Unit-5-International Financial Market.pdf

financial market

1. International Financial Market and
Instruments
21/05/25 Dr. Santosh Kumar, SRCC1

2. Foreign Portfolio Instruments
•Thisissinglemostlargestcomponentofinternationalfinancingincountries’financialsystem.Thishasgainedpopularitywithintroductionoffinancialglobalizationtoservetheinterestofglobalfinance.
•SomeoftheimportantcomponentsofFPIsarebondandequityinstrumentsintheformofwhichtheinternationalfinancecomesin.Someoftheexamplesofsuchbondsarecorporatebonds,FullyAccessibleRoute(FAR)andVoluntaryRetentionRoute(VRR).ThegovernmenthasallowedgreaterfreedomtosuchroutstobringFPIsindebtforms.
•EquityisanotherimportantroutethroughwhichFPIcomestoIndia.Investmentsbyforeignersinanentity’ssharesupto10%ofownershipistermedasFPIs.EvenmutualfundshaveturnedouttobethesourceofFPIsinIndia.
•Asperthedataof2019outofRs.135995netFPIs,Rs.101122cameasequity,Rs.25882asdebtandRs.8995ashybrid.
21/05/25 Dr. Santosh Kumar, SRCC2

3. Foreign Portfolio Instruments
•GovernmenthasbroughtseveralmeasurestoremovethecapsonFDIsandFPIstopromotetheforeigninvestmentinthecountries.Allsuchinvestmentsaresubjectedtoforeignexchangerisksthatbringstheforeigncurrencymarkettobemoreactiveanddeeper.Ithastobestudiedproperlytomakeappropriateandsuitablepoliciestoreducetheforeignexchangerisk.
•GlobalDepositoryReceipts(GDRs):AGDRisacertificateissuedbyadepositorybank,whichrepresentssharesinaforeigncompany.Thesereceiptsaretradedoninternationalstockexchanges,suchastheLondonStockExchangeorLuxembourgStockExchange,insteadofthecompany'sdomesticexchange.EachGDRrepresentsacertainnumberofsharesintheissuingcompany.GDRsallowinvestorstoinvestinforeigncompanieswithoutdealingwithcross-borderregulationsorcurrencyconversions.AdepositorybankpurchasesthesharesofaforeigncompanyandthenissuesGDRsagainstthoseshares.ItisDenominatedinForeignCurrenciesusuallyinUSdollarsoreuros.Thisrouteisfollowedbycompaniestoraisecapitalfromforeigninvestors;toexpandvisibilityandreputationinglobalmarkets;todiversifytheirinvestorbase.Itispopularforinvestorsbecauseitgivesaccesstoforeigncompanieswithouthavingtotradeonforeignexchanges.Italsodiversifiestheirinvestmentportfoliobeyondtheircountryanditiseasierandsaferthandirectinvestmentinforeignstockmarkets.AnIndiancompanywantstoraisefundsinEurope.ItcanissueGDRsthroughaEuropeanbank.InvestorsinEuropebuytheGDRs(nottheactualIndianshares),whichrepresentownershipintheIndiancompany.
21/05/25 Dr. Santosh Kumar, SRCC3

4. Foreign Portfolio Instruments
•AmericanDepositoryReceipts(ADRs):ItisanegotiablecertificateissuedbyaU.S.depositorybankthatrepresentsaspecifiednumberofshares(oftenoneormore,orafraction)inaforeigncompany.ADRsaretradedonU.S.stockexchangesliketheNYSEorNASDAQ,justlikeregularU.S.stocks.ItallowsU.S.investorstoinvestinforeigncompanieswithouthavingtodealwithforeignstockexchangesorcurrencies.
•EachADRstandsforoneormoresharesofaforeigncompany.ItisTradedinU.S.DollarsanddividendsarealsopaidinU.S.dollars.ADRsisregulatedbytheSECoftheUSAandtheyhavecomplywithU.S.regulationsprovidingtransparencyandprotectionforinvestors.
•TypesofADRs:(a)SponsoredADRs:issuedwiththecooperationoftheforeigncompany.(b)UnsponsoredADRs:createdbyaU.S.bankwithouttheinvolvementoftheforeigncompany.
21/05/25 Dr. Santosh Kumar, SRCC4

5. International Financial Instruments
•ForeignBond:Aforeignbondisabondissuedinadomesticmarketbyaforeignentityinthedomesticmarket'scurrencyasameansofraisingcapital.
•Aforeignbondisissuedbyaninternationalcompanyinacountrydifferentfromtheirown,andusingthatcountry'scurrencytodenominatethosebonds.
•Bulldogbond,forinstance,isissuedintheUnitedKingdom,inBritishpoundsterling,byaforeignbankorcorporation.
•MatildabondisabondissuedintheAustralianmarketbyanon-Australiancompany.
•SamuraibondisacorporatebondissuedinJapanbyanon-Japanesecompany.
21/05/25 Dr. Santosh Kumar, SRCC5

6. International Financial Instruments
•EuroBond:AEurobondisadebtinstrumentthat'sdenominatedinacurrencyotherthanthehomecurrencyofthecountryormarketinwhichitisissued.
•Eurobondsarefrequentlygroupedtogetherbythecurrencyinwhichtheyaredenominated,suchasEuro-DollarorEuro-Yenbonds.SinceEurobondsareissuedinanexternalcurrency,they'reoftencalledexternalbonds.
•Eurobondsareimportantbecausetheyhelporganizationsraisecapitalwhilehavingtheflexibilitytoissuetheminanothercurrency.
•ThepopularityofEurobondsasafinancingtoolreflectstheirhighdegreeofflexibilityastheyofferissuerstheabilitytochoosethecountryofissuancebasedontheregulatorylandscape,interestrates,anddepthofthemarket.
21/05/25 Dr. Santosh Kumar, SRCC6

7. International Financial Instruments
•GlobalBond:GlobalbondsareinternationalbondsthatareofferedsimultaneouslyinvariouscapitalmarketsincludingEurope,Asia,andAmerica.Thesebondsmayhaveafixedorfloatingratewithmaturitiesrangingfromoneto30years.
•Someglobalbondsaredenominatedinthecurrencyofthecompany'scountrybase,suchastheyenforJapanesecompaniesandtheeuroforaGermancorporation.Otherglobalbondsaredenominatedinthecurrencyofthecountrywherethebondisissued.ReturningtotheearlierexampletheU.S.corporationcouldsellabondonaJapanesemarketplaceanddenominateitinyen.
•GlobalbondissimilartoEurobondbutcarriesmorefeaturesthanEurobond.ForexampleanAustraliancompanycanissuebondsdenominatedindollarintheUSAaswellasJapan.
21/05/25 Dr. Santosh Kumar, SRCC7

8. International Money Market
•Internationalmoneymarketinstrumentsareshort-termdebtsecuritiestradedinglobalmarkets,allowingfortheefficienttransferoffundsbetweenentities.T
•heseinstrumentstypicallyhaveamaturityofoneyearorlessandareusedbygovernments,corporations,andfinancialinstitutionstoraiseshort-termcapital.
•ExamplesincludeTreasurybills,commercialpaper,certificatesofdepositandEurocurrencydeposits.
•Theseinstrumentsgivemanymoreoptionforinternationalinvestorstoinvestandmakethefundsavailabletocountrieswholackadequatedomesticsavingsintheircountries.
21/05/25 Dr. Santosh Kumar, SRCC8