International financial markets and institutions

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International financial markets and institutions

  1. 1. INTERNATIONAL FINANCIAL MARKETS DR RAVI INDER SINGH
  2. 2. INTERNATIONAL FINANCIAL MARKETS-MEANING • THEY BRING TOGETHER PEOPLE WHO HAVE SURPLUS OF FUNDS AND PEOPLE WHO ARE IN NEED OF FUNDS AND ARE LOOKING FORWARD TO BORROW THEM. THE COVERAGE OF THESE MARKETS IS THE ENTIRE GLOBE.
  3. 3. TYPES OF FINANCIAL MARKETS • PHYSICAL Vs FINANCIAL ASSETS MARKETS • SPOT Vs FUTURE MARKET • MONEY MARKET Vs CAPITAL MARKET • PRIMARY Vs SECONDARY MARKET • PRIVATE Vs PUBLIC MARKETS
  4. 4. FINANCIAL INSTITUTONS • INVESTMENT BANKING HOUSES • HELP CORPORATIONS DESIGN SECURITIES WITH FEATURES THAT ARE CURRENTLY ATTRACTIVE TO INVESTORS, • THEN BUY THESE SECURITIES FROM THE CORPORATION, AND • RESELL THEM TO SAVERS • INVESTMENT BANKER ACTING AS A FACILITATOR TO HELP TRANSFER CAPITAL FROM SAVERS TO BUSINESSES. • EXAMPLES :MERRILL LYNCH, MORGAN STANLEY, GOLDMAN SACHS, OR CREDIT SUISSE GROUP, KARVY CONSULTANTS ETC.
  5. 5. FINANCIAL INSTITUTIONS • COMMERCIAL BANKS • THEY SERVE A VARIETY OF SAVERS AND BORROWERS. • THEY ARE THE ORGANISATIONS THROUGH WHICH CENTRAL BANKS EXPAND OR CONTROL SUPPLY OF MONEY IN THE ECONOMY
  6. 6. FINANCIAL SERVICES CORPORATIONS • THEY ARE THE LARGE CONGLOMERATES THAT COMBINE MANY DIFFERENT FINANCIAL INSTITUTIONS WITHIN A SINGLE CORPORATION. • EXAMPLES OF FINANCIAL SERVICES CORPORATIONS, MOST OF WHICH STARTED IN ONE AREA BUT HAVE NOW DIVERSIFIED TO COVER MOST OF THE FINANCIAL SPECTRUM, • EXAMPLES : CITIGROUP, AMERICAN EXPRESS, FIDELITY, AND PRUDENTIAL, ICICI, IDBI, IFCI ETC.
  7. 7. PENSION FUNDS • THEY ARE RETIREMENT PLANS FUNDED BY CORPORATIONS OR GOVERNMENT AGENCIES FOR THEIR WORKERS AND • ADMINISTERED PRIMARILY BY THE TRUST DEPARTMENTS OF COMMERCIAL BANKS OR BY LIFE INSURANCE COMPANIES. • PENSION FUNDS INVEST PRIMARILY IN BONDS, STOCKS, MORTGAGES, AND REAL ESTATE.
  8. 8. MUTUAL FUNDS • THEY ARE CORPORATIONS THAT ACCEPT MONEY FROM SAVERS AND THEN USE THESE FUNDS TO BUY STOCKS, LONG-TERM BONDS, OR SHORT-TERM DEBT INSTRUMENTS ISSUED BY BUSINESSES OR GOVERNMENT UNITS. • THESE ORGANIZATIONS POOL FUNDS AND THUS REDUCE RISKS BY DIVERSIFICATION. THEY ALSO ACHIEVE ECONOMIES OF SCALE IN ANALYZING SECURITIES, MANAGING PORTFOLIOS, AND BUYING AND SELLING SECURITIES. • DIFFERENT FUNDS ARE DESIGNED TO MEET THE OBJECTIVES OF DIFFERENT TYPES OF SAVERS. HENCE, THERE ARE BOND FUNDS FOR THOSE WHO DESIRE SAFETY, STOCK FUNDS FOR SAVERS WHO ARE WILLING TO ACCEPT SIGNIFICANT RISKS IN THE HOPE OF HIGHER RETURNS, AND STILL OTHER FUNDS THAT ARE USED AS INTEREST-BEARING CHECKING ACCOUNTS.
