international financial markets final

8/11/2019 International Financial Markets Final

1/46

INTERNATIONAL FINANCIAL MARKETS

PROJECT REPORT

On

INTERN TION L FIN NCI L M RKETS

SUBMITTED BY

RESHM VISHNU M LI

ROLL NO 31

M.COM B NKING ND FIN NCE

SEMESTER IV (2013201!"

UNDER THE GUID NCE OF

P#$%. &' K)#n*'+)# .

SUBMITTED TO

S.K SOM IY DEGREE COLLEGE OF RTS,

SCIENCE ND COMMERCE,

VIDHY VIH R (E", MUMB I!000--

FFILI TED TO UNIVERSITY OF MUMB I

MCOM B & F SEM-IV Page 1


2/46


CERTIFICATE

This is to certify that (Reshma Mali) of M.Com Banking &Finance

Semester I (!"#$%#) has s'ccessf'lly Comlete the ro*ect on(I+TER+ATI,+A- FI+A+CIA- MARETS) g'iance of /rof. A*it

arnikar.

Co'rse Co%orinator /rincial

/ro*ect g'ie0Internal E1aminer

E1ternal E1aminer



3/46


2EC-ARATI,+

I (Reshma Mali) a st'ent of M.com Banking & Finance Semester I

(!"#$%#) here3y eclare that I ha4e Comlete the ro*ect on

(International Financial Markets).

The information s'3mitte is tr'e an original to the 3est of my

kno5lege.

Signat're

(Reshma Mali)



4/46


AC+,6-E7EME+T

I 5o'l sincerely like to gi4e my heartfelt ackno5legement an

thanks to my arents. Any amo'nt of thanks gi4en to them 5ill ne4er

3e s'fficient.

I 5o'l sincerely like to thank o'r /rincial 2r.Sangeeta ohli. I

5o'l also like to thank my ro*ect g'ie for his 4al'a3le s'ort

an g'iance 5hene4er neee.

I also feel heartiest sense of o3ligation my li3rary staff mem3ers &

seniors 5ho hele in collection of 2ata an materials an also in

this rocessing as 5ell as in rafting man'scrit.-ast8 3't not the least8 I 5o'l like to thank my friens & colleag'es

for al5ays 3eing there.

(Reshma Mali)



5/46


I+TER+ATI,+A- FI+A+CIA- MARETS

Sr.

+o.

Ine1 /age

+o.

#

!

$

9

:

;

Ly stable distributions" *he scale of change, or olatility, depends on

the length of the time unit to apowera bit more than 1H2" >arge changes

up or down are more likely than what one would calculate using a

=aussian distribution with an estimated standard deiation"

new area of concern is the proper analysis of international market

effects" s connected as today?s global financial markets are, it is

important to reali$e that there are both benefits and conse+uences to a

global financial network" s new opportunities appear due to integration,

so do the possibilities of contagion" *his presents uni+ue issues when

attempting to analy$e markets, as a problem can ripple through the entire

connected global network ery +uickly" or e%ample, a bank failure in

one country can spread +uickly to others, which makes proper analysis

more difficult"

http://en.wikipedia.org/wiki/Statistical_analysis_of_financial_marketshttp://en.wikipedia.org/wiki/Statistical_financehttp://en.wikipedia.org/wiki/Charles_Dowhttp://en.wikipedia.org/wiki/Dow_Jones_%26_Companyhttp://en.wikipedia.org/wiki/Dow_Jones_%26_Companyhttp://en.wikipedia.org/wiki/The_Wall_Street_Journalhttp://en.wikipedia.org/wiki/Dow_Theoryhttp://en.wikipedia.org/wiki/Technical_analysishttp://en.wikipedia.org/wiki/Market_trendshttp://en.wikipedia.org/wiki/Random_walk_hypothesishttp://en.wikipedia.org/wiki/Volatility_(finance)http://en.wikipedia.org/wiki/Beno%C3%AEt_Mandelbrothttp://en.wikipedia.org/wiki/Gaussian_distributionhttp://en.wikipedia.org/wiki/Levy_functionhttp://en.wikipedia.org/wiki/Power_lawhttp://en.wikipedia.org/wiki/Standard_deviationhttp://en.wikipedia.org/wiki/Statistical_analysis_of_financial_marketshttp://en.wikipedia.org/wiki/Statistical_financehttp://en.wikipedia.org/wiki/Charles_Dowhttp://en.wikipedia.org/wiki/Dow_Jones_%26_Companyhttp://en.wikipedia.org/wiki/Dow_Jones_%26_Companyhttp://en.wikipedia.org/wiki/The_Wall_Street_Journalhttp://en.wikipedia.org/wiki/Dow_Theoryhttp://en.wikipedia.org/wiki/Technical_analysishttp://en.wikipedia.org/wiki/Market_trendshttp://en.wikipedia.org/wiki/Random_walk_hypothesishttp://en.wikipedia.org/wiki/Volatility_(finance)http://en.wikipedia.org/wiki/Beno%C3%AEt_Mandelbrothttp://en.wikipedia.org/wiki/Gaussian_distributionhttp://en.wikipedia.org/wiki/Levy_functionhttp://en.wikipedia.org/wiki/Power_lawhttp://en.wikipedia.org/wiki/Standard_deviation


