MODULE 2 - INTERNATIONAL FINANCIAL

MARKET

2.1 CREATION OF EURO – EURO CURRENCY MARKET, EUROPEAN MONETARY SYSTEM

2.2 BASIC CONCEPT OF INTERNATIONAL MONETARY MARKET, INTERNATIONAL

MONEY MARKET INSTRUMENTS

2.3 FOREX MARKET – SPOT MARKET - FUTURE & OPTION MARKET, INTERNATIONAL
STOCK MARKETS AND BOND MARKETS
2.1 CREATION OF EURO

 The euro’s origins lay in the Maastricht Treaty (1991), an agreement

among the then 12 member countries of the European Community
(now the European Union)— As part of economic integration.
 United Kingdom, France, Germany, Italy, Ireland, Belgium,
Denmark, the Netherlands, Spain, Portugal, Greece, and
Luxembourg—that included the creation of an economic and
monetary union (EMU).
 The treaty called for a common unit of exchange, the euro, and set
strict criteria for conversion to the euro and participation in the
EMU.
WHY A COMMON CURRENCY
 An economic and monetary union (EMU) was a
recurring ambition for the European Union from the
late 1960s onwards.
 EMU involves coordinating economic and fiscal
policies, a common monetary policy, and a common
currency, the euro.
 A single currency offers many advantages: it makes it
easier for companies to conduct cross-border trade,
the economy becomes more stable, and
consumers have more choice and opportunities.
MAASTRICHT TREATY 1991
 The new Treaty on European Union, which contained the
provisions needed to implement the monetary union, was
agreed at the European Council held at Maastricht, the
Netherlands, in December 1991.
 After a decade of preparations, the euro was launched on 1
January 1999: for the first three years it was an ‘invisible’
currency, only used for accounting purposes and electronic
payments.
 Coins and banknotes were launched on 1 January 2002, and
in 12 EU countries the biggest cash changeover in history
took place.
GROWTH OF EURO
 In 1999 the currency was born virtually and in 2002
notes and coins began to circulate.
 It rapidly took over from the former national currencies
and slowly expanded behind the rest of the EU.
 In 2009 the Lisbon Treaty finalised its political authority,
the Eurogroup, alongside the European Central Bank.
 Currently, the euro (€) is the official currency of 20 out
of 27 EU member countries which together constitute
the Eurozone, officially called the euro area.
 The euro is the most tangible proof of European integration:
 around 341 million people use it every day, making it the second
most-used currency worldwide.
 The benefits of the common currency are immediately obvious to
anyone travelling abroad or shopping online on websites based in
another EU country.
THE INTERNATIONAL MONEY MARKET

 The international money market is a market where

international currency transactions between
numerous central banks of countries are carried on.
 The transactions are mainly carried out using gold or in
US dollar as a base.
 The basic operations of the international money market
include the money borrowed or lent by the governments or
the large financial institutions.
BASIC CONCEPT OF INTERNATIONAL MONETARY MARKET

The international monetary system is a set of

conventions and rules that support cross-border
investments, trades, and the reallocation of capital
between different countries.
These rules define how exchange rates,
macroeconomic management, and balance of
payments are addressed between nations.
 The international money market is governed by the
transnational monetary transaction policies of
various nations’ currencies.
 The international money market’s major responsibility is
to handle the currency trading between the countries.
 This process of trading a country’s currency with another
one is also known as forex trading.
 Unlike share markets, the international money market sees very
large funds transfer.
 The players of the market are not individuals; they are very big
financial institutions.
 The international money market investments are less risky and
consequently, the returns obtained from the investments are less
too.
 The best and most popular investment method in the
international money market is via money market mutual
funds or treasury bills.
 Note − The international money market handles huge sums of international
currency trading on a daily basis.
 The Bank for International Settlements has revealed that the daily turnover of
a traditional exchange market is about $1880 billion.
Some of the major  Royal Bank of Scotland
international money market  Bank of America
participants are −  Goldman Sachs
 Citigroup  Merrill Lynch
 Deutsche Bank  JP Morgan Chase
 HSBC
 Barclays Capital
 UBS AG
 The international money market keeps track of the
exchange rates between currency- pairs on a
regular basis.
 Currency bands, fixed exchange rate, exchange
rate regime, linked exchange rates, and floating
exchange rates are the common indices that govern
the international money market in a subtle manner.
EUROCURRENCY MARKET

