3 BF 732 Int. Money and Capital Markets-2

BACHELOR IN BANKING AND FINANCE
SECOND YEAR : 2015/2016
INTERNATIONAL TRADE FINANCE

Agenda 3
International Money Markets

and
International Capital Markets
06/23/20 Facilitator: MUSSA E!!! 2

Sub - Topics
International Money Markets
International Capital Markets
The Exchange Rate Mechanism
The World Bank Group
European Monetary System

Introduction
The overall financial environment in which global
businesses and global investors operate is known
as The International Financial Market.
The International Financial Market is made up of
three sectors;
1. Foreign Exchange Markets
2. International Money Markets
3. International Capital Markets
NB: The Forex Market will be discussed separately.
Part One
International Money Markets

Introduction
The International Money Market represents the
short and intermediate term borrowing and
investment market.
Global firms have access to the international
money markets either through;
Financial intermediaries (primarily large global
banks) or through access to
Direct financial markets.

Introduction
Intermediary markets include:
Eurocurrency Loan Market (i.e., Euro-Lines of
Credit)
Eurocredits Market (i.e., Syndicated Euro credits)
Direct markets include:
Short Term and Medium Term Euronotes Market
Eurocommercial Paper Market

The Eurocurrency Market
The international money market has as its core
the euro-currency deposit market, also called the
offshore currency market.
A Eurocurrency is a freely convertible currency
deposited in a bank outside its country of origin.
For example, Eurodollars are U.S. dollar-
denominated time deposits in banks located
outside of the United States.

This deposit market supports the borrowing and
lending of “offshore” currencies.
Banks accepting euro-currency deposits can be
local banks (i.e., domestic to the financial
market), or foreign banks operating in the local
market (including U.S. banks).
These banks are referred to as Eurobanks. Major
Eurobanks include Citi, Deutsche, and UBS(Union
Bank of Switzerland).

Participants in the Eurocurrency market
include large global banks and other large
financial institutions, large multinational
corporations, and governments.
The market is confined to time deposits.
The market is primarily a Eurodollar.
Eurocurrency markets exist all over the world,
but the major and largest market is in London.

In the London interbank Eurocurrency market
there are two major interest rates:
London Interbank Bid Rate: The interest rate
which a Eurobank will offer on deposit
(“deposit rate”); referred to at LIBID.
 London Interbank Offer (Ask) Rate: The rate
which a Eurobank will charge to lend a
Eurocurrency (“lending or “borrowing rate”);
referred to as LIBOR.

The Eurocurrency market serves two valuable
functions for global firms:
Investment Market: The market allows global
firms to earn a return on their excess (i.e.,
“idle”) funds.
Borrowing Market: Eurocurrency loans are an
important source of short-term and
intermediate term loans for global firms
(generally to finance working capital needs).


Eurocurrency Loans
Eurocurrency loans (also(Euro-Lines)
called euro
lines) are short term lines of credit
against Eurocurrencies offered by
Eurobanks.
Specifically these are arrangements
between a Eurobank and a customer
allowing the customer to borrow up to a
pre-specified amount of a designated
euro-currency.

Eurocredits
Eurocredits are short- to medium-term
euro-currency loans made by Eurobanks.
Often these loans are too large for one
bank to underwrite
Thus many banks will form a syndicate
to share the size and risk of the loan
(hence, they are called syndicated
eurocredits).

Eurocredits
Eurocredits generally feature a “roll over
provision.”
At maturity, the loan can be extended by
mutual agreement between lender and

borrower.

Euronotes
Euronotes are short term promissory
notes issued by a corporation and sold to

institutional or private investors.
Maturity is typically three to six
months.

Euronotes
Euro-notes are underwritten by
international investment banks or
international commercial banks through
“Euronote Programs.”
The program identifies the dealer(s) who
will act on behalf of the borrower in
placing issues with investors.

Euronotes
Euro-notes are originally sold at a discount
from their face value and pay back the full

face value at maturity and can trade in
secondary markets.

Eurocommercial Paper
Eurocommercial paper are unsecured short-
term notes issued by corporations and banks in
the Eurocurrency markets.
Maturities typically range from one month to 6
months.
Placed directly with investors through a dealer.
Through a “Eurocommercial Program” with a
dealer who places the issues with potential
investors.

Part Two
International Capital Markets

Introduction
International capital markets are a group of
markets (in London, Tokyo, New York,

Singapore, and other financial cities) that trade
different types of financial and physical capital
(assets).

