International Financial Market & International Monetary System In International Financial Management Course

1. International
Financial
Management
“International Financial Market
”
Itmamul Akwan,
M. Fitri bin Shahiran

2. Presentation Layout

3. Financial Market is…
……is the mechanism that facilitates the transfer of funds from
lenders (surplus party/units) to borrowers (deficit party/unit)
Financial
Market
Instrument
Institution
The institution & instrument
are integral part of financial
market

4. Source of International Funds
Institution or
agencies
(through
different
financial
instrument)
Providers of
funds
Seeker of funds
The Institution or agencies that serve as the sources of International funds
are; 1). Multilateral development banks
2). Governmental Agencies, 3). International banks, 4). Securities market

5.  So then, When funds flow across national
boundaries and transfer is between parties
residing in different countries, there comes
into existence the INTERNATIONAL
FINANCIAL MARKET
“Meaning, The INTERNATIONAL FINANCIAL MARKET is the
worldwide marketplace in which buyers and sellers trade
financial asset (stock, bonds, currencies, commodities, and
derivatives) across national borders”

6. What are the motives for the Internationalization of
financial transaction (Market) ?
 Differences in Interest Rate
 International diversification
 Economic growth prospects
 Exchange rate fluctuation

7. Functions of Financial Market
 Borrowing and Lending/the raising of capital
 Financial markets channel funds from households , firms,
governments and foreigners that have surplus funds to those who
have shortage of funds
 Price Determination/discovery
 Financial markets determine the price of financial assets. The
secondary market plays an important role in determining the prices for
newly issued assets.
 Facilitate global transactions with integration of financial markets
 Coordination and Provision of Information
 The exchange of funds is characterized by a high amount of
incomplete and asymmetric information. Financial markets collect and
provide much information to facilitate this exchange.

8. Functions of Financial Market
 Risk sharing/the transfer of risk
 Trade in financial markets is partly motivated by the transfer of
risk from borrowers to lenders who use the obtained funds to
invest.
 Liquidity
 The existence of financial markets enables the owners of
financial assets to buy and resell these assets. Generally, this
leads to an increase in the liquidity of these financial
instruments.
 Facilitate international trade transactions
 Efficiency
 The facilitation of financial transactions through financial markets
lead to a decrease in informational cost and transaction costs,
which from an economic point of view leads to an increase in
efficiency.

9. Segment of International Financial Market
 International financial market facilities the transfer of funds
globally. The funds so transferred may be ownership for
different maturity periods such as short term, medium term or
long term. Segments of International Financial Market;
Financial
Markets
Money
Market
Capital
Market
Equity
Market
Bond/Debt
Market
Forex
Market
Derivatives
Market

10.  There are two different forms of exchange in financial
markets:
 Direct finance – lenders and borrowers meet directly to
exchange securities
 Indirect finance – lenders and borrowers exchange funds or
securities through financial intermediaries. They never meet
directly.
 Financial markets can be categorized as follows:
 Debt vs Equity markets
 Primary vs Secondary Markets
 Organized Exchange vs Over the Counter (OTC)
 Money vs Capital Markets

11. Bond (debt) Market vs Equity Market
 The debt market is the market where debt
instruments are traded.
 Debt instruments require a fixed payment to the
holder, usually with interest.
 Examples of debt instruments include bonds
(government or corporate) and mortgages.
 The holder of the debt instrument does not own
ownership of the borrower’s company

12. Debt Market vs Equity Market
 The equity market (often referred to as the stock market)
is the market for trading equity instruments.
 Stocks are securities that are a claim on the earnings and
assets of a corporation (Mishkin 1998).
 An example of an equity instrument would be common stock
shares, such as those traded on the Bursa Malaysia.
 An equity instrument makes its buyer/holder an owner of the
company that sold the instrument.
 The return for a stock is normally in terms of dividend payment
(not compulsory) and capital gain.

13. Primary Market vs. Secondary
Market
 Primary markets are markets in which financial
instruments are newly issued by borrowers. It is in this
market that firms sell (float) new stocks and bonds to the
public for the first time.
 Examples: Initial Public Offerings (IPO), seasoned equity offerings (SEO)
 Secondary markets, also called the aftermarket, are
markets in which financial instruments already in
existence are traded among lenders/investors.
 Example: subsequent trading of financial securities/trading that happens in the Bursa
Malaysia

14. Organized Exchange vs. Over-
the-Counter Markets
 An Organized Exchange Market (centralized
exchange) is a securities marketplace where purchasers and
sellers regularly gather to trade securities according to the formal
rules adopted by the exchange.
 An Over-the Counter Market (OTC) is a security traded in
some context other than on a formal exchange. The phrase "over-the-
counter" can be used to refer to stocks that trade via a dealer
network who negotiate directly via computer networks or by
phone as opposed to on a centralized exchange. The over-the counter
market does not have listing requirements.

15. Money Markets vs. Capital Markets
 The money market is where financial instruments with high
liquidity and very short maturities are traded. It is used by
participants as a means for borrowing and lending in the short
term, with maturities that usually range from overnight to just
under a year.
 A capital market is a financial market in which long-term debt
or equity-backed securities are bought and sold. Capital
markets are defined as markets in which the traded securities
have maturities of longer than a year.

