International Financial Markets - Essay Example

International Financial Markets Introduction02 International Financial Markets.02 Foreign Exchange..03 Growth of foreign exchange..04 International capital...05 Growth and flow of International Capital.05 International stock markets...06 Impact on the economy.06 Growth of international stock markets in the last three decades..07 Factors hindering the growth rate of international financial markets...09 Conclusion10 Reference & Appendices..11 Introduction Foreign exchanges, international capital transfers, stock markets etc., account to the vast and significant arena of financial trade around the globe. These are collectively referred to as International Financial Markets where the players are mostly the member countries, purchasing and selling, accruing capital and trying to regulate the economic trend in the home country. International Financial Market trends have been on a growth rate since the last three decades. This study is to highlight the growth trend that has been achieved in the international financial market showing the curve over the past three decade. The paper starts with the basics of the global financial markets and moves to explaining the components viz., the foreign exchange, international capital and the international stock markets. The development and the growth trend of the market is subdivided and depicted with the aid of graphs and charts for analytical review. Obstacles hindering the smooth growth are also dealt with in the paper. International Financial Markets International Financial Markets collectively represents the total international trade and transaction in the foreign exchange market, international capital or foreign exchange basically refers to an over-the-counter (OTC) market, focusing on international currency trade. (Nature of foreign exchange, 2007) The whole scenario of international trade comprising of imports and exports and the flow of international capital is carried out through the Foreign exchange market. (Foreign Exchange in Economics, 2007) International exchange market being the largest global market place in regard to the monetary value traded, also includes international inter bank trading, exchange between central banks, multinational corporations and other international level speculators. The estimated average current global trade rate exceeds US$1.9 trillion/day. (Foreign Exchange Market, 2007) Foreign Exchange The foreign exchange market is the place where trading of currencies takes place. The foreign exchange market proclaims to be the largest and most volatile market all over the globe. Under foreign exchange foreign currency is used for trading and the trade takes place between nations. Price list for the goods or services imported or exported items between countries etc., gets its cash value established from the foreign exchange trade. 'Bank drafts, bills of exchange, bankers' acceptances, and letters of credit' etc., could be exchanged at previously agreed rates for settlement of debts. This results in the accumulation of currency surplus, received by way of loan repayments, import-export trade guaranteeing etc., done by the foreign exchange market for its customers. (Foreign exchange in economics, 2007) The foreign exchange operations are carried out by the Federal Reserve Bank of New York 'on behalf of the Federal Reserve System and the U.S. Treasury'. Thus being the authoritative party the Bank looks into the international financial market trends, maintains the U.S. foreign currency reserves, and participates in the foreign exchange market. (Role of Central Banks, 2007) Growth of foreign exchange The higher growth rate was achieved since 1971 with the closure of "gold window" (the practice of dollar exchange for gold at a predetermined rate) and the exchange rates were allowed to float depending upon the demand and supply principle. (Tim Schilling, 2007) Recent years witnessed a rapid increase in the foreign exchange volume. The estimates recorded a daily volume of over $2.5 trillion dollars and a significant rate of $20 billion on New York stock exchange in 1998. The entrance of Yen, and Euro, along with other international currencies initiated regular fluctuations in the market which paved way to create profit pools for the speculators. (Kwan Choi, 2005) There has been tremendous change in the past three decades. Flexibility in the exchange rates has become common for most of the nations and there is only little restriction being made with the current accounts than in the past. Also the international capital flows from private channels have also grown to higher levels. (John Lipsky, 2006) The main essence of the foreign exchange comprises of the currency trade. The currencies used in highly developed and forward economies along with the currencies from developing countries are put into trade under the foreign exchange market. In actual sense the forex market is not related to giving or taking bundles of currency between the countries. The growth of foreign exchange has reached a pace where the transaction and balances apply to the cyber world. For instance the dollar balances in the U.S. or other countries are traded in exchange of electronic balances internationally, that are denominated in