INTERNATIONAL FINANCIAL

MARKET

NAME- MAYANK AGARWAL

ROLL NO - 170

COURSE - B.COM(P)

SUBJECT: INTERNATIONAL BUSINESS

CONTENTS

 INTRODUCTION TO INTERNATIONAL FINANCIAL MARKET &

IT’S TYPES
 FOREIGN EXCHANGE MARKET
 FORWARD MARKET
 ARBITRAGE
 SPECULATION
 HEDGING
 INTERNATIONAL MONEY MARKET
INTRODUCTION TO INTERNATIONAL FINANCIAL
MARKET & IT’S TYPES

 Trading of financial wealth between individuals &

between countries.

 Trade between agents in surplus & agents in deficit.

 Purpose to make market a place where international

transactions are regulated to achieve efficiency.
TYPES

Foreign exchange market

International money market
International credit market
International bond market
FOREIGN EXCHANGE MARKET

 Place where exchange of currencies to facilitate

international transaction takes place.
 Different strategies are adopted varying from individuals
as well as countries.
 Foreign exchange is traded in two types of market
namely-:
 Spot market
 Forward market
COMPONENTS

SPOT MARKET FORWARD MARKET

FOREIGN EXCHANGE
MARKET

IMMEDIATE DELIVERY OF CONTRACT OF EXCHANGE AT

INSTRUMENTS AT THE CURRENT SPECIFIED PRICE FOR WHICH
PRICES DELIVERY AND PAYMENT IS TO BE
MADE AT FUTURE DATE
STRATERGIES

FORWARD PREMIUM & LONG & SHORT FORWARD

DISCOUNT POSITIONS

FORWARD
MARKET

ARBITRAGE & SPECULATION HEDGING

FORWARD RATE

 Rate quoted by by foreign exchange traders for purchase and sale of foreign
currency in future.

 Forward rate is simply the market’s best estimate of where interest

rates/Currency exchange rates are likely to be at some specified point in the
future.

 There are three different calculations for the forward rate that an investor
can look at – simple, yearly compounded, or continuously compounded rates.

 Each of the interest rate calculations will be slightly different. It’s up to the
individual to choose which calculation they believe is the most reliable at
that particular point in time.
FORWARD PREMIUM & DISCOUNT

 Forward exchange rate may be quoted at a premium or at a discount.

 Forward rate is above the spot rate then it is forward premium.

 Forward rate is below the spot rate then it is forward discount.

 Formula-:
FP OR FD = FR-SR/SR*100

 When the result of above formula is positive it is known as forward

premium while the negative result implies forward discount.
LONG & SHORT FORWARD POSITIONS
LONG POSTIONS
 Buying of stock or currency with expectation of increase in value of asset in
future is long position in forward market.
 In other words long positions are those that are OWNED.
 EXAMPLE-: a person of XYZ Ltd. Owning 100 shares is said to be in long
position. He has paid the full cost of owning the shares.

SHORT POSITIONS
 Sale of a borrowed security, commodity or currency without owning
them is short position.
 In other words short position are those that are OWED.
 EXAMPLE-: a person who sold 100 shares of XYZ ltd without currently
owning those shares.
APPLICABILITY & USAGE

 Long & short positions are created in option contracts.

 Long position implies purchasing of options either call or put. When the
investor thinks that the market price will go up in near future he will create
long positions.
 Similarly if he thinks that market will go down in near future he will sell the
call or buy put options.
 Investors use both long & short positions simultaneously to leverage or
produce income on security.
 Long call options are bullish i.e. anticipate growth while short call options
give a bearish trend. Investor can hedge long call option by purchasing long
put option.
ARBITRAGE
 Market arbitrage is a trading strategy whereby a trader sells a
security in one market and buys the same security in another market.

 The practice of market arbitrage is based on assuming that

an asset traded worldwide is priced differently in different
markets.The same stock may have a market value in Europe that is
different from its value on the New York Stock Exchange (NYSE).

 Example-: if Company XYZ's stock trades at $5.00 per share on the

New York Stock Exchange (NYSE) and the equivalent of $5.05 on the
London Stock Exchange (LSE), an arbitrageur would purchase the stock
for $5 on the NYSE and sell it on the LSE for $5.05 -- pocketing the
difference of $0.05 per share.
ARBITRAGE IN FOREIGN EXCHANGE
MARKET
 Currency arbitrage involves the exploitation of the differences in
quotes rather than movements in the exchange rates of the currencies
in the currency pair.

 A cross-currency transaction is one that consists of a pair of currencies

traded in forex that does not include the U.S. dollar. Ordinary cross
currency rates involve the Japanese yen.

 Arbitrage seeks to exploit pricing between the currency pairs, or the

cross rates of different currency pairs.
TYPES

 Covered interest rate arbitrage the practice of using favourable interest rate
differentials to invest in a higher-yielding currency, and hedging the exchange
risk through a forward currency contract.

 Uncovered interest rate arbitrage involves changing a domestic currency

which carries a lower interest rate to a foreign currency that offers a higher
rate of interest on deposits.