16/46


Financial market slang

/oison ill, when a company issues more shares to preent being

bought out by another company, thereby increasing the number of

outstanding shares to be bought by the hostile company making the

bid to establish maEority"

'ant, a +uantitatie analyst with a


17/46


#oth bonds and credit (currency) financing hae their adantages and

disadantages" or a gien company, under specific circumstances, one

method of financing may be preferred to the other" *he maEor differences

are6

1. Cost of 3orro5ing

#onds are issued in both fi%ed rate and floating rate forms" i%ed rate

bonds are an attractie e%posure management tool since the known long!term currency inflows can be offset by the known long!term outflows in

the same currency" In contrast, currency loans carry ariable

rates"

2" Mat'rity

#onds hae longer maturities while the period of borrowing in the

currency market has tended to lengthen oer time"

3" Si>e of the iss'e

arlier, the funds aailable for lending at any time hae been much more

in the inter!bank market than in the bond market" #ut of late, this

situation does not hold true" &oreoer, although in the past the flotation

costs of a uro currency loan hae been much lower than a uro bond

(about ;"5 M of the total loan amount ersus about 2"25 M of the face

MCOM B & F SEM-IV Page 1-


18/46


alue of a uro bond issue), compensation has worked to lower uro

bond flotation costs"

4. Fle1i3ility

In a uro bond issue, the funds must be drawn in one sum on a fi%ed date

and repaid according to a fi%ed schedule, unless the borrower pays a

substantial prepayment penalty" #y contrast, the drawdown in a floating

rate loan can be staggered tosuit the borrowerNs needs and can be repaidin whole or in part at any time, often without penalty" &oreoer, a uro

currency loan with a multi!currency clause enables the borrower to switch

currencies on any roll!oer date, whereas switching the denomination of a

uro bond from currency to currency # would re+uire a costly,

combined, refunding and reissuing operation"

9. See

unds can be raised by a known borrower ery +uickly in the uro

currency market" Cften, a period of two to three weeks should suffice"

uro bond financing generally takes more time, though the difference is

becoming less significant"

!. Creit Market

8redit or >oans are the loans e%tended for one year or longer" *he market

that deals in such loans is called 8redit &arket"



19/46


*he common maturity for credit loans is 5 years" 0ince banks accept

short!term deposits and proide long!term loans, it is likely that assetliability mismatch may arise" *o aoid this banks often e%tend floating

rate credit loans fi%ed to some market interest rate" *he >ondon Inter

#ank Cffer Bate (>I#CB) is the most commonly used interest rate" It is

the rate charged for loans between #anks"



20/46


/articiants in creit Market

*he maEor lending banks in the credit market are banks, merican,

apanese, #ritish, 0wiss, rench, =erman and sian (specially that of0ingapore) banks, 8hemical #ank, < &organ, 8iticorp, #ankers *rust,

8hase &anhattan #ank, irst .ational #ank of 8hicago, #arclay?s #ank,

.ational :estminster, #.


21/46


O Pari!passu clause that preents the borrower from contracting new

debts that subordinate the interest of lenders

O "xchange option clause that allows the withdrawal of a part or totalityof loan in another currency

O #egative guarantee clause that commits the borrower not to contract

other debts that subordinate the interest of lenders"

Characteristics of creit

maEor part (more than 7; M) of the debts is made in @0 dollars" *he

second (but far behind) is


22/46


generally renewable (roll oer credit) eery si% months, fi%ed with

reference to >I#CB" *he >I#CB is the rate of money market applicable

to short!term credits among the banks of >ondon" *he reference rate can

e+ually be


23/46


bond markets in all currencies e%cept the apanese /en are +uite free

from any regulation by the respectie goernments" 0traight bonds are

priced with reference to a benchmark, typically treasury issues" *hus a

dollar bond will be priced to a yield a /*& (/ield!to!&aturity)

somewhat aboe the @0 treasury bonds of similar maturity, the spread

depending upon the borrowers ratings and market conditions"

loatation costs of the bond are comparatiely higher than costs indicated

with syndicated credits"

