Global Financial Markets

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.

International Financial Markets

There are three sets of markets — home, foreign and euromarkets — faced  by every investor or borrower, plus the fourth market, the foreign currency  market, which must be crossed as one enters the world of finance. Each country  has more or less imperfect linkages with every other country and with the euro  market, both the segment in its own currency and Euro-market segments in other  currencies. The linkages of each country with its Euromarkets segment are very  important, since domestic and euromarkets instrument are close substitutes and  no foreign exchange market comes between them. The links among segments of  the euromarkets are also very important, since no national controls come  between them – in other words, linkages within the euromarkets are perfect,  being differentiated only by currency of denomination. They are linked through  the spot and forward foreign exchange markets. Global financial markets are thus  concerned with the following markets.

1. Domestic Capital Markets

The international role of a capital market and the regulatory climate  that prevails are closely related. Appropriate regulation can and does make  markets more attractive. However, the dividing line between regulatory  measures that improve markets and those that have just the opposite effect is  very thin.

2. Foreign Financial Markets

Major chunk of the savings and investments of a country take place in that  country’s domestic financial markets. However, many financial markets have  extensive links abroad — domestic investors purchase foreign securities and  invest funds in foreign financial institutions. Conversely, domestic banks can  lend to foreign residents and foreign residents can issue securities in the national  market or deposit funds with resident financial intermediaries.  The significant aspect of traditional foreign lending and borrowing is that  all transactions take place under the rules, usances and institutional  arrangements prevailing in the respective national markets. Most important, all  these transactions are directly subject to public policy governing foreign  transactions in a particular market. For example, when savers, purchase  securities in a foreign market, they do so according to the rules, market practices  and regulatory percepts that govern such transactions in that particular market.

Likewise, foreign borrowers who wish to issue securities in a national market  must follow the rules and regulations of that market. Frequently, these rules are  discriminatory and restrictive. The same is true with respect to financial  intermediaries; the borrower who approaches a foreign financial institution for a  loan obtains funds at rates and conditions imposed by the financial institutions  of the foreign country and is directly affected to foreign residents.

3. Euromarkets

Euro currencies — which are neither currencies nor are they  necessarily connected with Europe — represent the separation of currency of  denomination from the country of jurisdiction. Banks and clients make this  separation simply by locating the market for credit denominated in a particular  currency outside the country where that currency is legal tender. For example,  markets for dollar denominated loans, deposits and securities in jurisdictions  other than in the United States effectively avoid US banking and securities  regulations. These markets are referred to as “Euro” or, more properly, as  external markets in order to indicate that they are not part of the domestic or  national financial system. As in the domestic markets, the euromarkets consist  of intermediated funds and direct funds. Intermediated credit in channel through  banks is called the “Euro Currency Market”.

A domestic market, usually with special and unique aspects and  institutions stemming from historical and regulatory differences. A foreign  segment attached to the national market, where non-residents participate as  supplier and takers of funds, frequently playing both roles simultaneously, but  always under the specific conditions, rules and regulations established for  foreign participants in a particular national market. An external segment that is  characterized by being in a different political jurisdiction, with only the currency  used to determine the financial claims being the essential link to the national  market. As a result, the various external markets have more features in common  with each other than with the respective national markets. Therefore, they are  properly discussed as a common, integrated market where claims denominated  in different currencies are exchanged.

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