PPT FOR LAW, COMMERCE AND MANAGEMENT STUDENTS

1. GLOBAL
FINANCIAL
MARKETS
BBA SEM V (FMS)
UNIT I

2. EURO CURRENCY MARKET
 The Eurocurrency market is the money
market for currency outside of the country
where it is legal tender.
 The term Eurocurrency is a generalization
of Eurodollar and should not be confused
with the EU currency, the euro. The
Eurocurrency market functions in many
financial centres around the world, not
just Europe.

4. EURO CURRENCY MARKET
 The "euro-" prefix in the term arose because
originally such currencies were held in Europe, but
that is no longer solely the case, and a
Eurocurrency can now be held anywhere in the
world that local banking regulations permit.
 The Eurocurrency market is a major source of
finance for international trade because of ease of
convertibility and the absence of domestic
restrictions on trading.
 Dollars held outside the United States are called
Eurodollars, even if they are held in markets outside
Europe, such as Singapore. For eg. US dollars held in
an Australian Bank.
 There is not necessarily any connection between
Eurocurrency markets and Europe today, although
these markets did begin in Europe.

5. Features of Euro Currency
Market
 It is a short-term Money Market.
 It is a wholesale market. The size of an individual
transaction is about $1 million.
 It is an independent market as it is a free and
independent market which doesn’t function under
the control of any monetary authority.
 It is an interbank market.
 The market is large, efficient and highly
competitive.
 It is highly sensitive and affected by fluctuations of
interest rates.
 Major participants include – Government,
Commercial Banks.

6. Example:
 Let's look at a hypothetical example where Bank A
is based in France, and Bank B is based in the
United States. Bank A is planning to make some
rather large loans to a client of theirs and has
determined that they would be able to make more
money if they borrowed money from Bank B—in US
dollars—and loaned it out to their client.
 Bank B makes interest from the loan they offer to
Bank A, whereas Bank A profits from the difference
in the loan terms between their client and the loan
terms offered from Bank B. Although in theory Bank
A might do this at zero cost in order to satisfy their
client, it is much more often the case that they use
Eurocurrency as a way to take advantage of
an interest-rate discrepancy.

7. EURO CURRENCY MARKET
 Interest rates paid on deposits in the Eurocurrency
market are typically higher than in the domestic
market. That is because the depositor is not
protected by the same national banking laws and
does not have governmental deposit insurance.
 Rates on Eurocurrency loans are typically lower
than those in the domestic market for essentially the
same reasons. Eurocurrency bank accounts are
also not subject to the same reserve
requirements as domestic accounts.

8. Advantages and Disadvantages
of Euro Currency Market
 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 contrary, Eurocurrency markets face
higher risks as there are no regulators to control
the market.

10. Euro Bond Market
 A Eurobond refers to a bond issued in a
country in a currency different from its
legal tender. It acts as a fixed-income
debt instrument or security in the
Eurocurrency market and comes with a
maturity of 5-30 years. These bonds carry
lower interest rates and zero forex risk.

11. Example
 Assume a British corporation wants to start a new business
in Canada and needs a large sum of money in the local
currency, i.e., Canadian dollars. Because the firm does not
have adequate funds in the requisite currency, it considers
borrowing the funds from Canada. It realizes, however,
that the cost of borrowing would be too high.
 Soon, it learns about the Canadian immigrant population
in Japan and introduces Canadian dollar-denominated
external bonds to the Japanese market. Investors in Japan
who have Canadian dollars in their bank accounts invest
in the eurobond market and buy bonds in exchange for
those dollars. As a result, it enables the British company to
obtain lower-cost financing to establish the venture in
Canada.