Eurocurrency refers to any currency deposited in

banks anywhere outside the country that issued it.
These currencies belong to non-residents of a
nation.
Foreign-based banks lend these to anyone who
wants to use them in the country where they are
legal tender.
Despite having “euro” as a prefix, the term has nothing to
do with Europe, the Eurozone , or the monetary unit Euro.
For example, euros or Indian rupees deposited in a U.S.-
based bank would be eurocurrency or non-local currency.
It acts as a primary source of global financing for financial
institutions, banks, corporations, governments, and mutual
and hedge funds.
 The eurocurrency market originated in the aftermath of
World War II when the Marshall Plan to rebuild Europe sent
a flood of dollars overseas.
 The market developed first in London, as banks needed a
market for dollar deposits outside the United States.
 Dollars held outside the United States are called
eurodollars, even if they are held in markets outside
Europe
INTERNATIONAL MONEY MARKET INSTRUMENTS - TYPES OF
EUROCURRENCY MARKETS

Eurodollar
 Eurodollars were the first eurocurrency, and they still have the
most influence.
 It is worth noting that U.S. banks can have overseas operations
dealing in eurodollars.
 These subsidiaries are often registered in the Caribbean. However,
the majority of actual trading takes place in the United States.
 The eurodollar trades mostly overnight, although deposits and
loans out to 12 months are possible. Transactions are usually for a
minimum of $25 million and can top $1 billion in a single deposit.
Euroyen
 The offshore euroyen market was established in the 1980s and
expanded with Japan's economic influence.
 As interest rates declined in Japan during the 1990s, the higher rates
paid by euroyen accounts became more attractive
Eurobond
 There is an active bond market for countries, companies, and
financial institutions to borrow in currencies outside of their
domestic markets.
 The first such eurobond was issued by the Italian company
Autostrade in 1963.
 It borrowed $15 million for 15 years in a deal arranged in
London and listed on the Luxembourg stock exchange.
 Issuing eurobonds remained popular in Italy, and the Italian
government sold US$7 billion in eurobonds in October 2019.
ADVANTAGES AND DISADVANTAGES OF EUROCURRENCY
MARKETS

 The main benefit of eurocurrency markets is that

they are more competitive.
 They can simultaneously offer lower interest rates for
borrowers and higher interest rates for lenders.
 That is mostly because eurocurrency markets are
less regulated.
 On the downside, eurocurrency markets face higher
risks, particularly during a run on the banks.
EUROPEAN MONETARY SYSTEM (EMS)

 The European Monetary System (EMS) refers to an arrangement

established in 1979, whereby members of the European
Economic Community (now the European Union) agreed to link
their currencies to encourage monetary stability in Europe.
 The EMS aimed to create a stable exchange rate for easier trade
and cooperation among European countries through an
Exchange Rate Mechanism (ERM).
 The ERM was based on the European Currency Unit (ECU) – a
currency unit composed of a basket of 12 European currencies
weighted by gross domestic product (GDP).
HISTORY OF THE EUROPEAN MONETARY SYSTEM
 Beginning from the Second World War, the Bretton Woods System
was used to try and maintain stability among major currencies.
However, it was dropped in 1971.
 European countries then launched the European Monetary System
in 1979, and leaders sought to achieve monetary stability through
a stable exchange rate.
 The EMS launched the European Currency Unit and the European
Exchange Rate Mechanism in order to achieve the overarching
goal of monetary stability and work towards the idea of a single
market in Europe.
 It stayed in place until 1999 and was then succeeded by the
European Monetary Union (EMU) and the Euro.
GOALS OF THE EUROPEAN MONETARY SYSTEM

The European Monetary System aimed to achieve various

macroeconomic goals:
Encouraging trade within Europe
Exchange rate stability among trading members
Controlled inflation within Europe
BENEFITS OF THE EUROPEAN MONETARY SYSTEM

1. Ensuring currency stability

 The EMS ensured currency stability in Europe during times
of international market volatility.
2. Working towards a single market
 The EMS was considered an important step towards the
establishment of the EU and the single market in Europe.
3. Unity in Europe
 The EMS promoted political and economic unity across
Europe at a pivotal time in European history.
FOREX MARKETS – SPOT, FUTURES & OPTIONS

