PAPER ONE:
Introduction to Global Financial
Markets
Paper Delivered By Dr. Tunde Adeyemi To Participant offering
“Certificate in Introduction to Investment Banking; December
2019

 The financial system plays the key role in the economy by stimulating economic
growth, influencing economic performance of the actors, affecting economic
welfare. This is achieved by financial infrastructure, in which entities with funds
allocate those funds to those who have potentially more productive ways to invest
those funds. A financial system makes it possible a more efficient transfer of funds.
As one party of the transaction may possess superior information than the other
party, it can lead to the information asymmetry problem and inefficient allocation
of financial resources. By overcoming the information asymmetry problem the
financial system facilitates balance between those with funds to invest and those
needing funds.
 According to the structural approach, the financial system of an economy consists
of three main components:
 1) financial markets;
 2) financial intermediaries (institutions);
 3) financial regulators.
FINANCIAL SYSTEMS
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 A financial market is a market in which people trade financial securities and
derivatives at low transaction costs. Some of the securities include stocks and
bonds, and precious metals.
 The term "market" is sometimes used for what are more strictly exchanges,
organizations that facilitate the trade in financial securities, e.g., a stock exchange or
commodity exchange. This may be a physical location (such as the NSE, NYSE,
LSE, JSE, BSE) or an electronic system (such as NASDAQ). Much trading of
stocks takes place on an exchange; still, corporate actions (merger, spinoff) are
outside an exchange, while any two companies or people, for whatever reason, may
agree to sell stock from the one to the other without using an exchange.
 Financial markets refer broadly to any marketplace where the trading of securities
occurs, including the stock market, bond market, forex market, and derivatives
market, among others. Financial markets are vital to the smooth operation of
capitalist economies
FINANCIAL MARKETS
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 Intermediary functions: The intermediary functions of financial markets include the following:
 Transfer of resources: Financial markets facilitate the transfer of real economic resources from
lenders to ultimate borrowers.
 Enhancing income: Financial markets allow lenders to earn interest or dividend on their surplus
invisible funds, thus contributing to the enhancement of the individual and the national income.
 Productive usage: Financial markets allow for the productive use of the funds borrowed. The
enhancing the income and the gross national production.
 Capital formation: Financial markets provide a channel through which new savings flow to aid
capital formation of a country.
 Price determination: Financial markets allow for the determination of price of the traded
financial assets through the interaction of buyers and sellers. They provide a sign for the allocation of
funds in the economy based on the demand and to the supply through the mechanism called price
discovery process.
 Sale mechanism: Financial markets provide a mechanism for selling of a financial asset by an
investor so as to offer the benefit of marketability and liquidity of such assets.
 Information: The activities of the participants in the financial market result in the generation and
the consequent dissemination of information to the various segments of the market. So as to reduce the
cost of transaction of financial assets.
FUNCTIONS OF THE FINANCIAL
MARKETS
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 Financial Functions
 Providing the borrower with funds so as to enable them to carry out
their investment plans.
 Providing the lenders with earning assets so as to enable them to earn
wealth by deploying the assets in production debentures.
 Providing liquidity in the market so as to facilitate trading of funds.
 Providing liquidity to commercial bank
 Facilitating credit creation
 Promoting savings
 Promoting investment
 Facilitating balanced economic growth
 Improving trading floors
FUNCTIONS OF THE FINANCIAL
MARKETS
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 Based on market levels
 Primary market: A primary market is a market for new issues or new
financial claims. Therefore, it is also called new issue market. The primary
market deals with those securities which are issued to the public for the first
time.
 Secondary market: A market for secondary sale of securities. In other
words, securities which have already passed through the new issue market
are traded in this market. Generally, such securities are quoted in the stock
exchange and it provides a continuous and regular market for buying and
selling of securities.
 Simply put, primary market is the market where the newly started company
issued shares to the public for the first time through IPO (initial public
offering). Secondary market is the market where the second hand securities
are sold (security Commodity Markets).
COMPONENTS OF THE FINANCIAL
MARKETS
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 Based on security types
 1. Money market: Money market is a market for dealing with the financial
assets and securities which have a maturity period of up to one year. In other
words, it's a market for purely short-term funds.
 2. Capital market: A capital market is a market for financial assets which have
a long or indefinite maturity. Generally, it deals with long-term securities which
have a maturity period of above one year. The capital market may be further
divided into (a) industrial securities market (b) Govt. securities market and (c) long-
term loans market.
 3. Equity markets: A market where ownership of securities are issued and
subscribed is known as equity market. An example of a secondary equity market for
shares is the New York (NYSE) stock exchange.
 4. Debt market: The market where funds are borrowed and lent is known as
debt market. Arrangements are made in such a way that the borrowers agree to pay
the lender the original amount of the loan plus some specified amount of interest.