  9. 9. HEDGE FUNDS • HEDGE FUNDS ARE SIMILAR TO MUTUAL FUNDS BECAUSE THEY ACCEPT MONEY FROM SAVERS AND USE THE FUNDS TO BUY VARIOUS SECURITIES, BUT THERE ARE SOME IMPORTANT DIFFERENCES. WHILE MUTUAL FUNDS ARE REGISTERED AND REGULATED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC), HEDGE FUNDS ARE LARGELY UNREGULATED. THIS DIFFERENCE IN REGULATION STEMS FROM THE FACT THAT MUTUAL FUNDS TYPICALLY TARGET SMALL INVESTORS, WHEREAS HEDGE FUNDS TYPICALLY HAVE LARGE MINIMUM INVESTMENTS (OFTEN EXCEEDING $1 MILLION) THAT ARE EFFECTIVELY MARKETED TO INSTITUTIONS AND INDIVIDUALS WITH HIGH NET WORTHS.
  10. 10. STOCK MARKETS • STOCK MARKETS ALSO SERVES AS A MEDIUM FOR RAISING MONEY AT THE INTERNATIONAL LEVEL.
  11. 11. MODES FOR TRANSFER OF FUNDS • DIRECT TRANSFERS OF MONEY AND SECURITIES OCCUR WHEN A BUSINESS SELLS ITS STOCKS OR BONDS DIRECTLY TO SAVERS, WITHOUT GOING THROUGH ANY TYPE OF FINANCIAL INSTITUTION. THE BUSINESS DELIVERS ITS SECURITIES TO SAVERS, WHO IN TURN GIVE THE FIRM THE MONEY IT NEEDS.
  12. 12. THROUGH MIDDLEMAN • TRANSFERS MAY ALSO GO THROUGH AN INVESTMENT BANKING HOUSE SUCH AS MERRILL LYNCH, WHICH UNDERWRITES THE ISSUE. AN UNDERWRITER SERVES AS A MIDDLEMAN AND FACILITATES THE ISSUANCE OF SECURITIES. THE COMPANY SELLS ITS STOCKS OR BONDS TO THE INVESTMENT BANK, WHICH IN TURN SELLS THESE SAME SECURITIES TO SAVERS. THE BUSINESSES’ SECURITIES AND THE SAVERS’ MONEY MERELY “PASS THROUGH” THE INVESTMENT BANKING HOUSE. HOWEVER, THE INVESTMENT BANK DOES BUY AND HOLD THE SECURITIES FOR A PERIOD OF TIME, SO IT IS TAKING A RISK—IT MAY NOT BE ABLE TO RESELL THEM TO SAVERS FOR AS MUCH AS IT PAID.
  13. 13. THROUGH A FINANCIAL INTERMEDIARY SUCH AS A BANK OR MUTUAL FUND • HERE THE INTERMEDIARY OBTAINS FUNDS FROM SAVERS IN EXCHANGE FOR ITS OWN SECURITIES. THE INTERMEDIARY USES THIS MONEY TO BUY AND HOLD BUSINESSES’ SECURITIES. FOR EXAMPLE, A SAVER MIGHT DEPOSIT DOLLARS IN A BANK, RECEIVING FROM IT A CERTIFICATE OF DEPOSIT, AND THEN THE BANK MIGHT LEND THE MONEY TO A SMALL BUSINESS AS A MORTGAGE LOAN. THUS, INTERMEDIARIES LITERALLY CREATE NEW FORMS OF CAPITAL—IN THIS CASE, CERTIFICATES OF DEPOSIT, WHICH ARE BOTH SAFER AND MORE LIQUID THAN MORTGAGES AND THUS ARE BETTER FOR MOST SAVERS OR INVESTORS.
  14. 14. INTERNATIONAL CASH SETTLEMENT AND PROCESSING • CLEARING HOUSE INTERBANK PAYMENTS SYSTEM(CHIPS) • SOCIETY FOR WORLDWIDE INTERBANK FINANCIAL TELECOMMUNICATIONS(SWIFT)
  15. 15. CLEARING HOUSE INTERBANK PAYMENTS SYSTEM(CHIPS) • OPERATED BY NEW YORK CLEARING HOUSE ASSOCIATION • COMPUTERISED NETWORK THAT CONNECTS MAJOR BANKS GLOBALLY • TRANSFERS MORE THAN 1 TRILLION DOLLARS A DAY
  16. 16. SOCIETY FOR WORLDWIDE INTERBANK FINANCIAL TELECOMMUNICATIONS(SWIFT) • ESTABLISHED IN 1971 BY MORE THAN 240 OF THE LARGEST EUROPEAN AND NORTH AMERICAN BANKS AS A PRIVATE TELECOMMUNICATIONS NETWORK. • IT PROVIDE USER BANKS WITH PRIVATE INTERNATIONAL COMMUNICATION LINK • CHIPS ACTUALLY CLEARS FINANCIAL TRANSACTIONS, SWIFT IS PURELY A TELECOMMUNICATION SYSTEM
  17. 17. • THANKS

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