loans, equity is a form of ownership and is not charged any interest. This source of the fund does not have additional or hidden costs making it a favorable source of capital.
Reducing Risk of lenders
One of the major benefits of the international financial market is to reduce the risk of lenders. The international financial market enables investors to distribute risks on investments. By investing in the international financial market, spreads investment risks and is not vulnerable to failure in a single market. International financial markets offer a saver opportunity to invest in diverse organizations in different countries. This protects the saver from the risks that can be associated with one market. In the case where an investor has bought securities belong to organizations in different countries.
The business may be successful in one of the countries but fail in the other. In such a case, the investor is sure of returns from the country where there was a better business. Investment in bonds has low risks. Since bonds are guaranteed, a saver is sure to returns from investment. Many investors prefer to invest in areas of low risk even though the returns may be low.
Drivers to international financial Exchange
There has been unprecedented in the international financial market. Various factors have motivated this increase. Globalization has a high contribution to the international financial market. Globalization has led to opening up borders allowing free trade between countries. Global trade has led to the growth of international companies. In order to grow, these companies require additional capital. Globalization led to increased demand for international equity. Individual investors, organizations, and countries view investing in international securities and bonds as the best way of taking advantage of globalization (Lipsky par 4). Globalization has led to integration on national financial markets leading to international financial market phenomena. Global financial crises have effects stretching across countries. Development in ICT has a high contribution to the international financial market. Development in ICT has led to better communication that has motivated international trade. Privatization has also contributed significantly to international trade. Privatization has motivated more people to participate in economic activities leading to high demand for securities in the international financial market.
Major Components of International Financial Market
International Bond Market
Eurobond is a dominant bond in the international financial market. Eurobond issued in the currency that is different from the currency of the country of the borrower. A borrower using Eurobond has the freedom to choose the currency in which the bonds would be denominated (MapsofWorld.com par 5). In addition, the borrower has the freedom to choose the country in which to issue the bond. An example of a Eurobond is a bond that is denominated in US dollars but issued in Australia by a Japanese company. Eurobond is an important tool for international financing. A borrower using a euro bond is able to choose the most appropriate currency in which to issue the bond. This is different from conventional bonds which are issued in the currency of the borrower. By having the freedom to choose the country to issue the bond, the borrower is able to take advantage of the availability of capital in a particular country. In addition, the bond can be issued in various international financial markets such as London and New York.
This is a bond that is sold in a local bond market by a foreign company or government. Foreign bonds are placed in the financial market in the currency of the country of issue. They are controlled through regulations in the markets where they are issued (MapsofWorld.com par 7). A foreign bond allows a borrower diversity of where to issue the bonds. The borrower can choose the most appropriate market to issues bonds.
Foreign bonds give investors international diversification. An investor can be able to choose bonds offered in foreign companies and be able to invest in diverse business environments. A foreign bond is considered a better way of diversifying investment and reduce portfolio risk. There has been growth in the number of foreign bonds in the world. Today foreign bonds contribute to more than half of market capitalizations. By using foreign bonds an investor can take advantage of better growth rates in some countries by investing in foreign bonds issued by such countries. Foreign bonds are in three types: floating rate, fixed-rate or equity-related.
International Equity Market
Activities in international financial market are in form of dept and equity. Dept markets have been dominant in international financial market, but equity markets are increasingly becoming dominant (Woepking par 3). The major activities in international equity markets consist of foreign borrowers looking for capital in a domestic market. Foreign companies can issue stock or even initial public offering in stock markets such as London to acquire capital easily. Globalization has contributed highly to growth of international equity markets. These markets allow individuals to own shares in companies not necessarily belonging to their country of origin.
Availability of capital is an important condition for development. Inadequate capital has been the major obstacle to development in developing countries. Development in the international equity market, however, is changing the situation and motivates growth in developing countries. International equity markets enable companies from developing countries to acquire capital. The international equity market has contributed highly to development in Asian countries and the development of international companies.
Unlike commercial banks, the main objective of investment banks is to help companies acquire capital. Investment banks act as agents in the financial market. Growth in international financial markets has led to the development of investment banks that operate at the international level. International investment banks facilitate investment in international financial markets by offering investors diverse investment opportunities (Woepking par 8). The banks offer services such as foreign exchange trading, risk management, venture capital investment, and providing bridge loans. They help companies sell securities international financial market enabling them to acquire the necessary capital for growth.
Development in information technology has brought great changes in the financial market. Conventionally securities or bonds were bought in physical stock markets. Information technology has brought a new form of trading in financial markets referred to as electronic trading. Electronic trading allows individuals to participate in international finical markets without having to present themselves physically in the market. Through electronic trading, an individual can buy bonds or securities using electronic means. Electronic markets allow companies, individual investors, or governments to participate in financial markets using electronic means.
Privatization has a high contribution to the growth of the international financial market. There has been a trend of privatization of companies in the recent past. The main intention of privatization has been to bring efficiency to the companies but the privations have contributed to the growth of financial markets (Woepking par 7). Initial public offerings issued during privatizations have increased the volumes of stocks in the stock market and motivated more activities in the markets.
Eurocurrency is any currency that is held by a bank that is not in the country where the currency is issued. The eurocurrency market, on the other hand, refers to a money market where Eurocurrency can be borrowed from a bank. The euro currency market consists of a large portion of the international money market. It provides a convenient way of borrowing foreign currency and helps the international flow of capital.
Foreign Exchange Market
Conventionally, a foreign exchange market is a market where currencies are traded. Foreign exchange markets smooth the process of trade with foreign currency (SITPRO par 1). The foreign exchange market has a very significant role in international activities and trade. It allows participants in international trade to exchange currency and be able to engage in international activities effectively. The main participants in the forex market comprise central banks and commercial banks. Investment management firms and foreign exchange brokers are also involved.
Foreign exchange involves exchange currency from one country to that of another. To exchange convert one currency to another, the exchange rate is used. Exchange rate refers to a ratio in which one currency is exchanged for another. The exchange rate tells the value of one currency as compared to another. The rate, however, varies from time and dictates how much an individual can receive by exchanging currency (SITPRO par 5).
The frequent changes in exchange rates can result in loss to an investor. Currency hedging is intended to protect an investor from risks that can be involved in foreign exchange. There are various ways of reducing risks in foreign exchange but the common way is exchanging currency when the rates are favorable. Investors are also encouraged to invest using the native currency in order to mitigate some risks.
Exchange rates are an important driver of foreign exchange trade. Exchange rates changes depending on several factors in the market. An investor can take advantage of the variation to have quick gains on investment. Through currency arbitrage, an investor can invest in one currency and immediately convert it to another currency, taking advantage of temporal variation in prices.
Currency speculation occurs when an investor buys a currency, not with intention of using the currency for trade, but with intention of selling it later for gain (SITPRO par 9). Currency speculation is a common phenomenon in foreign exchange trade. Some currency speculations are important for international trade but uncontrolled speculation can lead to a financial crisis.
Globalization has come with increased activities in the international financial market. For development, capital is required. International financial markets facilitate development by diversifying sources of capital. Through international financial markets, debt and equity can be traded. Eurobond and foreign bonds are the common forms of debt that are traded in these markets. Privatization and increases of the international organization have led to an increase of activities in international equity markets. International financial markets facilitate the flow of capital across countries and will continue to be an important driver in the global economy.
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MapsofWorld.com. International Bond Market. 2008. Web.
SITPRO. Foreign Exchange Market. 2009. Web.
Woepking, James. International Capital Market and their importance. 2010. Web.