4
International
Financial System
Chapter: IV
MKT-305
Chapter Objectives
Discuss the purposes, development, and financial centers of
the international capital market
Describe the international bond, international equity, and
Eurocurrency markets
Discuss the four primary functions of the foreign exchange
market
Explain how currencies are quoted and the different rates given
Identify the main instruments and institutions of the foreign
exchange market
Explain why and how governments restrict currency
convertibility
International Capital Market
A capital market is a system that allocates financial resources
in the form of debt and equity according to their most efficient
uses.
Its purpose is to provide a mechanism through which those
who wish to barrow or invest money can do so efficiently.
Individuals, companies, Governments, Mutual funds, pension
funds participate in capital market.
Purpose of National Capital Market
National Capital market help individuals and institutions
borrow the money that other individuals and institutions want
to lend. This is done through Debt and Equity.
Debt: consists of loans, for which the borrower promises to
repay the borrowed amount (Principal) plus a pre-determined
rate of interest.
Equity: Is part ownership of a company in which the equity
holder participates with other part owners in the companie’s
financial gains and losses.
Purpose of International Capital
Market
The International Capital Market is a network of Individuals,
Companies, Financial Institutions and governments that invest
and barrow across national boundaries.
Large International Banks play a central role in the international
capital market. They gather the excess cash of investors and
savers around the world, and then channel this cash to
borrowers across the globe.
Expands the money supply for borrowers
Reduces the cost of money and borrowers
Reduces the risk for lenders
Forces Expanding the
International Capital Market
Three forces are expanding the International Capital Market:
1.
Information Technology
2.
Deregulation (removing restrictions and regulations)
3.
Financial Instruments - A document (such as a check, draft,
bond, share, bill of exchange, futures or options contract) that
has a monetary value or represents a legally enforceable
(binding) agreement between two or more parties regarding a
right to payment of money
World Financial Centers
World’s three most important financial centers are:
1.
London,
2.
New York
3.
Tokyo.
Main Components of the
International Capital Market
Main components of International Capital Market are:
1.
The international Bond
2.
International Equity
3.
Eurocurrency markets
Main Components of the
International Capital Market
1.
2.
3.
The international Bond consists of all bonds sold by issuing
companies, governments, or other organizations outside their
own countries.
International Equity Market consist of all stocks brought and
sold outside the issuer’s home country . Buyers include
banks, mutual funds, pension funds etc.
All the world’s currencies that are banked outside their
countries of origin are referred to as Eurocurrency and traded
on the Eurocurrency Market. Eurodollers, Europounds,
Euroyen are examples.
Foreign Exchange Market
Foreign Exchange Market is a market in which currencies are
brought and sold and their prices are determined.
Financial Institutions convert one currency into another at a
specific exchange rate
Functions of Foreign Exchange
Market
there are four functions of foreign exchange market
1.
Currency Conversion
2.
Currency Hedging
3.
Currency Arbitrage
4.
Currency Speculation
Foreign Exchange Market Today
Foreign Exchange market is actually an electronic network that
connects the world’s major financial centers. In turn, each of
these centers is a network of foreign exchange traders,
currency trading banks, and investment firms.
The daily trading volume on the foreign exchange market is
estimated to be $4.0 trillion.
Institutions of the Foreign
Exchange Market
The main components of foreign exchange market are:
1.
The Interbank Market
2.
Securities Exchange
3.
Over-the Counter Market
Institutions of the Foreign
Exchange Market
1.
2.
3.
Interbank Market: It is in the interbank market the world’s
largest banks exchange currencies at spot and forward rates.
Companies tend to obtain foreign exchange services from the
bank where they do most of their business.
Securities Exchange: it specialize in currency futures and
options transactions. Buying and selling currencies on these
exchanges entails the use of securities brokers, who facilitate
transactions by transmitting and executing clients’ orders.
Over-the Counter Market: It is a decentralized exchange
encompassing a global computer network of foreign exchange
traders and other market participants.
Currency Convertibility
currency Convertibility means converting the currency of one
country into the currency of another country and its price is
determined by the forces of supply and demand.
Countries that allow full convertibility are those that are in
strong financial positions and have adequate reserves of
foreign currencies.
Such countries have no reason to fear that people will sell their
own currency for that of another.
Goals of Currency Restrictions
The goals of currency restrictions are:
1.
2.
3.
4.
Preserve the country’s reserve of hard currencies with which
to repay debts owed to other nations.
Preserve hard currencies to pay for imports and to finance
trade deficits.
Protect a currency from Speculators
To keep resident individuals and businesses from investing in
other nations.
Policies for Restricting Currencies
Certain Government policies are frequently used to restrict
currency convertibility.
All foreign transactions be performed at or approved by the
country’s central bank.
Import licenses for some or all import transactions
Certain countries require import deposit requirements before
granting import licenses.
One more policy is countertrade , as Boeing has sold aircraft to
Saudi Arabia in return for oil.
International Financial Institutions
Multilateral development bank
-World Bank
-Islamic Development Bank
Bretton Woods institutions (International Monetary Fund)
Regional development banks
Bilateral development banks and agencies
Other regional financial institutions
World Bank
The World Bank is an international financial institution that
provides loans to developing countries for capital programs.
it was created in 1944
Located in Washington (US)
Reduction of poverty is the main goal of World Bank.
It comprises of two institutions:
-International Bank for Reconstruction and Development (IBRD)
and International Development Association (IDA)
International Monetary Fund
it was officially created in 1945.
Its headquarter is in Washington US.
Working to foster global monetary cooperation, secure
financial stability, facilitate international trade, promote high
employment and sustainable economic growth, and reduce
poverty around the world
Islamic Development Bank
It is a multilateral development Financial Institution
Located in Jeddah, Saudi Arabia
Founded in 1973
On the basis of paid-up capital, major shareholders include:
-Saudi Arabia (26.5%)
-Libya (10.7%)
-Iran (9.32%)
-Egypt (9.22%)
-Turkey (8.41%)
-United Arab Emirates (7.54%)
-Kuwait (7.11%)
-Pakistan (3.31%)
-Algeria (3.31%)
-Indonesia (2.93%)
Mini Project
Write a detailed note on any three of
the following:
1. Islamic Development Bank
2. Islamic Research & Training Institute (IRTI),
3. Islamic Corporation for Development of the
Private Sector (ICD),
4. Islamic Corporation for Insurance of
Investment and Export Credit (ICIEC)
5. International Islamic Trade Finance
Corporation (ITFC).