Components of International Financial Environment

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.… Read the rest

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.… Read the rest

Advantages of Fixed Exchange Rate System

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.

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  • Fixed Exchange  Rate System
  • Flexible Exchange  Rate System

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.

  1. Fixed  exchange  rates provide stability in international prices for the conduct of  trade.
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Eurobond

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.… Read the rest

Eurocurrency Market Characteristics

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.… Read the rest

An Overview of Depositary Receipts

Equity investment by foreign investors into a country can occur in one or  more of three ways. Foreign investors can directly purchase shares in the stock  market of the country e.g. investment by Foreign Institutional Investors  (FIIs)  in the Indian stock market. Or,  companies from that country can issue shares (or depositary receipts) in the  stock markets of other countries. Finally, indirect purchases can be made  through a mutual fund which may be a specific country fund or a multi-country  regional fund.

The Depositary Receipts Mechanism

The volume of new equity issues in the international markets increased  dramatically between 1983 and 1987 and again after 1989.… Read the rest