Once you start working on something, dont be afraid of failure and dont abandon it.
People who work sincerely are the happiest. - Chanakya
International Financial Operations
Foreign exchange operations buying and selling of currencies Banking transactions deposits and advances Capital market operations issuance of securities
Global financial system
International Market segments
Money markets exchange related transactions Credit markets deposit taking / lending Capital markets issuance of securities Equity markets issuance of international equities Financial markets a mechanism of all the above activities
Classification of Financial Markets
Fixed amount claim
Debt instrument Debt market Fixed income market Preferred stock
Classification of Financial Markets
Residual or equity claim
Common stock Preferred stock Equity (stock) market Common stock market
Classification of financial markets (by maturity)
Debt instruments
Maturity 1 year or less Money market Maturity greater than 1 year Capital market
Classification of financial markets (by maturity)
Common stock and preferred stock
Capital market
Classification of Global Financial Markets
Internal Market (National market)
Domestic market Foreign market
External market (International market)
Off shore market or Euro market
Global financial system
Deals with exchange of different currencies Deals with promises to pay in the future Deals with contingent contracts, where payments depend on some future event Contingent contracts include futures, options, letters of credit, forward contracts etc. International trade paves the way for International finance International finance integrates international trade
Global financial system
International financial system revolves around the foreign exchange market Eurocurrency market permits the separation of the currency of denomination from the country of jurisdiction International capital market consists of the global bond and equity markets Global derivatives market derivatives are contracts for future performance derived from cash instruments such as bonds, stocks and deposits International equities and commodity markets link into the global capital market
Global financial system
Foreign exchange finance Official Channels Bilateral funding arrangements Multilateral financial Institutions Commercial Channels ( Debt) Euro-currency market National financial market Buyers / Suppliers credit
Global financial system
Commercial Channels ( Equity)
Euro equity issues
Off shore country funds
Portfolio Investments Direct foreign investment
Global financial system
Primary markets Private placements Secondary markets Direct search markets Brokered markets Dealer markets Auction markets
Global financial system
History of Globalisation Bretton woods conference in 1944 at New Hampshire
Establishment of IMF and IBRD ( World Bank) in 1945 (known as Bretton woods twins) Formation of GATT in 1948 Uruguay Round 1986 to 1994 World Trade Organisation - 1995
Global financial system
Concept of circular flow in an economic system Consumer / Household Business Government Goods/services/income Payments Goods/services/taxes Services/payments
Global financial system
Concept of circular flow in an economic system
Inputs of one sector become the output of another sector Explain the theory of free enterprise Theory more applicable in the case of capitalistic society Role of the government is viewed differently by socialists and communists
Global financial system
Role of Government Proactive role of the government Protects investors Guidelines on disclosure and transparency Promote healthy competition Promote stability and growth of financial institutions Provide level playing field by regulating the activities of multinational corporations Provide support and stimulus to the markets
Global financial system
Role of Government Disclosure regulations
Regulations on financial activity Regulations on financial Institutions Regulations on Foreign participations Monetary policy and banking regulations
Global financial system - IMF
Promotion of international monetary co-operation Expansion of international trade Promoting exchange stability Establishment of multilateral system of payments
Provide resources to nations having balance of payment difficulties
Global financial system - IMF
Founded in 1945 Global membership of 185 countries Membership prerequisite for world bank (IBRD) membership Three major functions :regular financial consultative Works closely with World Bank, WTO and BIS (Bank for International settlements)
World Bank
International Bank for Reconstruction and Development (IBRD) Focuses on middle income and credit worthy poor countries
International Development Association (IDA) Focuses on the poorest countries in the world
Provide low interest loans, interest free credit and grants to developing countries
Asian Development Bank (ADB)
