A money market is a market for instruments and a means of lending (or investing) and borrowing funds for relatively short periods, typically regards as from one day to one year. Such means and instruments include short term bank loans. Treasury bills, bank certificates of deposit, commercial paper, banker’s acceptances and repurchase agreements and other short term asset backed claims.
As a key elements of the financial system of a country, the money market plays a crucial economic role that if reconciling the cash needs of so called deficit units (such as farmers needing to borrow in anticipation of their later harvest revenues), with the investment needs of surplus units (such as insurance companies wanting to invest cash productively prior to making long term investment choices). Holding or borrowing liquid claims is more productive than holding cash balances. A smoothly functioning money market can perform these functions very efficiently if borrowing lending spreads (or bid offers spreads for traded instruments) are small (operational efficiency), and if funds are lent to those who can make the most productive use of them (allocation efficiency).…
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International financial environment is totally different from domestic financial environment. International financial management is subject to several external forces, like foreign exchange market, currency convertibility, international monitory system, balance of payments, and international financial markets.
1. Foreign Exchange Market
Foreign exchange market is the market in which money denominated in one currency is bought and sold with money denominated in another currency. It is an overthe counter market, because there is no single physical or electronic market place or an organized exchange with a central trade clearing mechanism where traders meet and exchange currencies. It spans the globe, with prices moving and currencies trading somewhere every hour of every business day. World’s major trading starts each morning in Sydney and Tokyo, and ends up in the San Francisco and Los-Angeles.
The foreign exchange market consists of two tiers: the inter bank market or wholesale market, and retail market or client market. The participants in the wholesale market are commercial banks, investment banks, corporations and central banks, and brokers who trade on their own account.…
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The financial markets of the world consist of sources of finance, and uses for finance, in a number of different countries. Each of these is a capital market on its own. On the other hand, national capital markets are partially linked and partially segmented. National capital markets are of very different stages of development and size and depth, they have very different prices and availability of capital. Hence, the international financier has great opportunities for arbitrage – finding the cheapest source of funds, and the highest return, without adding to risk. It is because markets are imperfectly linked, the means and channels by which foreigners enter domestic capital markets and domestic sources or users of funds go abroad, are the essence of this aspect of international financial management.
The other aspect is the fact that domestic claims and liabilities are denominated in national currencies. These must be exchanged for another for capital to flow internationally; since relative values depend on supply and demand, the international financier faces exchange risk. Finally, the past few decades have seen a new phenomenon; the separation of currency of denomination of assets and liabilities from country of jurisdiction.…
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A nation’s choice as to which currency regime to follow reflects national priorities about all factors of the economy, including inflation, unemployment, interest rate levels, trade balances, and economic growth. The choice between fixed and flexible exchange rates may change over time as priorities change.
At the risk of over-generalizing, the following points partly explain why countries pursue certain exchange rate regimes. They are based on the premise that, other things being equal, countries would prefer fixed exchanges rates.
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- Fixed exchange rates provide stability in international prices for the conduct of trade. Stable prices aid in the growth of international trade lessens risks for all businesses.
- Fixed exchange rate system reduces the possibility of competitive depreciation of currencies, as it happened during the 1930s. Also, deviation from the fixed rates is easily adjustable.
- Fixed exchange rate provides stability in the foreign exchange markets and certainty about the future course of exchange rate and it eliminates risk caused by uncertainty.
Money may be raised internationally by bond issues and by bank loans. This is done in domestic as well as international markets. The difference is that in international markets the money may come in a currency which is different from that normally used by the borrower. The characteristic feature of the international bond market is that bonds are always sold outside the country of the borrower. There are three types of bond, of which two are international bonds. A domestic bond is a bond issued in a country by a resident of that country. A foreign bond is a bond issued in a particular country by a foreign borrower. Eurobonds are bonds underwritten and sold in more than one country.
A foreign bond may be defined as an international bond sold by a foreign borrower but denominated in the currency of the country in which it is placed. It is underwritten and sold by a national underwriting syndicate in the lending country. Thus, a US company might float a bond issue in the London capital market, underwritten by a British syndicate and denominated in sterling.…
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The Euro-currency market has no geographical limits or a common market place. Business is done by telex, telephone and other communication systems. Internationally-reputed brokers put through the transactions for the banks. Deposits are secured for the banks operating in the market by the general guarantee of its parent or holding company and in some cases, by its central bank and /or the government of the concerned country. Similarly, loans to commercial parties are guaranteed by their respective governments. Deposits and loans to banks are, however, not guaranteed except by the banks parent companies or their exchange control authorities.
The amounts of loans and the periods of maturity vary over a wide range from a few thousands to millions of dollars and from call loans to maturities extending up to 10-15 years. Some of the loans may be syndicated and jointly sponsored by a number of banks. There are also varied interest rates of floating rate notes.
The Euro-currency market has growth enormously since its inception in 1958. The principal agencies for collection of data on operations in this market are the Bank for International Settlements and the Bank of England.…
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