global fin system

8/2/2019 Global Fin System

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Once you start working on something,dont be afraid of failure and dont

abandon it. People who work sincerelyare the happiest. - Chanakya


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International Financial Operations

Foreign exchange operations buying and selling ofcurrencies

Banking transactionsdeposits and advances

Capital market operations issuance of securities


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Global financial systemInternational 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 aboveactivities


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Classification of Financial Markets Fixed amount claim

Debt instrument

Debt market

Fixed income market

Preferred stock


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Classification of Financial Markets Residual or equity claim

Common stock

Preferred stock

Equity (stock) market

Common stock market


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Classification of financial markets (by

maturity) Debt instruments

Maturity 1 year or less

Money market

Maturity greater than 1 year

Capital market


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Classification of financial markets (by

maturity) Common stock and preferred stock

Capital market


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Classification of Global Financial Markets Internal Market (National market)

Domestic market

Foreign market

External market (International market)

Off shore market or Euro market


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Global financial system Deals with exchange of different currencies

Deals with promises to pay in the future

Deals with contingent contracts, where paymentsdepend on some future event

Contingent contracts include futures, options, lettersof credit, forward contracts etc.

International trade paves the way for Internationalfinance

International finance integrates international trade


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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 futureperformance derived from cash instruments such as bonds,

stocks and deposits International equities and commodity markets link into the global

capital market


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Global financial system

Foreignexchange financeOfficial Channels

Bilateral funding arrangements Multilateral financial Institutions

Commercial Channels ( Debt)

Euro-currency market

National financial market

Buyers / Suppliers credit


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Global financial systemCommercial Channels ( Equity)

Euro equity issues

Off shore country funds

Portfolio Investments

Direct foreign investment


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Global financial system Primary markets

Private placements

Secondary markets

Direct search markets

Brokered markets

Dealer markets

Auction markets


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History of Globalisation

Bretton woods conference in 1944 at New Hampshire

Establishment of IMF and IBRD ( World Bank) in1945 (known as Bretton woods twins)

Formation of GATT in 1948

Uruguay Round 1986 to 1994

World Trade Organisation - 1995


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Concept of circular flow in an economic system

Consumer / Household

Business Government

Goods/services/income

Payments

Goods/services/taxes Services/payments


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Concept of circular flow in an economic system

Inputs of one sector become the output of anothersector

Explain the theory of free enterprise

Theory more applicable in the case of capitalisticsociety

Role of the government is viewed differently bysocialists and communists


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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 activitiesof multinational corporations

Provide support and stimulus to the markets


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Role of Government

Disclosure regulations

Regulations on financial activity

Regulations on financial Institutions

Regulations on Foreign participations

Monetary policy and banking regulations


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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 ofpayment difficulties


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Global financial system - IMF

Founded in 1945

Global membership of 185 countries

Membership prerequisite for world bank (IBRD)membership

Three major functions :regular financialconsultative

Works closely with World Bank, WTO and BIS (Bankfor International settlements)


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World Bank

International Bank for Reconstruction andDevelopment (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 andgrants to developing countries


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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


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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, INCOTERMS2000 etc.

Setting rules and standards for world business


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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


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Indian Financial System

Unorganised

Indigenous bankers

Money lenders

Traders

Landlords


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Indian Financial System

Organised

Reserve Bank of India

Commercial Banks

Non banking financial institutions

Financial Institutions


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Commercial Banks

Deposit mobilisation

Fund transfer

Extension of credit

Investments

Creation of money

Miscellaneous functions


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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 wayof subscriptions/ sale of units


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Syndicated Euro Credits (SEC)

These are large loans put together by a group ofinternational banks, each of which takes aparticipation in the single loan.

It provided funding to international corporations,governments, multinational agencies like ADB thanany other single market.

Credits are for medium term and long term periods.

Club loansprivate arrangement between the lendingbanks and a borrower.

Syndicated loans


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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


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Euronote

Euronotes, also called Eurocommercial paper areshort term unsecured promissory notes.

Priced in relation to LIBOR, but trade at a discount topar.

Allows investors to explore the capital market,beyond the interbank market.

Medium and long term funds can be raised with theunderwriting by financial intermediaries.

Minimal documentation formalities.


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Commercial Paper

European commercial paper (ECP) emerged as anextension of Euronote.

It is a short term unsecured promise to repay a fixedamount representing borrowed funds plus interest ona future date and at a specified place.

Promissory Eurodollar bearer note issued by acorporate.

It can be issued at a discount price or as an interestbearing note.


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Commercial Paper

Negotiable promissory notes

Unsecured by nature and stand on the credibility ofthe 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 Dealerplaced method and Directly placed method


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Debt Vs equity claims

The claims of the holder of a financial asset may beeither a fixed amount or a varying or residual,amount.

In the former case, the financial asset is referred toas 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 theholders of debt instruments have been paid.

Eg: common stocks, partnership share


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Debt Vs equity claims

Fixed amount claim

Debt instrument

Debt market

Fixed income market

Preferred stock

Equity

Common stock

Common stock market Equity market

Preferred stock


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Insurance

Insurance companies promise to pay specified sumscontingent on the occurrence of future events, suchas death, accident, legal claims etc

Types of Insurance

life insurance

Health insurance

Property and causality insurance

Liability insurance Disability insurance

Investment oriented products (ULIP)


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Types of Life Insurance

Term Insurance

Pure life insurance

Beneficiary receives death benefit

no cash value or investment value accrues

Policy holder cannot borrow

Whole life insurance

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


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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 orminimum interest rate is that investors demand forinvesting in a non-treasury security

Risk premium is the spread which reflects the

additional risks the investor faces by acquiring asecurity


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Interest Rates

Base rate = real rate of interest + expected rate ofinflation

Real rate rate that would prevail in the economy ifprice levels remain constant, and are expected to beconstant indefinitely

Interest rate = base rate + risk premium

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