Introduction
Assets being traded in the capital market include;
 stocks
 bonds (government and corporate)
 bank deposits denominated in different currencies
 commodities (like petroleum, wheat, bauxite, gold)
 forward contracts, futures contracts, swaps, options
contracts
 real estate and land
 factories and equipment

The participants:
1. Commercial banks and other depository

institutions:
 Accept deposits
 Lend to governments, corporations, other
banks, and/or individuals
 Buy and sell bonds and other assets
 Some commercial banks underwrite stocks and
bonds by agreeing to find buyers for those assets
at a specified price.
The participants:
2. Non bank financial institutions:
 Pension funds accept funds from workers and invest
them until the workers retire.
 Insurance companies accept premiums from policy
holders and invest them until an accident or another
unexpected event occurs.
 Mutual funds accept funds from investors and invest
them in a diversified portfolio of stocks.
 Investment banks specialize in underwriting stocks
and bonds and perform various types of investments.

The participants:
3. Private firms:
 Corporations may issue stock, may issue bonds
or may borrow from commercial banks or other
lenders to acquire funds for investment
purposes.
 Other private firms may issue bonds or borrow
from commercial banks.

The participants:
4. Central banks and government agencies:

 Central banks sometimes intervene in
foreign exchange markets.
 Government agencies issue bonds to
acquire funds, and may borrow from
commercial or investment banks.

Part Three
European Monetary System

The European Monetary System (EMS) was
founded in 1979 after the collapse of the
Bretton Woods Agreement in 1972, to help
foster economic and political unity in the
European Union (EU) and pave the way for
a future common currency, the euro.

The Bretton Woods Agreement, formed in the

wake of World War Two’s aftermath, established
among other European unity advances an
adjustable fixed foreign exchange rate in order to
stabilize economies within Europe.
 Due to various economic and political pressures
this agreement was abandoned in 1972.

The EMS established a new policy of linked

currencies between most countries in the
EU in order to stabilize foreign exchange
and prevent large fluctuations in inflation
among members.

Another important tenet of the EMS was

the formation of the European Currency
Unit (ECU), a prelude to the euro.
The ECU determined exchange rates
among the participating countries’
currencies via officially sanctioned
accounting methods.

The early years of the EMS were marked by

uneven currency values, with adjustments
that raised the values of stronger currencies
and lowered those of weaker ones.
 However, after 1986 changes in national
interest rates were specifically used to keep
all currencies more stable.

The early 90s saw a new crisis for the EMS.

Differing economic and political conditions
of member countries, particularly the
reunification of Germany, led to Britain
permanently withdrawing from the EMS in
1992.

This reflected and foreshadowed Britain’s

insistence on independence from
continental Europe, later refusing to join
the Eurozone along with Sweden and
Denmark.
However, efforts to push on to a common
currency and greater economic alliance
continued.
 In 1994 the EU created the European

Monetary Institute in order to transition to
the European Central Bank (ECB), which was
formed in 1998.
The primary responsibility of the ECB was to
institute a single monetary policy and interest
rate – working with national central banks –
including the euro common currency.

Like a typical central bank, the ECB is

responsible for controlling inflation;
however, unlike most central banks it was
not charged with boosting employment
rates or functioning as a lender to
governments during financial difficulty.

At the end of 1998, most EU nations unanimously

cut their interest rates in order to promote
economic growth and prepare for the
implementation of the euro.
The European Economic and Monetary Union
(EMU) was then established, succeeding the EMS
as the new name for the common monetary and
economic policy of the EU.

The euro was fully adopted and brought into

circulation by EU member states.
This was considered a major step towards
European political unity, and together
participating nations acted to reduce debt, curb
excessive public spending and attempt to tame
inflation.
As more countries subsequently joined the EU,
many have adopted the euro.

Part Four
The Exchange Rate Mechanism

What is an Exchange Rate
Mechanism?
This is a process by which member countries of an
economic community (such as the European
Union) maintain exchange rate parity among their
currencies. The currencies are allowed to fluctuate
with respect to one another within a specified
limit. If the exchange rate between any two
currencies reaches the limit, the central banks of
both countries intervene to bring it back within
the limit.

Types of Exchange Rate
Mechanisms
There are two types of Exchange Rate
mechanisms: –
Floating Exchange Rate – no intervention by
governments or central banks
Fixed Exchange Rate – officials strive to keep the
Exchange Rate fixed (or pegged) even if the rate
that they choose is not the equilibrium rate.
Managed Exchange Rates fall in-between these
two categories
Floating Exchange Rate
 Floating exchange rate are of two types;
 Clean Float – is a floating exchange rate with
no government participation in the market
 Managed Float or Dirty Float – is a floating
exchange rate with government
influence/participation in the market

