What are the different international financial markets?


The international financial markets consist of the credit market, money market, bond market and equity market.


The international credit market, also called Euro credit market, is the market that deals in medium term Euro credit or Euro loans.


International banks and their clients comprise the Eurocurrency market and form the core of the international money market. There are several other money market instruments such as the Euro Commercial Paper (ECP) and the Euro Certificate of Deposit (ECD).


Foreign bonds and Eurobonds comprise the international bond market. There are several types of bonds such as floating rate bonds, zero coupon bonds, deep discount bonds, etc.


The international equity market tells us how ownership in publicly owned corporations is traded throughout the world. This comprises both, the primary sale of new common stock by corporations to initial investors and how previously issued common stock is traded between investors in the secondary markets.


International Financial Market-


The last two decades have witnessed the emergence of a vast financial market across national boundaries enabling massive cross-border capital flows from those who have surplus funds and a search of high returns to those seeking low-cost funding. The degree of mobility of capital, the global dispersal of the finance industry and the enormous diversity of markets and instruments, which a firm seeking funds can tap, is something new.


Major OECD (Organization for Economic Co-operation and Development) countries had began deregulating and liberalizing their financial markets towards the end of seventies. While the process was far from smooth, the overall trend was in the direction of relaxation of controls, which till then had compartmentalized the global financial markets. Exchange and capital controls were gradually removed, non-residents were allowed freer access to national capital markets and foreign banks and financial institutions were permitted to establish their presence in the various national markets.


While opening up of the domestic markets began only around the end of seventies, a truly international financial market had already been born in the mid-fifties and gradually grown in size and scope during sixties and seventies. This refers to the Euro currencies Marketwhere borrower (investor) from country A could raise (place) funds from (with) financial institutions located in country B, denominated in the currency of country C. During the eighties and nineties, this market grew further in size, geographical scope and diversity of funding instruments. It is no more a “euro” market but a part of the general category called “offshore markets”.


Alongside liberalization, other qualitative changes have been taking place in the global financial markets. Removal of restrictions has resulted into geographical integration of the major financial markets in the OECD countries. Gradually this trend is spreading to developing countries many of which have opened up their markets-at least partially-to non-resident investors, borrowers and financial institutions.


Another noticeable trend is functional integration. The traditional distinctions between different financial institutions-commercial banks, investment banks, finance companies, etc.- are giving way to diversified entities that offer the full range of financial services. The early part of eighties saw the process of disintermediation get underway. Highly rated issuers began approaching investors directly rather than going through the bank loan route.


On the other side, debt crisis in the developing countries, adoption of capital adequacy norms and intense competition, forced commercial banks to realize that their traditional business of accepting deposits and making loans was not enough to guarantee their long-term survival and growth. They began looking for new products and markets. Concurrently, the international financial environment was becoming more volatile- there were fluctuations in interest and exchange rates. These forces gave rise to innovative forms of funding instruments and tremendous advances in risk management. The decade saw increasing activity in and sophistication of the derivatives’ market, whichhad begun emerging in the seventies.


Taken together, these developments have given rise to a globally integrated financial marketplace in which entities in need of short- or long-term funding have a much wider choice than before in terms of market segment, maturity, currency of denomination, interest rate basis, incorporating special features and so forth. The same flexibility is available to investors to structure their portfolios in line with their risk-return tradeoffs and expectations regarding interest rates, exchange rates, stock markets andcommodity prices.


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