COMPONENTS OF THE FINANCIAL
MARKETS
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 Based on security types
 5. Derivative markets: A market where financial instruments are derived and
traded based on an underlying asset such as commodities or stocks.
 6. Financial service market: A market that comprises participants such as
commercial banks that provide various financial services like ATM. Credit cards. Credit
rating, stock broking etc. is known as financial service market. Individuals and firms use
financial services markets, to purchase services that enhance the workings of debt and
equity markets.
 7. Depository markets: A depository market consists of depository institutions
(such as banks) that accept deposits from individuals and firms and uses these funds to
participate in the debt market, by giving loans or purchasing other debt instruments
such as treasury bills.
 8. Non-depository market: Non-depository market carry out various functions in
financial markets ranging from financial intermediary to selling, insurance etc. The
various constituencies in non-depositary markets are mutual funds, insurance
companies, pension funds, brokerage firms etc.
COMPONENTS OF THE FINANCIAL
MARKETS
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1. Inadequate skills for financial products development (Capital Market);
2. Inadequate collaboration of regulators and stakeholders;
3. Unavailability of investible fund for long term financial products;
4. Weak risk management;
5. Physical insecurity and prevalence of financial fraud;
6. Low level of financial literacy and inclusion;
7. Low acceptability of mobile money at merchant locations;
8. Non-existence of sound collateral management;
9. Inadequate legal and regulatory framework for the commodities market and the
NIFC;
10. 10. Unwillingness of Private companies to go public;
11. 11. Inadequate Foreign Direct Investment and non-existence of an Integrated
Credit Scoring System.
Challenges Facing The Financial
Markets
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CAPITAL MARKETS
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Why Do We Have
Capital Markets?
 Capital markets bring together investors and borrowers
 investors - corporations with surplus cash, individuals,
and non-bank financial institutions
 borrowers - individuals, companies, and governments
 markets makers - the financial service companies that
connect investors and borrowers, either directly
(investment banks) or indirectly (commercial banks)
 capital market loans can be equity or debt
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Who Are The Main Players
in Capital Markets?
The Main Players in a Generic Capital Market
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What Makes The Global
Capital Market Attractive?
Today’s capital markets are highly interconnected and facilitate the
free flow of money around the world
Borrowers benefit from the additional supply of funds global capital
markets provide
lowers the cost of capital
the price of borrowing money or the rate of return that borrowers
pay investors
Investors benefit from the wider range of investment opportunities
diversify portfolios and lower risk
But, volatile exchange rates can make what would otherwise be
profitable investments, unprofitable
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Why Is The Global Capital
Market Growing?
 Two factors are responsible for the growth of capital markets
1. Advances in information technology
 the growth of international communications technology and advances in
data processing capabilities
 24-hour-day trading
 so, shocks that occur in one financial market spread around the globe
very quickly
2. Deregulation by governments
 has facilitated growth in international capital markets
 governments have traditionally limited foreign investment in domestic
companies, and the amount of foreign investment citizens could make
 since the 1980s, these restrictions have been falling
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Why Is The Global Capital
Market Growing?
 deregulation began in the U.S., then moved to
Great Britain, Japan, and France
 many countries have dismantled capital controls making it
easier for both inward and outward investment to occur
 The 2008-2009 global financial crisis raised questions as
to whether deregulation had gone too far
 Question: Are new regulations for the financial services
industry needed?
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What Are The Risks Of The
Global Capital Markets?
 Question: Could deregulation of capital markets and fewer
controls on cross-border capital flows make nations more
vulnerable to the effects of speculative capital flows?
 can have a destabilizing effect on economies
 Speculative capital flows may be the result of inaccurate
information about investment opportunities
 if global capital markets continue to grow, better quality
information is likely to be available from financial intermediaries
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What Is A Eurocurrency?
 A eurocurrency is any currency banked outside its country
of origin
 About two-thirds of all eurocurrencies are Eurodollars
 dollars banked outside the U.S.
 Other important eurocurrencies are the euro-yen, the euro-pound,
and the euro-euro
 The eurocurrency market is an important source of low-
cost funds for international companies
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Why Has The Eurocurrency
Market Grown?
 The eurocurrency market began in the 1950s when the Eastern bloc
countries feared that the United States might seize their dollars
 so, they deposited them in Europe
 additional dollar deposits came from Western European central banks
and companies that exported to the U.S. could earn a higher rate of
interest in London
 In 1957, the market surged again after changes in British laws
 under the new laws, British banks had to attract dollar deposits and loan
dollars rather pounds to finance non-British trade
 London became the leading center of the eurocurrency market
 continues to hold this position today
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Why Has The Eurocurrency
Market Grown?
 In the 1960s, the market grew once again
 Changes in U.S. regulations discouraged U.S. banks from lending to
non-U.S. residents
 would-be borrowers of dollars outside the U.S. turned to the euromarket
as a source of dollars
 The next big increase came after the 1973-74 and 1979-80 oil price
increases
 Arab members of OPEC accumulated huge amounts of dollars
 avoided potential confiscation of their dollars by the U.S. by
depositing them in banks in London
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What Makes The Eurocurrency
Market Attractive?