 Spot-future arbitrage involves taking positions in the same currency in the

spot and futures markets. For example, a trader would buy currency on the
spot market and sell the same currency in the futures market if there is a
beneficial pricing discrepancy.
CHALLENGES
 Some circumstances can hinder or prevent arbitrage. A discount or
premium may result from currency market liquidity differences, which
is not a price anomaly or arbitrage opportunity, making it more
challenging to execute trades to close a position.
 Arbitrage demands rapid execution, so a slow trading platform or
trade entry delays can limit opportunity.
 Time sensitivity and complex trading calculations require real-time
management solutions to control operations and performance.
 Forex arbitrage often requires lending or borrowing at near to risk-
free rates, which generally are available only at large financial
institutions.
 The cost of funds may limit traders at smaller banks or brokerages.
Spreads, as well as trading and margin cost overhead, are additional
risk factors.
SPECULATION

 Speculation in Foreign Exchange is an act of buying and selling the foreign

currency under the conditions of uncertainty with a view to earning huge
gains.
 Speculation is gaining popularity as it gives an opportunity to earn huge
profits in short term investments
 Risk involved in speculation is quite high as the speculators rely on movement
of prices without any in depth analysis.However there is a potential of huge
return is also.
 Speculation depends on the nature of the asset, expected duration of the
holding period and/or amount of applied leverage.
TYPES OF SPECULATOR

 SCALPERS
 They have the shortest holding time generally few minutes from initiation.
 Purpose is short term profit by reading other traders transacting during that
time.
 They act as exchange members.

 DAY TRADER
 They hold future positions for few hours but not longer than one trading
session.
 They generally make profit from scheduled announcements related to money
supply, trade deficit etc.
 POSITION HOLDER
 They have longer horizon holding position ranging from overnight to few
months. They are of two types-

 OUTRIGHT POSITION HOLDER-Takes position in future relying on the future of

market. It carries large prospects of huge gains as well as losses.

 SPREAD POSITION HOLDER-he focuses on relative price movements of twoor

more commodities.
HEDGING

 Hedging means covering an exchange risk by setting the exchange rate for
future transaction.

 It is done to avoid the possible loss due to exchange rate fluctuation.

 In other words hedging secures present contracts like forward market trading
in share market & helps in avoiding uncertainty arising out of risk.
TYPES OF HEDGING

LONG HEDGE

SHORT HEDGE

CROSS HEDGE
 LONG/ANTICIPATORY
EDGE
The long hedge is a hedging
strategy used by manufacturers
and producers to lock in the
price of a product or
commodity to be purchased
some time in the future.
Hence, the long hedge is also
known as input hedge.
SHORT HEDGE CROSS HEDGE
A short hedge is an A cross hedge is used to
investment strategy manage risk by investing
utilized to protect in two positively
against the risk of a correlated securities that
declining asset price at have similar price
some time in the movements. The investor
future. takes opposing positions
in each investment in an
attempt to reduce the
risk of holding just one of
the securities.
CHALLENGES

 Technology Limitations Current solutions do not provide support for the

entire FX workflow. You cannot achieve 100% automation but can’t afford to
switch providers.
 Painful Month-End Close The month-end process is very manual and very
painful. Too much time is spent analysing inaccurate and incomplete data and
you are not able to understand large variances and inconsistencies.
 Lack of Visibility Inability to quickly understand risks mean you cannot
provide meaningful and timely reporting to upper management for strategic
decision making.
 Global Expansion Sales are expanding into new markets and your multi-
currency exposure is growing. Standard ERP reports just don’t provide the
complete pictur
 SPECULATION VS HEDGING

BASICS SPECULATION HEDGING

MEANING Purchase or sell of securities for Covering of risk by investing in

small amount in short term different market/commodity to
based on price movements to minimize the losses.
earn potential gains.

PURPOSE The main purpose of speculation Hedging attempts to eliminate

is to profit from betting on the the volatility associated with
direction in which an asset will the price of an asset by taking
be moving. offsetting positions contrary to
what the investor currently has.
INTERNATIONAL MONEY MARKET

 The international money market is the market that handles the international
currency transactions between the various central banks of the nations.

 The international money market mainly handles the currency trading between
the countries.

 In the international money market, the transactions are carried out mainly in
gold or in US dollar.

 The trading of one country’s currency for another one is also named as the
foreign exchange currency trading or forex trading.
FACTORS AFFECTING FOREIGN
CURRENCY FUND REQUIREMENT
 Payment of imports denominated in that foreign currency from where the
goods were imported.

 It may borrow funds denominated in foreign currency in which interest rate is

lower relatively.

 Cheap interest rates in foreign countries also increase the demand for their
currencies in the local countries. Thus it gives rise to international financial
markets.
TYPES
EUROPEAN MONEY MARKET

 The eurocurrency market originated in the aftermath of World War II.

 The market developed first in London as banks needed a market for
dollar deposits outside the United States.
 Eurocurrency is currency deposited by national governments
or corporations, outside of its home market. For example, it can be
currency held in banks located outside of the country which issues the
currency.
 The market eases local regulations and gives access to foreign
currencies to offshore business. It has made doing business in one
currency, in a market that does not issue that currency, much easier.
ASIAN MONEY MARKET

 Originated as market involving dollar denominated deposits.

 Purpose was to accommodate the needs of businesses using US dollar as a medium

of exchange for international trade.

 The time difference & distance were the factors that created hindrance leading to
the need of Asian money market.

 Major source of deposits come from MNC’s having excess cash.

 The Asian money market is Centered in Hongkong & Singapore where large bank
accept deposits & make loan in various foreign currencies
THANK YOU