yen, euros, d-marks, or any of dozens of other commonly traded monies'. (Tim Schilling, 2007) International capital Mounting rate of globalization in the financial markets drifted up the amount of international capital flows since the 1980s. The GDP of the G-7 nations were around 2-3 percent in 1970s and remained without a high fluctuation till the mid of 1980s. These denoted the international capital flows which abruptly rose to over 10 percent after the mid of the eighties. (International flow of funds, 2006) This represents a clear instance of growth in the international capital flow. (Appendix, Chart 1) Growth and flow of International Capital A significant rise in the capital flows was seen in the 1970s in the developing ecomomies. This trigger was further drifted the oil issue in 1973-1974, the expansion of the Euro and dollar market and the significant increase in bank lending during 1979-1981. As a result there was a huge capital flow mainly to Latin America, attaining even more at 1981 reaching to an average of US$44 billion. The inflows was mainly in the form of syndicated bank loans and came to about 6 per cent of the gross domestic product (GDP). However this upward trend nearly came to a halt in 1982 with the rise in interest rates. Thus the developing economies were put in tight debts. The revival occurred in 1980s when the capital flows to Latin America was restored. Inflows to Asia also increased to over ten fold than when compared to the early 1980s. Later the, bank lending was replaced by foreign direct investment (FDI) and Portfolio Investment Bank. For the graphically represented growth trend . (Appendix Chart 2) (Graciela L. Kaminsky, 2005) International stock markets International stock markets serve as the universal market place for trading international stocks and shares. Rather it is the pathway for international trade. From speculation to raising capital, mobilizing savings to redistribution of wealth, creating investment opportunities to capital raising by governments, all these and more become the fruits of international stock markets. (International trade, 2005) The international stock market serves as one of the most eminent sources for nations or corporates to raise money which could be used for the purpose of floating shares by the company making it public or accruing additional capital for renovation or expansion purposes. The international stock exchanges currently provide a great extent of liquidity which enables investors to trade easily with the available securities. Hence the stock market trading is emerging as a lucrative form of investment too other than other modes of investments. Impact on the economy Historical reports prove that the face value of the shares, securities and other trading assets contribute to a high level of changes in the economic activity and could even influence or reflect the social economic culture. A rise in business investment relates to high rate of investment in business. This could be an instance. Also the share prices stimulate the income level or economy of households and affect the level of their consumption patterns. Central banks of the respective nations hence try to be always alert and monitor control and fluctuations of the stock markets catering to the most important function of guaranteeing smooth operation of the economic system resulting in financial stability. International stock markets with its function of collecting and delivering the shares, guaranteeing payment initiating the security trade etc., acts as the clearinghouse too. This is done to forgo the risk that may fall upon an individual buyer or seller incase of default made by the other party. This system creates a sense of confidence and support and investors would be more and more attracted towards the market. Thus the uninterrupted functioning of all these activities facilitated by the international stock markets enables stable economic growth minimizing the costs and risks involved and lead the nation to utmost financial prosperity. (Importance of stock market, 2007) Growth of international stock markets in the last three decades As per the Economic Research Service the world economic growth rates for the last three decades are given below. Global monetary growth as for 2001 and 2005, annually estimates to around 2.7 percent, and is projected to a hike of 3.3 percent by 2011. The US exports marked an upward trend due to the increase in global purchasing power and rise in population. On the other hand the developing nations recorded fluctuations in parlance with income changes as a result of heavy imports. The graph represents the world GDP growth rates with the decade averages. (Growth of International Financial Markets, 2002) (USDA, 2002) Bank for International Settlements conducted a survey named Triennial Central Bank Survey in 2004 on which a rate of $1,880 billion average turnover per day was estimated in the international financial market. The chart below gives such averages per day for the month of April for the past years as per the survey analysis. (Foreign Exchange Market, 2007) Another significant development is with the international stock markets. In the past only wealthy private investors or those with family history of corporate tie ups were only