INTERNATIONAL

FINANCIAL MARKETS
INNOVATIONS
CHAPTER 7
LEARNING OBJECTIVES:
At the end of this chapter, the students are
expected to:
 Describe the different factors that affect the strategies
in doing international financial market.
 Describe the roles of international agencies that may
affect the financial market.
 Identify the risk that may affect the financial market
strategies.
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 INTERNATIONAL FINACIAL MARKET
A financial market is the mechanism that facilitates
the transfer of funds from lenders (surplus units) to
borrowers (deficit units). The institutions & instruments are
integral part of financial market. When funds flow across
national boundaries and the transfer is between parties
residing in different countries, there comes into existence
the international financial markets.
The international financial market is the worldwide
marketplace in which buyers and sellers trade financial
assets, such as stocks, bonds, currencies, commodities and
derivatives, across national borders. 3
 Institutions or Agencies of
International Financial Markets
The institutions or agencies of
International Financial Markets that serve as
the sources of international funds are:
1. Multilateral development banks or
agencies
2. Government / governmental agencies
3. International banks
4. Securities market
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 Segments of International Financial
Markets
1. Foreign Exchange Market: The Foreign Exchange
Market is the world's largest financial market.
Foreign exchange market is the market for the
purchase and sale of foreign currencies. Borrowing
or investing internationally requires the use of
foreign exchange market for conversion of
currencies. The foreign exchange market facilitates
international trade and international transactions.
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 Segments of International Financial
Markets
2. International Bond Market: Foreign bonds and Euro bonds
are the two types of international bonds. International
bond market also includes a) Sinking fund bonds b)
Convertible bonds c) Floating rate notes e) Global bonds.
3. International Equity Market: Equity capital for a company
is raised through the issue of shares. A multinational
company would often like to raise equity capital from
different countries by issuing shares in those countries.
These shares are then traded in the stock exchange of the
country.
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 Segments of International Financial
Markets
4. International Money Market: International Money
market is the market for transfer of short-term funds. In
international money market, transactions take please in
a variety o f different currencies. International banks
and financial institutions across the world are the major
suppliers of funds in these markets, while MNCs and
governments of different countries are the major users
of these funds. The European money market is an
important part of the international money market.

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 Segments of International Financial
Markets
5. International Credit Market: International Credit market
refers to the market through which companies and
governments issue debt to investors, such as
investment-grade bonds, junk bonds, and short-
term commercial paper. Sometimes called the debt
market, the credit market also includes debt offerings,
such as notes and securitized obligations,
including collateralized debt obligations (CDOs),
mortgage-backed securities, and credit default
swaps (CDS).
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 FOREIGN DIRECT INVESTMENT (FDI)
Foreign direct investment (FDI) is an ownership
stake in a foreign company or project made by an investor,
company, or government from another country.
Generally, the term is used to describe a business
decision to acquire a substantial stake in a foreign
business or to buy it outright to expand operations to a
new region. The term is usually not used to describe a
stock investment in a foreign company alone. FDI is a key
element in international economic integration because it
creates stable and long-lasting links between economies.
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 How Does Foreign Direct Investment (FDI)
Work?
Companies or governments considering a foreign
direct investment (FDI) generally consider target firms or
projects in open economies that offer a skilled workforce
and above-average growth prospects for the investor.
Light government regulation also tends to be prized. FDI
frequently goes beyond mere capital investment. It may
include the provision of management, technology, and
equipment as well. A key feature of foreign direct
investment is that it establishes effective control of the
foreign business or at least substantial influence over its
decision making. 10
 CURRENCY EXCHANGE
A currency exchange is a licensed business that
allows customers to exchange one currency for another.
Currency exchange of physical money (coins and paper
bills) is usually done over the counter at a teller station,
which can be found in various places such as airports,
banks, hotels, and resorts. Currency exchanges make
money by charging a nominal fee and through the bid-ask
spread in a currency.

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 How a Currency Exchange Works?
Currency exchange businesses, both physical and
online, allow you to exchange one country's currency for
another by executing buy and sell transactions. For example,
if you have U.S. dollars and you want to exchange them for
Australian dollars, you would bring your U.S. dollars (or bank
card) to the currency exchange store and buy Australian
dollars with them. The amount you would be able to purchase
would be dependent on the international spot rate, which is
basically a daily changing value set by a network of banks
that trade currencies. The currency exchange store will
modify the rate by a certain percentage to ensure that it
makes a profit on the transaction. 12
 For example, suppose the spot rate for exchanging U.S. dollars
into Australian dollars is listed as 1.2500 for the day. This means that
for each U.S. dollar spent, you can buy 1.25 Australian dollars if traded
at the spot rate. But the currency exchange store may modify this rate
to 1.20, meaning you can buy 1.20 Australian dollars for 1 U.S. dollar.
With this hypothetical rate change, their fee would effectively be 5
cents on the dollar.
Because the transaction is not conducted at the spot
rate, and depends on the profit that the exchange wants to
make, consumers may find that it is less expensive to incur
ATM or credit card fees at the foreign destination, rather than
use exchange services ahead of time. Travelers are advised
to estimate how much money they will spend on a trip and
compare the amounts saved through typical transactions. 13
 CRYPTOCURRENCY
A cryptocurrency is a digital currency, which is an
alternative form of payment created using encryption
algorithms. The use of encryption technologies means that
cryptocurrencies function both as a currency and as a
virtual accounting system. To use cryptocurrencies, you
need a cryptocurrency wallet. These wallets can be
software that is a cloud-based service or is stored on your
computer or on your mobile device. The wallets are the tool
through which you store your encryption keys that confirm
your identity and link to your cryptocurrency.
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What are the risks to using cryptocurrency?
Cryptocurrencies are still relatively new, and the
market for these digital currencies is very volatile. Since
cryptocurrencies don't need banks or any other third party
to regulate them; they tend to be uninsured and are hard to
convert into a form of tangible currency (such as US dollars
or euros.) In addition, since cryptocurrencies are
technology-based intangible assets, they can be hacked
like any other intangible technology asset. Finally, since
you store your cryptocurrencies in a digital wallet, if you
lose your wallet (or access to it or to wallet backups), you
have lost your entire cryptocurrency investment.
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 COUNTRY RISK PREMIUM (CRP)
Country Risk Premium (CRP) is the additional return
or premium demanded by investors to compensate them
for the higher risk associated with investing in a foreign
country, compared with investing in the domestic market.
Overseas investment opportunities are accompanied by
higher risk because of the plethora of geopolitical and
macroeconomic risk factors that need to be considered.
These increased risks make investors wary of investing in
foreign countries and as a result, they demand a risk
premium for investing in them. The country risk premium is
generally higher for developing markets than for developed
nations. 16
 Country risk encompasses numerous factors,
including:
● Political instability;

