2. 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.
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.
3. What is Money Market?
Money Market is a financial market where short-term financial assets having
liquidity of one year or less are traded on stock exchanges.
The securities or trading bills are highly liquid. Also, these facilitate the participant’s
short-term borrowing needs through trading bills.
The participants in this financial market are usually banks, large institutional
investors, and individual investors.
4. Objectives of Money Market
Below are the main objectives of the money market:
1.Providing borrowers such as individual investors, government, etc. with short-term funds at a
reasonable price. Lenders will also have the advantage of liquidity as the securities in the money
market are short-term.
2.It also enables lenders to turn their idle funds into an effective investment. In this way, both the
lender and borrower are at a benefit.
3.RBI/ Central bank regulates the money market. Therefore, in turn, helps to regulate the level of
liquidity in the economy.
4.Since most organizations are short on their working capital requirements. The money market helps
such organizations to have the necessary funds to meet their working capital requirements.
5.It is an important source of finance for the government sector for both national and international
trade. And hence, provides an opportunity for the banks to park their surplus funds.
5. Importance of the Money Market
The money market is a market for short term transactions. Hence it is responsible for the
liquidity in the market. Following are the reasons why the money market is essential:
•It maintains a balance between the supply of and demand for the monetary transactions done in
the market within a period of 6 months to one year.
•It enables funds for businesses to grow and hence is responsible for the growth and development
of the economy.
•It aids in the implementation of monetary policies.
•It helps develop trade and industry in the country. Through various money market instruments,
it finances working capital requirements. It helps develop the trade in and out of the country.
•The short term interest rates influence long term interest rates. The money market mobilises the
resources to the capital markets by way of interest rate control.
6. Importance of the Money Market
•It helps in the functioning of the banks. It sets the cash reserve ratio and statutory liquid
ratio for the banks. It also engages their surplus funds towards short term assets to
maintain money supply in the market.
•The current money market conditions are the result of previous monetary policies. Hence
it acts as a guide for devising new policies regarding short term money supply.
•Instruments like T-bills, help the government raise short term funds. Otherwise, to fund
projects, the government will have to print more currency or take loans leading to
inflation in the economy. Hence the it is also responsible for controlling inflation.
7. What are Money Market Instruments?
Money market instruments are financial instruments that help companies, corporations,
and government bodies to raise short-term debt for their needs.
The borrowers meet their short-term needs at a low cost and the lenders benefit from
interest rates and liquidity.
Money market instruments include bonds, treasury bills, certificates of deposit,
commercial paper, etc.
9. What is a Depositary Receipt?
A depositary receipt is a negotiable instrument issued by a bank to represent shares in a
foreign public company, which allows investors to trade in the global markets.
Understanding Depositary Receipts
Depositary receipts allow investors to invest in companies in foreign countries while trading in a
local stock exchange in the investor’s home country. It is advantageous to investors since shares are
not allowed to leave the home country that they trade in.
Depositary receipts were created to minimize the complications of investing in foreign securities.
Previously, if investors wanted to buy shares in a foreign company, they would need to exchange their
money into foreign currency and open a foreign brokerage account.
Then, they would be able to purchase shares through the brokerage account on a foreign stock
exchange.
The creation of depositary receipts eliminates the entire process and makes it simpler and more
convenient for investors to invest in international companies.
10. Reasons for the issue of depository receipts are given as under:
•Fundraising
•Diversifying shareholder’s base into extended geographies.
•Setting up employee stock option plans.
•Increasing the global presence of the company.
•Improving the image and position of the company.
•Facilitating merger and acquisition activities.
11. #1 – ADR- American Depositary Receipts
An American Depositary Receipts is a financial instrument representing a certain number of
shares in the company situated outside the United States.
The United States depositary bank issues ADR to the investors.
This ADR gets listed on the stock exchange in the United States & trades like the other shares
on the exchange.
Therefore, ADR benefits the foreign firm to attract & raise the fund from the investor without
listing its equity shares in the United States at a lower expense than if the firm chooses to list
its shares in the United States.
Thus ADRs allow U.S. investors to invest in non-U.S. companies and give non-U.S.
companies easier access to the U.S. capital markets.
12. A Global Depository Receipt (GDR), also known as International Depository Receipt
(IDR), is a certificate issued by a depository bank, which purchases shares of foreign
companies and deposits it on the account.
GDRs represent ownership of an underlying number of shares of a foreign company and
are commonly used to invest in companies from developing .
Typically, 1 GDR is equal to 10 underlying shares, but any ratio can be used. It is a
negotiable instrument which is denominated in some freely convertible currency.
Financial Intermediaries such as depository banks purchase the shares in one country,
create a GDR containing those shares, and sell the GDR in the foreign market. It helps
companies raise capital from foreign markets.
GDR is a negotiable instrument, that can be denominated in any freely convertible
security.
13. Some of the Indian companies who have GDRs in multiple countries include:
•Bombay Dyeing
•Axis Bank
•Indiabulls Housing
•HDFC Bank, and many more.
Companies usually issue GDRs from developing and emerging markets because they can offer
relatively higher growth than developed economies and, therefore, attract more investors.
Characteristics Of GDR
1. It is an unsecured security
2. It may be converted into number of shares
3. Interest and redemption price is public in foreign agency
4. It is listed and traded in the stock exchange
14. Advantages of Global Depository Receipts
The following are the advantages of global depository receipts(GDR)
•Liquidity – Global Depository Receipts are liquid instruments traded on stock exchanges. The
liquidity can be managed by managing the supply-demand of the instruments.
•Access to Foreign Capital – GDRs have emerged as one of the essential mechanisms to raise
capital from foreign markets in today’s world. It is giving companies worldwide access to foreign
capital through a relatively simpler mechanism. It is also helping companies increase their
worldwide visibility by issuing GDRs in multiple countries
•Easily Transferrable – Global Depository Receipts can be easily transferred from one person to
another. It makes trading them easy, even for non-resident investors. The transfer of GDR does not
involve extensive documentation like some other securities.
•Potential Forex Gains – Since GDRs are international capital market instruments, they are
exposed to foreign exchange rate volatility.
15. European Depositary Receipt (EDR)
It is the European equivalent of ADRs. Similarly, EDRs are only listed on
European stock exchanges and can only be traded in Europe. It pays
dividends in euros and can be traded like a regular stock.
