Globalization of International Markets

FINN 931 International Financial Management: Spring 2014

Professor Joyce Veasley

Student Name – Kavita Gaur

Student ID – 85684

FINAL CSLO

Introduction

The purpose of this short thesis is to have better understanding about International Financial Management and its various aspects. It provides valuable knowledge about knowledge about Globalization & its challenges, deep understanding about foreign exchange markets, essentials of Foreign Direct Investments and financial management of global operations.

Understand the structures & challenges of Global Financial Environment

As per Erçel Gazi’s1 speech on globalization & international financial environment, the acceleration of globalization of financial market started in 1980’s and 1990’s. The world seemed to get smaller due to the technology & the globalization. It is almost impossible for us to imagine a world without globalization. It is only because of globalization that we are able to do international banking. Globalization has also made diversified portfolios & profit maximization possible.

Structure of Globalized Financial Markets

Globalized financial markets can be categorized into international financial institutions, banks, insurance, real estate, bonds, hedge funds, and stock markets etc.

• International Banking Sector: An international bank can be defined as financial entity that offers financial services to foreign clients. These foreign clients could be corporations or individuals. Organizations do business with global banks as it helps to expedite international business transactions; the complexities of which can be quite expensive & tedious. Organizations who seek global presence prefer to use international bank services. Individuals operate through international banks for a number of reasons, such as tax avoidance, offshore banking, foreign exchange, etc.

International financial Institutions (IFI’s): International Financial Institutions are formed or established by more than one country and are subjected to all pertaining international laws. It is owned or governed by national governments.

      The three major IFI’s are

• The International Monetary Fund (IMF)
• The International Finance Corporation (IFC)
• The World Bank

These institutions were formed post world war period, to balance global economy. These institutions are a major source of funds for the developing countries.

    Stock Market: Stock market is where people can trade shares and securities listed on stock exchange as well as those traded privately. People can invest in stocks from around the world. This has become possible only because of globalization and technology advancements.

Individuals & Organizations heavily invest in real estate, insurance & other international financial markets to maximize their profits. Globalization & technology has made it possible to buy or sell real estate with a single click on your laptop or computer.

Challenges of Globalized Financial Environment

Globalization has benefited us with free flow of international capital funds, and has enhanced competition worldwide. But, several factors such as social, economic, financial, cultural & even political risks impact globalization adversely. Below are the few barriers to globalization, which makes international trade difficult.

• Weak Macroeconomic & Financial Policies
• Inconsistencies in domestic policies
• Higher volatility of exchange rates due to integrated financial markets.
• Higher international capital mobility
• Cultural, Social and Political differences

These barriers affect international trade relations of any single country and; every other country involved suffer the consequences equally.

There is no doubt that every country faces its own challenges that are directly affected by their corresponding economic and social conditions but as the world is now engaged in globalized trade, such factors will also affect the world economy to some extent.

This exercise has helped me to understand the various factors involved in the international markets. Understanding & analyzing the international market is important not only to minimize the risk involved in international trade but also to mitigate issues that might arise because of cultural & social differences between countries.

Foreign Exchange Theory

The decentralized global financial market for trading all currencies is known as the foreign exchange market. The foreign exchange market determines the virtual values of different currencies at any given point of time. It operates through various financial institutions and it is open 365 days a year, 24 hours a day. Foreign exchange market enables currency conversion & aids international trade. Foreign exchange market is the most liquid financial market of the world. Traders who widely participate in foreign exchange market are large & central banks, investment management firms, currency speculators, governments of all countries of the world, huge corporations, financial institutions, etc.

Following are the characteristics of foreign exchange market:

• It has large trading volume
• It is globally spread
• It operates continuously
• It is majorly affected by exchange rates
• Liquidity of the market
• Diversified market

To understand foreign exchange markets, it is essential for us to understand the functions & structure of foreign exchange market. We will further discuss the same as below

• Spot

• Forward
• Futures
• Swap
• Options

Spot Transactions

In global finance terms, a spot transaction or spot contract is a contract for trading commodities, security, exchange of currencies, etc. with almost instantaneous delivery. Spot transactions are generally single type of transaction. Spot market is over-the-counter (OTC) market. Generally, the cash payment is made within 2 business days. The settlement date is called as “value date” & the settlement price is called as spot price or spot rate.