. Commercial aer(C/s)

8ommercial paper is a corporate short!term, unsecured promissory

note issued on a discount to yield basis" 8ommercial paper maturities

generally do not e%ceed 2-; days" 8ommercial paper represents a cheap

and fle%ible source of funds :hile 8


24/46


final holder is paid the face alue on maturity along with the interest" It is

used by the commercial banks as short! term funding instruments"

uro 8s are mainly issued in >ondon by banks" Interest on 8s withmaturity more than a year is paid annually than semi!annually"



25/46


:. International Caital Markets

International 8apital &arkets hae come into e%istence to cater to the

need of international financing by economies in the form of short,

medium or long!term securities or credits" *hese markets also called

markets, are the markets on which currencies, bonds, shares and bills are

tradedHe%changed" Cer the years, there has been a phenomenal growth

both in olume and types of financial instruments transacted in these

markets" currency deposits are the deposits made in a bank, situated

outside the territory of the origin of currency" or e%ample, dollar is a

deposit made in @0 dollars in a bank located outside the @0 banks are

the banks in which currencies are deposited" *hey hae term deposits in

currencies and offer credits in a currency other than that of the country in

which they are located"

distinctie feature of the financial strategy of multinational companies

is the wide range of e%ternal serices of funds that they use on an ongoing

basis" #ritish *elecommunication offers stock in >ondon, .ew /ork and

*okyo, while 0wiss #ank 8orporation!, aided by Italian, #elgian,

8anadian and =erman banks! helps corporations sell 0wiss franc bonds in

urope and then swap the proceeds back into @0 dollars"



26/46


irms hae three general sources of funds aailable6 (i) internally

generatedcash, (ii) short!term e%ternal funds, and (iii) long!term e%ternal

funds" %ternal inestment comes in the form of debt or e+uity, which are

generally negotiable (tradable) instruments" *he pattern of financing

aries from country to country" 8ompanies in the @A get an aerage of

;!-;M of their funds from internal sources" =erman companies get

about 4;!5;M of their funds from e%ternal suppliers" In 19-5, apanese

companies got more than -;M of their money from outside sources, but

this pattern has since reersed maEor chunks of finances come from

internal sources"

nother significant aspect of financing behaiour is that debt accounts for

the oerwhelming share of e%ternal finance" Industry sources of e%ternal

finance also differ widely from country to country" =erman and apanese

companies hae relied heaily on bank borrowing, while the @0 and

#ritish industry raised much more money directly from financial markets

by the sale of securities" Doweer, in all countries, bank borrowing is on

a decline" *here is a growing tendency for corporate borrowing to take

the form of negotiable securities issued in the public capital markets

rather than in the form of commercial bank loans" *his process known as

securitisation is most pronounced among the apanese companies"

;. /etro 2ollar

uring the oil crises of 19-3, the 8apital markets hae played a ery

important role" *hey accepted the dollar deposits from oil e%porters and

channeled the funds to the borrowers in other countries" *his is called

Qrecycling the petrodollarsN"



27/46



28/46


issue, maturity and so forth" loatation costs tend to be high" ong!term


29/46


$. 6hat are the ifferent international financial markets

*he international financial markets consist of the credit market, money

market, bond market and e+uity market"

*he international credit market, also called uro credit market, is the

market that deals in medium term uro credit or uro loans"

International banks and their clients comprise the urocurrency market

and form the core of the international money market" *here are seeralother money market instruments such as the uro 8ommercial


30/46


and how preiously issued common stock is traded between inestors in

the secondary markets"

International Financial Market% (general% can 3e 'se in any)

*he last two decades hae witnessed the emergence of a ast financial

market across national boundaries enabling massie cross!border capital

flows from those who hae surplus funds and a search of high returns to

those seeking low!cost funding" *he degree of mobility of capital, the

global dispersal of the finance industry and the enormous diersity of

markets and instruments, which a firm seeking funds can tap, is

something new"

&aEor C8 (Crgani$ation for conomic 8o!operation and

eelopment) countries had began deregulating and liberali$ing their

financial markets towards the end of seenties" :hile the process was far

from smooth, the oerall trend was in the direction of relaxation of

controls, which till then had compartmentali$ed the global financial

markets" %change and capital controls were gradually remoed, non!