16.  The board of governors of the IMF appointed committee
initiated an exchange rate system that could be
acceptable to the member countries
 System are classified based on flexibility in the
exchanges rate
 1.Fixed exchange rate
 2.Flexible exchange rate
EXCHANGE RATE SYSTEM

17.  A currency is pegged
to a foreign currency,
with fixed parity. The
rate are maintained
constant
1. FIXED EXCHANGE RATE SYSTEM
When a currency trend
towards crossing over
the limits, government
intervene to keep it
within the band

18.  Involved market forces determining the
exchange rate without intervention of
government
 Less-develop countries were given
greater access to IMF fund
2. FLEXIBLE EXCHANGE RATE SYSTEM
Advantage
Adjusted to changes in macro-economic
variable
Stable around the equilibrium in the long
run

19.  3 categories for flexible exchange rate regime
 1.floating
 Independent floating system (No Intervention
“clean floating”
 Managed floating system (Direct and Indirect
Intervention)
 2. Pegging Periodic adjustment of fixed exchange
rate to catch up with market determined rates
 3. Target zone arrangements arrangement involves
member countries having fixed exchange rate among
their currencies
TYPES OF EXCHANGE RATE REGIME

20. How Financial Market Serve MNCs

21. How Financial Market Serve MNCs
1. Foreign
Exchange Market
Allows currencies to be
exchanged to facilitate
International Financial
Transaction
Commercial
banks serve
as financial
intermediaries
in this market
negotiate forward contracts with MNCs that wish to buy and/or
sell currencies in the future (Derivatives)

22. How Financial Market Serve MNCs
2. International
Money Market
accept deposits and provide
short-term loans in various
currencies used primarily by
governments and large
corporations
Commercial banks convert some
of the deposits received into loans
(for medium-term periods) to
governments and large
corporations
Allows MNCs to deposits and obtain short-term loans in various
currencies

23. How Financial Market Serve MNCs
3. International
capital Market
facilitate international
transfers of long-term credit,
thereby enabling governments
and large corporations to
borrow funds from various
countries
multinational syndicates of
investment banks that help to
place the bonds
International stock markets enable firms to obtain equity
financing in foreign countries. Thus, these markets help MNCs
finance their international expansion

24. References
 Madura, F. (2010) Financial Markets and
Institutions. 9th Edition.
 Mishkin, S.(2007). The Economics of Money,
Banking, and Financial Markets, 8th Edition.
USA: Pearson.

25. Thanks you !

26. International
Financial
Management
“Interntaional Monetary
System”
Itmamul Akwan,
M. Fitri bin Shahiran

27. Presentation Outline
 Definition and Function of Money
 International Monetary System (IMS)
 Features of IMS
 Requirements of Good IMS
 Stages in IMS
 Implications for Managers

28.  A current medium of exchange in the form of
coins and banknotes, coins and banknotes
collectively
 Any good that is widely accepted in exchange
of goods and services, as well as payment of
debts
WHAT IS MONEY?

29.  Medium of exchange – money used for
buying and selling good and service
 Unit of account – common standard for
measuring relative worth of goods and
services
 Store of value – convenient way to store
wealth
THREE FUNCTIONS OF
MONEY

30. International Monetary System
(IMS)
 IMS: A set of internationally agreed rules and
supporting institutions to facilitate
international trade, cross-border investment,
and allocation of capital among countries.
“The system prevailing in World Foreign
Exchange Markets through which international
trade and capital movement are financed and
exchange rates are determined.”

31. Features of IMS
 Unrestricted flow of international trade and
investment.
 Stability in foreign exchange aspects.
 Providing countries with sufficient liquidity
to finance temporary balance of payments
deficits.
 Allowing member countries to pursue
independent monetary and fiscal policies.

32. Requirements of Good IMS
 Adjustment: Able to adjust imbalances
in balance of payments quickly and at lower
cost.
 Stability & Confidence: Able to keep
exchange rates fixed and have confidence
in the system stability itself.
 Liquidity: Able to provide enough
reserve assets for a nation to correct its
balance of payments deficits without making
the nation itself face deflation/ inflation
issue.

33. Stages in IMS
 Classical Gold Standard (1875 –
1914)  Each currency was
convertible into gold at a specified rate
(gold was freely imported & exported).
 Interwar Period (1915 – 1944) 
International Economic Disintegration
(high inflation rates), started to print
money to pay for war, existence of the
Great Depression (restrictions on
international trade).

34. Stages in IMS (con’t)
 Bretton Woods Agreement (1945 – 1972)
 Post-war International Monetary System
(exchange rate stability without Gold
Standard), existence of:
 IMF : To maintain order in monetary
system.
 World Bank : To promote general economic
development.
 International Monetary System (1973 –
present)  No longer backed by Gold
(abandoned as international reserve asset),
flexible exchange rate system, and allow
market forces to determine their currency’s
value.

35. Implications for Managers (within
Corporation)
 Currency Management : To understand the certain
speculative buying and selling of currencies – volatile
movement in exchange rates.
 Business Strategy : To recognize the impact of volatile
exchange rate movement on competitive business
position – dispersing production to different locations.
 Corporate – Government Relations : Businesses can
influence government policy towards IMS – companies
should promote IMS that facilitates international growth
and development.

36. References
 Madura, F. (2010) Financial Markets and Institutions. 9th
Edition.
 Mishkin, S.(2007). The Economics of Money, Banking, and
Financial Markets, 8th Edition. USA: Pearson.
 P K Jain, josette Peyrard, Surendra S Yadav, “International
Financial Management”, Macmillan India Ltd, New Delhi,
2005.
 Mandhu Vij, “Internatinal Financial Management”,
Publication, New Delhi, 2001
 Vyuptakesh Sharan, “International Financial Management”,
Prantice Hall of India Pvt, New Delhi, 2006.