International Financial Markets & Instruments: Euro currency; GDRs; ADRs | UGC NET Commerce Preparation Course PDF Download

Overview of International Financial Markets and Instruments

International financial markets provide a platform for exchanging financial assets among individuals and nations. These markets function as a comprehensive system with rules and institutions that facilitate the trading of assets between entities with surplus funds and those with deficits. The regulatory guidelines are established by these institutions.

Understanding International Financial Markets

International financial markets refer to the global arena where various financial assets—such as stocks, bonds, currencies, commodities, and derivatives—are traded across national boundaries. These markets serve as a conduit for the global transfer of both ownership and debt finances, with assets having different maturity periods, including short-term, medium-term, and long-term.

Segments of International Financial Markets

Foreign Exchange Market (Forex Market):

• The forex market is where foreign currencies are bought and sold.
• It plays a crucial role in international borrowing and investment by enabling currency conversion.
• Unlike traditional physical trading floors, the forex market operates as an over-the-counter (OTC) system.
• Traders, who are located in major commercial banks around the world, use electronic terminals, telephones, telexes, and other communication methods to conduct transactions.

International Bond Market:

• This market is where international bonds are traded.
• Companies seeking long-term funding in foreign currencies issue international bonds, which primarily come in two types: foreign bonds and Eurobonds.

International Equity Market:

• Companies raise equity capital by issuing shares, which are traded on the stock exchanges of their home countries.
• These shares may also be listed on stock exchanges in other countries.
• This approach is often used to obtain foreign currency for specific projects, increase the company's global presence, or when the domestic market cannot accommodate a large stock offering.

International Money Market:

• The international money market deals with the transfer of short-term funds.
• Transactions occur in various currencies, with international banks and financial institutions being the main suppliers of these funds.
• Major users include multinational corporations and governments from various countries.

International Credit Market:

• The international credit market involves the exchange of medium-term finances between fund suppliers and borrowers.
• International corporations can secure short-term funds in foreign currencies from the international money markets and obtain long-term funds in foreign currencies from the international bond markets.

Instruments of International Financial Markets

Equity Instruments

American Depository Receipts (ADRs):

• ADRs are significant international equity instruments. These negotiable certificates, issued by U.S. banks, represent a specific number of shares from foreign corporations and are actively traded on U.S. financial markets. ADRs offer U.S. investors an accessible way to invest in foreign companies, thereby enhancing the global diversification of investment portfolios.

Global Depository Receipts (GDRs):

• GDRs, also known as International Depositary Receipts (IDRs), are versatile financial instruments issued by depositary banks. They represent shares from foreign corporations and are similar to ADRs. GDRs are unique in that they can be converted into varying numbers of shares and are denominated in freely convertible currencies. They are listed and traded on European stock exchanges, broadening the scope and accessibility of international investment opportunities.

Debt Instruments

Foreign Bonds:

• Foreign bonds are a key category within international debt instruments. Issued by foreign corporations or entities in their domestic currency, these bonds are sold to investors within the issuing country. Foreign bonds are typically listed on domestic stock exchanges, facilitating cross-border capital flows and diversifying funding sources.

External Bonds:

• External bonds are domestic bonds issued by local companies but denominated in foreign currencies. A notable subtype of external bonds is Foreign Currency Convertible Bonds (FCCBs). FCCBs allow investors to convert the bonds into shares, either partially or fully, at predefined prices or ratios upon maturity. This feature provides flexibility for both investors and companies seeking adaptable financing options.

Euro Bonds:

• Euro bonds are issued by international entities or syndicates and are denominated in currencies other than those of the issuing countries. These bonds offer multinational companies a flexible financing method and contribute to portfolio diversification for investors.

European Bonds:

• European bonds are issued collectively in Euros by Eurozone countries to address debt-related challenges within the region. This collaborative issuance aims to mitigate issues related to free rider and force rider problems, promoting economic stability in the Eurozone.

Conclusion

International financial markets and instruments navigate a dynamic and interconnected global finance landscape. These markets are essential to the world economy, facilitating the exchange of financial assets across borders, bridging national gaps, and connecting entities with surplus and deficit.