● Economic risks such as recessionary conditions,

higher inflation etc.;

● Currency fluctuations;

● Adverse government regulations (such as

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 OFFSHORE BANKING UNIT (OBU)
An offshore banking unit (OBU) is a bank shell branch,
located in another international financial center. For instance, a
London-based bank with a branch located in Delhi. Offshore
banking units make loans in the Eurocurrency market when they
accept deposits from foreign banks and other OBUs.
Eurocurrency simply refers to money held in banks located
outside of the country which issues the currency.
Local monetary authorities and governments do not
restrict OBUs' activities; however, they are not allowed to accept
domestic deposits or make loans to residents of the country, in
which they are physically situated. Overall OBUs can enjoy
significantly more flexibility regarding national regulations.
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How Offshore Banking Units Work?
OBUs have proliferated across the globe since the
1970s. They are found throughout Europe, as well as in the
Middle East, Asia, and the Caribbean. U.S. OBUs are
concentrated in the Bahamas, the Cayman Islands, Hong
Kong, Panama, and Singapore. In some cases, offshore
banking units may be branches of resident and/or
nonresident banks; while in other cases an OBU may be an
independent establishment. In the first case, the OBU is
within the direct control of a parent company; in the second,
even though an OBU may take the name of the parent
company, the entity’s management and accounts are
separate. 19
 Some investors may, at times, consider moving
money into OBUs to avoid taxation and/or retain privacy.
More specifically, tax exemptions on withholding tax and
other relief packages on activities, such as offshore
borrowing, are occasionally available. In some cases, it is
possible to obtain better interest rates from OBUs.
Offshore banking units also often do not have currency
restrictions. This enables them to make loans and
payments in multiple currencies, often opening more
flexible international trade options.

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 World Bank and International Finance
Corporation
What Is the International Finance Corporation (IFC)?
The International Finance Corporation (IFC)
provides financing of private-enterprise investment in
developing countries around the world, through both
loans and direct investments. Affiliated with the World
Bank, it also provides advisory services to encourage
the development of private enterprise in nations that
might be lacking the necessary infrastructure or liquidity
for businesses to secure financing.
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How the International Finance Corporation (IFC) Works
The IFC was established in 1956 as a member of the
World Bank Group, focused on investing in economic
development. It claims to be the largest global development
institution focused on the private sector in developing
countries. The IFC says it also seeks to ensure that private
enterprises in developing nations have access to markets and
financing.
The IFC's most recent stated goals include the
development of sustainable agriculture, expanding small
businesses' access to microfinance, supporting infrastructure
improvements, as well as promoting climate, health, and
education policies. The IFC is governed by its 184 member
countries and is headquartered in Washington, D.C. 22
IFC Global Financing
To raise money, the IFC issues bonds in
markets around the world. As of 2021, the IFC
has issued $10.553 billion worth across 178
bonds in 20 currencies.
In fiscal year 2021, the IFC invested $31.5
billion in long-term and short-term finance,
including $10.8 billion mobilized from other
investors.

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Example of an IFC Investment
The IFC provided $145 million in financing to
help one of the world’s largest dairy producers,
FrieslandCampina, acquire a controlling stake of
51% of Engro Foods, Pakistan’s leading dairy
processor.
Although Pakistan is the fourth-largest milk-
producing country in the world, demand has
consistently outpaced supply due to poor
infrastructure and an outdated supply chain. Small
subsistence farms account for nearly 80% of the
industry’s output. 24
 FrieslandCampina has promised to share its
experience and best practices with the smaller
farmers who supply Engro Foods, along with the
majority of the dairy processors in Pakistan. The
stated goal is to help these small farmers increase
productivity and reduce waste.
The IFC said it expects that 200,000 farmers
and 270,000 distributors will benefit from
FrieslandCampina's acquisition of Engro Foods. In
addition, the investment is projected to create
1,000 new jobs in the dairy supply chain.
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END OF CHAPTER 7