Set up in Manila in 1966 Promote investment in asian region
Provide public and private capital for development
Poverty alleviation and environmental protection Funded by developed countries
International Chamber Of Commerce (ICC)
Voice of the world business Estd in 1919 Open market for goods and services Free flow of capital Fighting corruption and combating commercial crime Business self regulation of e-commerce Publications like UCPDC ICC 600, INCOTERMS 2000 etc. Setting rules and standards for world business
Financial Intermediaries
Depository Institutions Commercial Banks Savings Institutions Credit Unions Non-Depository Institutions Finance Companies Mutual Funds Investment banks, brokers and dealers Pension Funds Insurance Companies
Indian Financial System
Unorganised
Indigenous bankers
Money lenders
Traders Landlords
Indian Financial System
Organised Reserve Bank of India
Commercial Banks Non banking financial institutions Financial Institutions
Commercial Banks
Deposit mobilisation Fund transfer Extension of credit Investments Creation of money Miscellaneous functions
Non-banking financial institutions (NBFCs)
Financing by way of loans, advances Acquisition of shares/ stocks/ bonds/ debentures/ securities Hire-purchase Lease finance Stock-broking, Insurance etc. Chit funds Collection of money by way of subscriptions/ sale of units
Syndicated Euro Credits (SEC)
These are large loans put together by a group of international banks, each of which takes a participation in the single loan. It provided funding to international corporations, governments, multinational agencies like ADB than any other single market. Credits are for medium term and long term periods. Club loans private arrangement between the lending banks and a borrower. Syndicated loans
Syndicated Euro Credits (SEC)
Draw-down facility of the SEC Interest rates LIBOR, LIBID or Limean Lead Manager Co-lead Manager, Co-manager and participants Underwriting Documentation Execution Loan administration
Euronote
Euronotes, also called Eurocommercial paper are short term unsecured promissory notes. Priced in relation to LIBOR, but trade at a discount to par. Allows investors to explore the capital market, beyond the interbank market. Medium and long term funds can be raised with the underwriting by financial intermediaries. Minimal documentation formalities.
Commercial Paper
European commercial paper (ECP) emerged as an extension of Euronote. It is a short term unsecured promise to repay a fixed amount representing borrowed funds plus interest on a future date and at a specified place. Promissory Eurodollar bearer note issued by a corporate. It can be issued at a discount price or as an interest bearing note.
Commercial Paper
Negotiable promissory notes Unsecured by nature and stand on the credibility of the borrower No underwriting support Pricing is with reference to LIBOR Can be issued for 7 days to 365 days In US markets, CPs are issued through Dealer placed method and Directly placed method
Debt Vs equity claims
The claims of the holder of a financial asset may be either a fixed amount or a varying or residual, amount. In the former case, the financial asset is referred to as a Debt Instrument. An Equity Claim (also called a residual claim) obligates the issuer of the financial asset to pay the holder an amount based on earnings, after the holders of debt instruments have been paid. Eg: common stocks, partnership share
Debt Vs equity claims
Fixed amount claim
Debt instrument Debt market Fixed income market Preferred stock
Common stock Common stock market Equity market Preferred stock
Equity
Insurance
Insurance companies promise to pay specified sums contingent on the occurrence of future events, such as death, accident, legal claims etc Types of Insurance
life insurance Health insurance Property and causality insurance Liability insurance Disability insurance Investment oriented products (ULIP)
Types of Life Insurance
Term Insurance
Pure life insurance Beneficiary receives death benefit no cash value or investment value accrues Policy holder cannot borrow
Pure life insurance along with cash value or investment value Cash value can be withdrawn Can be borrowed against by the owner of the policy
Whole life insurance
Interest Rates
Measure of price paid by a borrower (debtor) to a lender (creditor) for use of resources during some time interval Base interest rate or bench mark interest rate or minimum interest rate is that investors demand for investing in a non-treasury security Risk premium is the spread which reflects the additional risks the investor faces by acquiring a security
Interest Rates
Base rate = real rate of interest + expected rate of inflation Real rate rate that would prevail in the economy if price levels remain constant, and are expected to be constant indefinitely Interest rate = base rate + risk premium