13. Advantages of Euro Bonds
The advantages of external or Euro bonds are:
– Issued in the desired country and currency
– Highly liquid
– Low-cost investment
– Introduced in a nation with higher currency
value
– Reduced Forex risk
– No associated tax withholding
– Traded globally
– Offer diverse investment opportunities

14. Foreign Exchange Market
 The foreign exchange market is over a counter (OTC)
global marketplace that determines the exchange rate for
currencies around the world. This foreign exchange market
is also known as Forex, FX, or even the currency market. The
participants engaged in this market are able to buy, sell,
exchange, and speculate on the currencies.
 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. The most liquid trading
pairs are, in descending order of liquidity:
 EUR/USD
 USD/JPY
 GBP/USD

15. Functions of Foreign Exchange
Market
The various functions of the Foreign Exchange Market are as follows:
 Transfer Function: The basic and the most obvious function of the
foreign exchange market is to transfer the funds or the foreign
currencies from one country to another for settling their payments.
The market basically converts one’s currency to another.
 Credit Function: The FOREX provides short-term credit to the importers
in order to facilitate the smooth flow of goods and services from
various countries. The importer can use his own credit to finance
foreign purchases.
 Hedging Function: The third function of a foreign exchange market is
to hedge the foreign exchange risks. The parties in the foreign
exchange are often afraid of the fluctuations in the exchange rates,
which means the price of one currency in terms of another currency.
This might result in a gain or loss to the party concerned.

16. Features of Foreign Exchange
Market
 High Liquidity - The foreign exchange market is the most
liquid financial market in the whole world. This involves the
trading of various currencies worldwide. The traders in this
market are free to buy or sell the currencies anytime as per
their own choice.
 Market Transparency - There is much clarity in this market.
The traders in the foreign exchange market have full
access to all market data and information. This will help to
monitor different countries’ currency price fluctuations
through the real-time portfolio.
 Dynamic Market - The foreign exchange market is a
dynamic market structure. In these markets, the currency
values change every second and hour.
 Operates 24 Hours - The Foreign exchange markets
function 24 hours a day. This provides the traders the
possibility to trade at any time.

17. Who are the Participants in a
Foreign Exchange Market?
 Central Bank: The central bank takes care of the exchange
rate of the currency of their respective country to ensure that
the fluctuations happen within the desired limit and this
participant keeps control over the money supply in the market.
 Commercial Banks: Commercial banks are the channel of
forex transactions, which facilitates international trade and
exchange to its customers. Commercial banks also provide
foreign investments.
 Traditional Users: The traditional users consist of foreign tourists,
the companies who carry out business operations across the
globe.
 Traders and Speculators: The traders and the speculators are
the opportunity seekers who look forward to making a profit
through trading on short-term market trends.
 Brokers: Brokers are considered to be the financial experts who
act as a sure intermediary between the dealers and the
investors by providing the best quotations.

18. Facts about Forex market
 The Foreign Exchange Market is the biggest and the
most liquid financial market in the whole world.
 The foreign exchange market trades 24/5. It starts its
operation on Sunday at 5 pm EST and closes its
operation on Friday at 5 pm EST.
 This market represents a $3.98 trillion value of
transactions in a single day!
 You can even have access to Foreign Exchange
Market provided you have an internet connection.
 USD (United States), EUR (EuroZone), JPY (Japan), GBP
(Great Britain) – some of the major currencies of the
world.

19. Types of Forex Market
1. The Spot Market - In the spot market, transactions involving currency
pairs take place. It happens seamlessly and quickly. The transactions
require instant payment at the prevailing exchange rate which is also
known as the spot rate. The traders in the spot market are not exposed to
the uncertainty of the market, which can lead to an increase or decline
in the price between the agreement and trade.
2. Futures Market - The transactions in the futures market require future
payment and distribution at a previously agreed upon exchange rate
which is known as the future rate. The transaction or agreement is more
formal in nature which ensures that the terms of the transaction are set in
stone and cannot be altered. Traders who conduct the majority of the
transactions enjoy a consistent return on the assets. Regular traders
prefer a future market transaction.
3. Forward Market - The third type of foreign exchange market is the
forward market where deals are similar to future market transactions. In
this case, the parties will negotiate the terms of the transactions and the
terms agreed-upon can be negotiated and altered as per the needs of
the concerned parties. The forward market has higher flexibility as
compared to the futures market.