able to enjoy the international stock trade. But currently the stock markets have opened the doors to institutions like insurance companies, mutual and pension funds etc and the private individual investors have become less in number. The rise in this type of investors has brought more scope and growth in the stock market and its functioning. Thus major institutions that could initiate development activities etc to the home land were able to take part in the international stock market reaping high potential. Factors hindering the growth rate of international financial markets The main issue of panic is the global imbalances which remain as a threat to the significant growth of international financial markets. These imbalances spurt up due to the extensive divergence among countries, related to the disparity of differences in the relative winning of their home market, and other incompatible patterns of saving and investment. These imbalances should be reduced to optimize global growth rate of international financial markets. (John W Snow, 2006) Conclusion This paper takes into study the international financial markets and accounts for the growth of the foreign exchange, international capital and international stock markets in the last three decades. Financial markets play an important role in the whole economic system. Here, the focus is given for the international scenario apart from national financial markets. The study starts with the introduction part comprising of defining and explaining the growth trends in the international financial market. For detailed examination each components of the global financial system is separated and dealt with. The first and foremost important area of foreign exchange is then elaborated. The growth rate is also explained. The focus is then shifted to the international capital and the same is satisfactorily explained and illustrated. The growth trends and in flows of the international capital market for the past three decades are summarized. Information about the international stock markets comes next in the order. The impacts of international stock markets are mentioned here. Some crucial factors hindering the growth of international financial markets are also dealt with. Thus the paper clearly depicts and analyses the growth rate and achievement of the foreign exchange, international capital market and international stock market in the last three decades References 1. Nature of foreign exchange, (2007). Basic Concepts II: Nature of the Foreign Exchange Market. Retrieved April 25, 2007, from ActionForex tutorials Web site http://www.actionforex.com/articles_library/beginners_tutorials/basic_concepts_ii:_nature_of_the_foreign_exchange_market_200607249679/ 2. Foreign Exchange Market, (2007). Foreign Exchange Market, Retrieved April 26, 2007, from Wikipedia, the free encyclopedia Website http://en.wikipedia.org/wiki/Foreign_exchange_market 3. Kwan Choi, (2005). International Economics, Retrieved April 26, 2007, from Department of Economics, Iowa State University Web site http://www.econ.iastate.edu/classes/econ355/choi/fex.htm 4. Tim Schilling, (2007). Strong Dollar, Weak Dollar: Foreign Exchange Rates and the U.S. Economy, Retrieved April 25, 2007, from Official site of Federal Reserve Bank of Chicago Web site http://www.chicagofed.org/consumer_information/strong_dollar_weak_dollar.cfm 5. Foreign Exchange in Economics, (2007). Retrieved April 26, 2007, from Web site http://www.answers.com/foreign+exchange&r=67 6. John Lipsky, (2006). The Reform Process at the International Monetary Fund, Retrieved April 25, 2007, from IMF External Relations Department Web site http://www.imf.org/external/np/speeches/2006/091306.htm 7. International flow of funds, (2006). International Financial Markets as Viewed from BIS Statistics: Changes in the International Flow of Funds in the 1990s, Retrieved April 27, 2007, from website http://www.boj.or.jp/en/type/ronbun/ron/research/data/ron9908a.pdf 8. International trade, (2005). Basics of foreign trade and exchange, Retrieved April 26, 2007, Web site http://www.newyorkfed.org/education/fx/print.html 9. Growth of International Financial Markets, (2002). Growth of international financial markets in the last three decades, Retrieved April 27, 2007, Web site www.ers.usda.gov/.../Baseline/present2002.htm 10. USDA, (2002). World GDP growth rates decade averages, Retrieved April 27, 2007, Web site http://www.ers.usda.gov/Briefing/Baseline/gallery/gallery2002/gdpgrowth.gif 11. John Snow, W. (2006) Statement of Treasury Secretary John W. Snow on the Report on International Economic and Exchange Rate Policies, Retrieved April 26, 2007, Website http://www.treasury.gov/press/releases/js4250.htm 12. Graciela, Kaminsky, L. (2005-December) International Capital Flows, Financial Stability and Growth, Retrieved April 26, 2007, from DESA working paper No. 10 Website http://www.un.org/esa/desa/papers/2005/wp10_2005.pdf 13. Importance of stock market, (2007) Stock Market, Retrieved April 27, 2007, from Website http://en.wikipedia.org/wiki/Stock_market#Function_and_purpose 14. Role of Central Banks, (2007) The basics of foreign trade and exchange, Retrieved April 27, 2007, website http://www.newyorkfed.org/education/fx/role.html Appendix Chart 1 Chart 2 Read More