International Capital Market Drivers and Institutions

International Capital Market Drivers

The volume of debt, equity, and currencies traded internationally has increased dramatically.

Key Drivers

1. Information Technology: This is the lifeblood of every nation's capital market because investors require information corresponding to risk levels. (Example: Big Data)
2. Deregulation: Instrumental in the expansion of the international capital market.
3. Financial Instruments: Greater competition in the financial industry is creating the need to develop innovative financial instruments. (Example: Securitization, Mortgage Loan)

Key Market Institutions

1. Interbank Market

Market in which the world's largest banks exchange currencies at spot and forward rates.

• Clearing Mechanisms: Important element of the interbank market.

2. Securities Exchange

Exchange specializing in currency futures and options transactions. (Example: CME Group)

3. Over-the-Counter Market (OTC)

Decentralized exchange encompassing a global computer network of foreign exchange traders and other market participants.

Manager's Briefcase: Managing Foreign Exchange

Strategies for Effective FX Management:

1. Match Needs to Providers: Analyze your foreign exchange needs and the range of service providers available.
2. Work with Major Banks: Money-center banks that participate directly in the foreign exchange market can offer cost and service advantages over local banks.
3. Consolidate to Save: Save money by timing your international payments to consolidate multiple transfers into one large transaction.
4. Get the Best Rate Possible: If your foreign exchange activity is substantial, develop relationships with two or more money-center banks to secure the best rate.
5. Embrace Information Technology: Every time an employee phones, emails, or faxes in a transaction, human error could delay getting funds where and when your company needs them.

Currency Restriction Policies

Objectives for Restricting Currency Flow:

• Preserve hard currency to repay debts owed to other nations.
• Preserve hard currency to pay for imports and finance trade deficits.
• Protect a currency from speculators.
• Constrain individuals and companies from investing abroad.

Common Policy Tools:

• Central bank approval.
• Import licenses.
• Multiple exchange rate system.
• Import deposit requirements.
• Quantity restrictions.

Countertrade: Practice of selling goods or services that are paid for, in whole or in part, with other goods or services.