Floating Exchange Rate
Under a floating (flexible) exchange rate
mechanism;
 No government interference
Market forces dictate equilibrium exchange
rates
Value of a nation’s currency allowed to
“float” down or up
End of the 1990’s – these are the norm
Fixed Exchange Rates
 The exchange rate is fixed at some par value, although

there is some small degree of flexibility (bands set around
par value)
 Predominant exchange rate system in the world for
most of 20th century (1900’s – 1970s)
 In a fixed exchange rate system, the value of a nation’s
currency is fixed (pegged) to a fixed amount of a
commodity or to another currency
Commodity – usually Gold (Gold Standard); Currency
– US$
Fixed Exchange Rates
Under a fixed exchange rate mechanism;

National supply and demand for currency may
vary, but the nominal exchange rate does not
Monetary authorities ensure that the rate does
not change
Typically, there are bands set above/below the
par value that allow for some small fluctuation in
the exchange rate

Fixed Exchange Rate
Maintenance
Governments must act to counter and

appreciation/depreciation of their currency
Typically this is done by buying/selling foreign
currency in the foreign exchange markets
Ex. If the TZS is appreciating, the TZ government
will buy FC (sell TZS) – release TZS into the
market – increase the TZS money supply
 If the TZS is depreciating, sell FC (buy TZS) –
decrease the TZS money supply
Exchange Rate Maintenance
In addition to activity in the foreign

exchange markets, a government can
defend an exchange rate by:
Exchange Controls
Tariffs/Quotas
Changing Domestic Interest Rates
Monetary/Fiscal Policy

Exchange Rate Maintenance
Switch to a floating ER
Adjustable and Crawling Pegs
The par value of a fixed exchange rate can be
changed- it is nothing permanent
 Adjustable Peg – a fixed exchange rate that can be
periodically devalued or revalued if need
be…..competitive devaluations
 Crawling Peg – a fixed exchange rate with regular
(frequent?) periodic adjustments
Fixed Exchange Rate vs. Flexible Exchange Rate
Fixed Exchange Rate Flexible Exchange Rate
• Reduce uncertainty associated • Help increase nation’s growth?

with Exchange Rate
fluctuations
• Helps limit inflationary • Liberate macroeconomic policy

pressures?
• let monetary policy influence

domestic economy and not just
maintain ER
Part Five
The World Bank Group

Introduction
The World Bank was created at Bretton
Woods in 1944 to lend money to European
countries to help them rebuild after World
War II.
It was the worlds first multilateral
development bank and it was funded
through the sale of World Bonds.

Purposes of the World Bank
Granting reconstruction loans to war
devastated countries
Providing loans to governments for
agriculture, power, irrigation, transport,
water supply, education, health, etc.
Promoting foreign investments by
guaranteeing loans provided by other
organizations
Purposes of the World Bank
Encouraging industrial development of
underdeveloped countries by promoting
economic reforms
Providing technical, economic and
monetary advice to member countries for
specific projects.

The World Bank is made up of five
different organizations;
International Bank for Reconstruction and
Development – IBRD ; a.k.a The “World
Bank”.
International Development Association –
IDA

International Finance Corporation – IFC

Multinational Investment Guarantee
Agency – MIGA
International Centre for the Settlement of
Investment Disputes – ICSID
Established in 1966

International Bank for Reconstruction and
Development
 This is an institution within the World

Bank and was Established in 1946.
IBRD aims to reduce poverty in the middle-
income and creditworthy poorer countries
by promoting sustainable development
through loans, guarantees, risk
management products and analytical and
advisory services.
Development
IBRD raises most of its funds on the world’s

financial markets.
IBRD has become one of the most
established borrowers since issuing its first
bond in 1947 to finance the reconstruction
of Europe.
Lends to countries with relatively high per
capita incomes
International Development Association - IDA
 The IDA is the second World Bank institution

which was Established in 1960
IDA’s main focus is helping the poorest countries
in the world by providing loans and grants to
boost economic growth, reduce inequality and
improve living conditions.
IDA mostly gets its money from governments’
voluntary contributions

International Development Association - IDA
IDA lends money on concessional terms.

This means that IDA charges little or no
interest and repayments are stretched over
25 to 40 years, including a grace period of 5
to 10 years.
IDA lends money to countries with annual
per capita incomes of about
$ 800 or less.
International Finance Corporation – IFC
 Established in 1956 to reduce poverty and

improve people’s lives in an
environmentally and socially responsible
manner.
Provides both loan and equity finance for
business ventures in developing countries.

International Finance Corporation – IFC
Finances private sector investments ,

mobilizes capital in international financial
markets, and provides technical assistance
and advice to governments and businesses.

– MIGA
The MIGA was created in 1988 as a member

of the World Bank Group to promote
foreign direct investment into developing
countries to support economic growth ,
reduce poverty and improve people’s lives.
MIGA fulfils this mandate by offering
political risk insurance to investors and
lenders.
International Centre for the Settlement Of
Investment Disputes – ICSID
International Centre for the Settlement Of

Investment Disputes (ICSID) was established in 1966
to promote increased flow of international
investment.
ICSID provides international facilities for conciliation
and arbitration of investment disputes.
Provides facilities for the reconciliation of disputes
between governments and foreign investors.