The foreign exchange market is a global decentralized

or over-the-counter market for the trading of
currencies.
 This market determines foreign exchange rates for
every currency.
It includes all aspects of buying, selling and
exchanging currencies at current or determined
prices.
FOREX MARKETS

Participants in these markets can buy, sell,

exchange, and speculate on the relative exchange
rates of various currency pairs.
Foreign exchange markets are made up of banks,
forex dealers, commercial companies, central
banks, investment management firms, hedge
funds, retail forex dealers, and investors.
FOREIGN EXCHANGE / FOREX / FX / MARKET

 The foreign exchange market—also called forex, FX, or

currency market—was one of the original financial markets
formed to bring structure to the burgeoning global economy.
 In terms of trading volume, it is, by far, the
largest financial market in the world.
 Aside from providing a venue for the buying, selling,
exchanging, and speculation of currencies, the forex market
also enables currency conversion for international
trade settlements and investments.
FUNCTION OF FOREX MARKET

Currencies are always traded in pairs, so the "value" of one of

the currencies in that pair is relative to the value of the other.
This determines how much of country A's currency country B
can buy, and vice versa.
stablishing this relationship (price) for the global markets
is the main function of the foreign exchange market.
 This also greatly enhances liquidity in all other financial
markets, which is key to overall stability.
IMPORTANCE OF THE FOREIGN EXCHANGE MARKET

Foreign exchange markets serve an important function in

society and the global economy.They allow for:
 currency conversions,
 facilitating global trade (across borders),
 investments,
 the exchange of goods and services, and
 financial transactions.
VALUE OF CURRENCY IN FOREX MARKET

The value of a country's currency depends on whether it is a

"free float" or "fixed float."
Free-floating currencies - are those whose relative value is
determined by free-market forces, such as supply-demand
relationships.
A fixed float is where a country's governing body
sets its currency's relative value to other
currencies, often by pegging it to some standard.
Free-floating currencies include the U.S. dollar,
Japanese yen, and British pound, while examples of
fixed floating currencies include the UAE Dirham
and the Saudi Riyal.
TYPES OF FOREIGN EXCHANGE MARKETS

There are three main forex markets:

the spot forex market,
the forward forex market, and
the futures forex market.
SPOT FOREX MARKET:

The spot market is the immediate exchange of

currencies at the current exchange.
On the spot.
This makes up a large portion of the total forex
market and involves buyers and sellers from across
the entire spectrum of the financial sector, as well
as those individuals exchanging currencies.
FORWARD FOREX MARKET

The forward market involves an agreement between

the buyer and seller to exchange currencies at
an agreed-upon price at a set date in the future.
 No exchange of actual currencies takes place, just the
value.
The forward market is often used for hedging.
It is over the counter and not a regulated market.
FUTURES FOREX MARKET

The futures market is similar to the forward

market, in that there is an agreed price at an
agreed date.
The primary difference is that the futures market
is regulated and happens on an exchange.
This removes the risk found in other markets.
Futures are also used for hedging.
FOREX OPTIONS MARKET

• Currency options give investors the right, but not the

obligation, to buy or sell a particular currency at a pre-
specific exchange rate before the option expires.
• Currency options allow traders to hedge currency risk or to
speculate on currency moves.
• Currency options are one of the most common ways for
corporations, individuals or financial institutions to hedge
against adverse movements in exchange rates.
INTERNATIONAL STOCK MARKETS

 International equity markets are an important platform for

global finance.
 They not only ensure the participation of a wide variety of
participants but also offer global economies to prosper.
 To understand the importance of international equity markets,
market valuations and turnovers are important tools.
 Moreover, we must also learn how these markets are
composed and the elements that govern them.
 Cross-listing, Yankee stocks, ADRs and GRS are important
elements of equity markets.
INTERNATIONAL BOND MARKETS

 Unlike Equity and Money markets, there is no specific bond

market to trade bonds.
 However, there are domestic and foreign participants who sell
and buy bonds in various bond markets.
 A bond market is much larger than equity markets, and the
investments are huge too.
 However, bonds pay on maturity and they are traded for
short-time before maturity in the markets.
Bonds also have risks, returns, indices, and
volatility factors like equity and money markets.
The international bond market is composed of
three separate types of bond markets: Domestic
Bonds, Foreign Bonds, and Eurobonds.