residents were allowed freer access to national capital markets and

foreign banks and financial institutions were permitted to establish their

presence in the arious national markets"

MCOM B & F SEM-IV Page 3;


31/46


:hile opening up of the domestic markets began only around the end of

seenties, a truly international financial market had already been born in

the mid!fifties and gradually grown in si$e and scope during si%ties and

seenties" *his refers to the uro currencies &arket where borrower

(inestor) from country could raise (place) funds from (with) financial

institutions located in country #, denominated in the currency of country

8" uring the eighties and nineties, this market grew further in si$e,

geographical scope and diersity of funding instruments" It is no more a

'euro' market but a part of the general category called Roffshore

marketsS"

longside liberali$ation, other +ualitatie changes hae been taking place

in the global financial markets" Bemoal of restrictions has resulted into

geographical integrationof the maEor financial markets in the C8

countries" =radually this trend is spreading to deeloping countries many

of which hae opened up their markets!at least partially!to non!resident

inestors, borrowers and financial institutions"

nother noticeable trend is functional integration" *he traditional

distinctions between different financial institutions!commercial banks,

inestment banks, finance companies, etc"! are giing way to diersified

entities that offer the full range of financial serices" *he early part of

eighties saw the process of disintermediation get underway" Dighly rated

issuers began approaching inestors directly rather than going through the

bank loan route"



32/46


Cn the other side, debt crisis in the deeloping countries, adoption of

capital ade+uacy norms and intense competition, forced commercial

banks to reali$e that their traditional business of accepting deposits and

making loans was not enough to guarantee their long!term surial and

growth" *hey began looking for new products and markets" 8oncurrently,

the international financial enironment was becoming more olatile!

there were fluctuations in interest and e%change rates" *hese forces gae

rise to innovative forms of funding instrumentsand tremendous adances

in risk management" *he decade saw increasing actiity in and

sophistication of the deriatiesN market, which had begun emerging in

the seenties"

*aken together, these deelopments hae gien rise to a globally

integrated financial marketplace in which entities in need of short! or

long!term funding hae a much wider choice than before in terms of

market segment, maturity, currency of denomination, interest rate basis,

incorporating special features and so forth" *he same fle%ibility is

aailable to inestors to structure their portfolios in line with their risk!

return tradeoffs and e%pectations regarding interest rates, e%change rates,

stock markets andcommodity prices"

. -ist o't the gro5th an f'nctions of c'rrency markets



33/46


:hile opening up of the domestic markets began only around the end of

seenties, a truly international financial market had already been born in

the mid!fifties and gradually grown in si$e and scope during si%ties and

seenties" *his refers to the well!known Qurocurrencies &arketN" It is the

largest offshore market"


34/46


1" uring the 195;s, the erstwhile @00B was earning dollars from the

sale of gold and other commodities and wanted to use them to buy

grain and other products from the :est, mainly from the @0"

Doweer, they did not want to keep these dollars on deposit with

banks in .ew /ork, as they were apprehensie that the @0

goernment might free$e the deposits if the cold war intensified" *hey

approached banks in #ritain and rance who accepted these dollar

deposits and inested them partly in @0"

2" omestic banks in @0 (as in many other countries) were subEected

to resere re+uirements, which meant that a part of their deposits were

locked up in relatiely low yielding assets"

3" *he importance of the dollar as a ehicle currency in international

trade and finance increased, so many uropean corporations had cash

flows in dollars and hence temporary dollar surpluses" ue to distance

and time $one problems as well as their greater familiarity with

uropean banks, these companies preferred to keep their surplus

dollars in uropean banks, a choice made more attractie by the

higher rates offered by uro banks"

*he main factors behind the emergence and strong growth of the

urodollar markets were the regulations on borrowers and lenders

imposed by the @0 authorities which motiated both banks and

borrowers to eole urodollar deposits and loans" dded to this are the

considerations mentioned aboe, i$" the ability of uro banks to offer

better rates both to the depositors and the borrowers and conenience of



35/46


dealing with a bank that is closer to home, who is familiar with business

culture and practices in urope"

0DCB* .C*0

#. /articiants in International /ro*ect Financing a) Sonsors 3)

-eners

0ponsors

*hese are partners in the proEect who bring in the e+uity capital or risk

capital" #eing so, they are keenly interested in the successful completion

of the proEect and shoulder maEor responsibilities as regards its e%ecution"

*he fact that they bring in the e+uity capital is an indication of their

interest" lso the amount of e+uity that they bring has a marked bearing

on the e%tent of debt that can be raised for the proEect"