20. Types of Forex Market
4. Swap Market - When there is a simultaneous
borrowing and lending of two types of currencies
between two investors, it is known as a swap
transaction. Here, one investor borrows a currency and
in turn, pays in the form of a second currency to the
second investor. The transaction is done to pay off their
obligations without having to deal with a foreign
exchange risk.
5. Option Market - In the options market, the currency
of exchange from one denomination to the other is
agreed upon by the investor at a specific rate and on a
specific date. The investor has a right to convert the
currency on a future date but there is no obligation to
do so.

21. Depositary Receipts
 A depositary receipt allows investors to hold shares in stocks
of companies that are listed on exchanges in foreign
countries. A depositary receipt avoids the need to trade
directly with the stock exchange in the foreign market.
 A depositary receipt (DR) is a negotiable certificate
representing shares in a foreign company traded on a local
stock exchange.
 Depositary receipts allow investors to hold equity shares of
foreign companies without the need to trade directly on a
foreign market.
 Depositary receipts allow investors to diversify their portfolios
by purchasing shares of companies in different markets and
economies.
 Depositary receipts are more convenient and less
expensive than purchasing stocks directly in foreign
markets.

23. How does a company issues ADRs?

26. Features of Depositary
Receipts
 It allows investors to diversify their portfolios and purchase
shares in foreign companies.
 Depositary receipts give investors the advantages and rights
of the underlying shares, such as dividends, voting rights,
and access to markets they might not otherwise have.
 Depositary receipts are more convenient and affordable
than buying stocks on foreign exchanges.
 Depository receipts facilitate companies (Multinational)
raising funds for business and encourage international
investment.
 The liquidity of depository receipts is low as there are not
many buyers and sellers.
 The currency risk associated with the underlying shares in
another nation is not eliminated by depositary receipts, such
as American Depository Receipts (ADRs).

27. Types of Depositary Receipts
 American Depositary Receipts: It is a negotiable
instrument or certificate issued by a U.S. bank
representing shares of a foreign company. ADR
facilitates investors in the U.S. to purchase shares of
overseas companies.
 Global Depositary Receipts: It is a tradable financial
instrument or security that represents shares of a
foreign company traded on two or more global stock
exchanges.
 Note: ADR facilitates trading of the shares of overseas
companies in stock exchanges in the U.S. only while
GDR facilitates trading of the shares of overseas
companies in two or more stock exchanges globally.

28. Process of Issuance of
Depositary Receipts
 At first, to purchase a depository receipt an investor is required
to communicate with a broker in a local bank (depository
bank).
 The depository bank in the investor’s home country will make
an assessment of foreign security before buying the
security/shares.
 The broker in the depositary bank will procure the shares either
on the local stock exchange or in the foreign stock exchange
by using another broker in a foreign bank (custodian bank).
 After the procurement of the shares, the depositary bank will
ask the shares to be delivered to the custodian bank.
 After receiving the shares by the custodian bank it will be
issued to the depositary bank as a depositary receipt that is
traded on the bank’s local stock exchange.
 After that, the broker will deliver the shares to the investor.

29. What is the difference
between ADR and GDR?
The following are the differences between ADR and GDR:
 US depositary banks issue ADRs in exchange for shares of non-
US companies traded on the US stock market. International
depository banks issue GDRs to represent shares of a foreign
company traded on the international market.
 GDRs can be negotiated anywhere around the globe. ADRs
can only be negotiated in the USA.
 ADRs are listed on the American Stock Exchange for trading.
GDRs are listed on stock exchanges outside the US, such as the
London and Luxembourg Stock Exchanges.
 The Securities and Exchange Commission's (SEC) guidelines for
ADR disclosure are strict. GDR has less stringent disclosure rules.
 The ADR market is for retail investors with substantial investor
activity and where a company’s shares are valued
appropriately. The GDR is institutional and has less liquidity.