Membership to the World Bank
Under the Articles of Agreement of the

Development (IBRD), a country must first
join the International Monetary Fund (IMF)
prior to becoming a member of the Bank.
 Membership in IDA, IFC, and MIGA is
conditioned upon membership in IBRD.

The International Monetary Fund (IMF) and the
World Bank are institutions in the United Nations
system. They share the same goal of raising living
standards in their member countries.
Their approaches to this goal are complementary,
with the IMF focusing on macroeconomic issues
and the World Bank concentrating on long-term
economic development and poverty reduction.

The International Monetary Fund (IMF)
promotes international financial stability
and monetary cooperation.
IMF also seeks to facilitate international
trade, promote high employment and
sustainable economic growth, and reduce
poverty around the world.

Any country may apply to become a member of

the IMF.
 When a country applies for membership, the
IMF’s Executive Board examines the application.
If found suitable, the Executive Board gives its
report to IMF’s Board of Governors, after the
Board of Governor clears the application, the
country may join the IMF.

However, before joining, the country
should fulfil legal requirements, if any, of its
own country.
Voting right, right to draw funds etc.
depends on many factors, including the
member country’s first subscription to the
IMF.

3 BF 732 Int. Money and Capital Markets-2

Caricato da

Informazioni sul documento

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

3 BF 732 Int. Money and Capital Markets-2

Caricato da

Copyright:

Formati disponibili

BACHELOR IN BANKING AND FINANCE

SECOND YEAR : 2015/2016

INTERNATIONAL TRADE FINANCE

International Money Markets

06/23/20 Facilitator: MUSSA E!!! 2

06/23/20 Facilitator: MUSSA E!!! 3

International Money Markets

06/23/20 Facilitator: MUSSA E!!! 5

06/23/20 Facilitator: MUSSA E!!! 6

06/23/20 Facilitator: MUSSA E!!! 7

06/23/20 Facilitator: MUSSA E!!! 8

06/23/20 Facilitator: MUSSA E!!! 9

06/23/20 Facilitator: MUSSA E!!! 10

06/23/20 Facilitator: MUSSA E!!! 11

06/23/20 Facilitator: MUSSA E!!! 12

06/23/20 Facilitator: MUSSA E!!! 13

06/23/20 Facilitator: MUSSA E!!! 14

mutual agreement between lender and

06/23/20 Facilitator: MUSSA E!!! 15

notes issued by a corporation and sold to

06/23/20 Facilitator: MUSSA E!!! 16

06/23/20 Facilitator: MUSSA E!!! 17

from their face value and pay back the full

06/23/20 Facilitator: MUSSA E!!! 18

06/23/20 Facilitator: MUSSA E!!! 19

International Capital Markets

06/23/20 Facilitator: MUSSA E!!! 20

markets (in London, Tokyo, New York,

06/23/20 Facilitator: MUSSA E!!! 21

06/23/20 Facilitator: MUSSA E!!! 22

1. Commercial banks and other depository

06/23/20 Facilitator: MUSSA E!!! 24

06/23/20 Facilitator: MUSSA E!!! 25

4. Central banks and government agencies:

06/23/20 Facilitator: MUSSA E!!! 26

European Monetary System

06/23/20 Facilitator: MUSSA E!!! 27

06/23/20 Facilitator: MUSSA E!!! 28

The Bretton Woods Agreement, formed in the

06/23/20 Facilitator: MUSSA E!!! 29

The EMS established a new policy of linked

06/23/20 Facilitator: MUSSA E!!! 30

Another important tenet of the EMS was

06/23/20 Facilitator: MUSSA E!!! 31

The early years of the EMS were marked by

06/23/20 Facilitator: MUSSA E!!! 32

The early 90s saw a new crisis for the EMS.

06/23/20 Facilitator: MUSSA E!!! 33

This reflected and foreshadowed Britain’s

 In 1994 the EU created the European

06/23/20 Facilitator: MUSSA E!!! 35

Like a typical central bank, the ECB is

06/23/20 Facilitator: MUSSA E!!! 36

At the end of 1998, most EU nations unanimously

06/23/20 Facilitator: MUSSA E!!! 37

The euro was fully adopted and brought into

06/23/20 Facilitator: MUSSA E!!! 38

The Exchange Rate Mechanism

06/23/20 Facilitator: MUSSA E!!! 39

06/23/20 Facilitator: MUSSA E!!! 40

06/23/20 Facilitator: MUSSA E!!! 42

 The exchange rate is fixed at some par value, although

Under a fixed exchange rate mechanism;