0ometimes people who bring in the e+uity capital are Eust the initiators of

the proEect" Included in this category are multinational firms, future

buyers of products or serices of the proEect, the public or priate

inestors, international organisations, deelopment banks etc"



36/46


>enders

*hey bring in the debt capital" inancing of a big proEect necessitates

interention of a banking pool consortium composed of banks, national orinternational financial institutions, e%port financing institutions etc"

=uarantors

=uarantees maybe proided by banks, public financing organisations,

international financial institutions, priate insurance companies etc"


37/46


financial risk are degree of indebtedness, the terms and conditions of

repayment of debt and currency used"

0ome proEects will hae e%penses and reenues that inole seeral

currencies" s a result the e%change rate risk is ery high"


38/46


consumer preferences, etc" Ideally, a pure domestic firm is affected only

by domestic economic conditions ! the domestic economic risk" Doweer,

in today?s integrated world economy, the concept of a pure domestic firm

has less practical releance" &any firms that appear strictly pure domestic

confront foreign economic risk indirectly" ("g"6 local restaurantHdept

store, real estate agent)

4"


39/46


! Identifying political risk and its likely conse+uences

! eeloping policies in adance to cope with the possibility of political

risk

! 0trengthening a firm?s bargaining position

! eising measures to ma%imi$e compensation in the eent of

e%propriation

8ountry Bisk6 It refers to elements of risk inherent in doing business in

the economic, social, and political enironment of another country"

5" 8ounter party Bisk ! *he risk that a counter party will default on a

financial obligation"

" >i+uidity Bisk !*he risk that a financial position cannot be sold

+uickly at preailing prices"

-" eliery Bisk ! *he risk that a buyer will not delier payment of

funds after a seller has deliered securities or foreign e%change that

were purchased"



40/46


7" Bolloer Bisk ! *he risk of being closed out from a financial market

and unable to renew (or roll oer) a short!term contract"

=. Cther risks ! Cther risks relate to the risk of cost oerruns and bad

management"

$. Financing of M+Cs in local or international market


41/46


2" In another type of financing, both the lender and the promoter share

the risk" *he problem sometimes encountered in this method is todecide the proportion in which the risk is to be shared between two

parties"

2omestic 40s offshore markets

inancial assets and liabilities denominated in a particular currency ! say

the 0wiss ranc ! are traded are primarily in the national financial

markets of that country" *hese financial markets are known as Qomestic

&arketsN"

In case of many conertible currencies they are traded in the financial

markets outside the country of that currency" *hese financial markets are

known as QCffshore &arketsN"

:hile it is true that neither both markets will offer both the financing

options nor any entity can access all segments of a particular market, it is

true generally that a gien entity has an access to both the segments of the

markets for placing as well as raising funds"



42/46


*here are theories by e%perts that suggest that there are no two types of

financial markets (vi$'omestic and offshore markets) but eerything is apart of single Q=lobal inancial &arketN"

0imilarity

%perts suggest that QarbitrageN will ensure that both these markets will be

closely linked together in terms of costs of funding and returns on assets'

ifferences

#oth of these markets significantly differ on the QBegulatory dimensionN"

&aEor segments of the domestic markets are subEect to strict superision

by the releant authorities such as 08 in @0, &inistry of inance in

apan and the 0wiss .ational #ank in 0wit$erland" *hese authorities

regulate foreign (non!resident) entitiesN access to the public capital

markets in their countries by laying down eligibility criteria, disclosure J

accounting norms and registration J rating re+uirements (similarly for

domestic banks, resere re+uirements and deposit insurance)"

*he offshore markets on the other hand hae minimal regulation and

often no registration"

inally it must be noted that though the nature of regulation continues to

distinguish omestic from the offshore markets, there are segments like



43/46



44/46


Cer the years, these markets hae eoled a ariety of instruments other

than time deposits and short!term loans, e"g" certificates of deposit (8s),

euro commercial paper (8


45/46


oreign #ond &arket and

#ond &arket

oreign #ond6 issue is one offered by a foreign borrower to the inestors

in a national capital market and denominated in that nations currency" n

e%ample is =erman &.8 issuing dollar denominated bonds to the @"0"

inestors"

#ond6 issue is one denominated in a particular currency but sold to

inestors in national capital markets other than the country that issued the

denominating currency" n e%ample is a utch borrower issuing &!

denominated bonds to inestors in the @A, 0wit$erland and the

.etherlands"



46/46


international financial markets final

Documents