 The eurocurrency market is attractive because it is not regulated by
the government
 banks can offer higher interest rates on eurocurrency deposits
than on deposits made in the home currency
 banks can charge lower interest rates to eurocurrency borrowers
than to those who borrow the home currency
 The spread between the eurocurrency deposit and lending rates is
less than the spread between the domestic deposit and lending rates
 gives eurocurrency banks a competitive edge over domestic banks
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What Makes The Eurocurrency
Market Unattractive?
 The eurocurrency market has two significant drawbacks:
1. Because the eurocurrency market is unregulated, there is
a higher risk that bank failure could cause depositors to
lose funds
 can avoid this risk by accepting a lower return on a home-
country deposit
2. Companies borrowing eurocurrencies can be exposed to
foreign exchange risk
 can minimize this risk through forward market hedges
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What Is The
Global Bond Market?
 Bonds are an important means of financing for many companies
 the most common bond is a fixed rate which gives investors fixed cash
payoffs
 The global bond market grew rapidly during the 1980s and 1990s and continues
to grow today
 There are two types of international bonds
 Foreign bonds are sold outside the borrower’s country and are denominated in
the currency of the country in which they are issued and are used by companies
when they think it will reduce the cost of capital
 Eurobonds are underwritten by a syndicate of banks and placed in countries
other than the one in whose currency the bond is denominated
 Foreign bonds sold in the United States are called Yankee bonds.
 Foreign bonds sold in Japan are Samurai bonds.
 Foreign bonds sold in Great Britain are bulldogs
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What Makes The Eurobond
Market Attractive?
 The eurobond market is attractive because
1. It lacks regulatory interference
 since companies do not have to adhere to strict regulations, the
cost of issuing bonds is lower
2. It has less stringent disclosure requirements than
domestic bond markets
 it can be cheaper and less time consuming to offer eurobonds
than dollar-denominated bonds
3. It is more favorable from a tax perspective
 eurobonds can be sold directly to foreign investors23

What Is The
Global Equity Market?
 The global equity market allows firms to:
1. Attract capital from international investors
 many investors buy foreign equities to diversify their portfolios
2. List their stock on multiple exchanges
 this type of trend may result in an internationalization of corporate
ownership
3. Raise funds by issuing debt or equity around the world
 by issuing stock in other countries, firms open the door to raising capital in the
foreign market
 gives the firm the option of compensating local managers and employees with
stock
 provides for local ownership
 increases visibility with local stakeholders24

How Do Exchange Rates
Affect The Cost Of Capital?
 Adverse exchange rates can increase the cost of foreign
currency loans
 While it may initially seem attractive to borrow foreign
currencies, when exchange rate risk is factored in, that can
change
 firms can hedge their risk by entering into forward contracts
 but this will also raise costs
 Firms must weigh the benefits of a lower interest rate
against the risk of an increase in the real cost of capital
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What Do Global Capital Markets
Mean For Managers?
 Growth in global capital markets has created opportunities for firms
to borrow or invest internationally
 firms can often borrow at a lower cost than in the domestic capital
market
 firms must balance the foreign exchange risk associated with borrowing
in foreign currencies against the costs savings
 Growth in capital markets offers opportunities for firms, institutions, and
individuals to diversify their investments and reduce risk
 again though, investors must consider foreign exchange rate risk
 Capital markets are likely to continue to integrate providing more
opportunities for business
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The Future of the Financial
System and the Money and
Capital Markets
McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All Rights Reserved.

Introduction
 Powerful forces are reshaping today’s financial
marketplace
 Forces for change
 Powerful new trends within the financial marketplace
itself
 Major changes in the structure and functioning of the
economy
 New social and demographic trends
 Altering the public’s need for new financial
services
4-28
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Financial Forces: Reshaping the Money and Capital
Markets Today
 Financial innovation - the development of many new financial
services and instruments
 Service proliferation - the expansion of the menu of financial
services offered
 Competition - the intense struggle for the customer’s business
 Consolidation - mergers and acquisitions have created financial
giants out of numerous smaller financial-service providers
 Deregulation - the lightening or elimination of government
rules brought about by a strategy of privatization of the
financial sector
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Financial Forces: Reshaping the Money and Capital
Markets Today
 Convergence - the blurring of the traditional distinctions among
different types of financial-service institutions
 Homogenization - the growing similarity in the service menus offered
by financial institutions
 Globalization - the global expansion of operations and the falling of
geographical barriers
 Market broadening - the expansion of traditionally local markets to
become regional, national, or even international in scope
 Securitization - the pooling of loans and the issuance of securities as
claims against the loan pool
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Forces Affecting the Financial
System of the Future
4-31
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THANK YOU!
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