International Business & Trade (Interbus) CM3: International Financial Market & Monetary System PDF

INTERNATIONAL BUSINESS AND TRADE (INTERBUS) CM3: INTERNATIONAL FINANCIAL MARKET AND INTERNATIONAL MONETARY SYSTEM INTERNATIONAL FINANCIAL MARKET: is the place where financial wealth is traded between individuals (and between countries). When funds flow across national boundaries and...

INTERNATIONAL BUSINESS AND TRADE (INTERBUS) CM3: INTERNATIONAL FINANCIAL MARKET AND INTERNATIONAL MONETARY SYSTEM INTERNATIONAL FINANCIAL MARKET: is the place where financial wealth is traded between individuals (and between countries). When funds flow across national boundaries and the transfer is between parties residing in different countries. Is the worldwide marketplace in which buyers and sellers trade financial assets, such as stocks, bonds, currencies, commodities, and derivatives, across national borders. It plays a vital role in facilitating the smooth operations of capitalist economies by allocating resources and creating liquidity for businesses and entrepreneurs. TYPES OF FINANCIAL MARKETS: STOCK MARKETS: (Equity Market) Venues where companies list their shares, which are bought and sold by traders and investors. Used by companies to raise capital and by investors to search for returns. TYPES OF STOCKS 1. COMMON STOCKS Sometime referred to as ordinary shares. Represents partial ownership in a company Entitles investors to generated profits, usually paid in dividends. Common stockholders elect a company’s board of directors and vote on company policies. Investors : company founders, employees 2. PREFERRED STOCKS Also known as preference shares Entitles the holder to regular dividend payments before dividends are issued to common shareholders Doesn’t carry voting rights Passive income Investors: venture capital investors (provide capital) 3. GROWTH STOCKS Companies expected to grow sales and earnings at a faster rate than the market average. Example investments: foreign exchange, real estate. 4. VALUE STOCKS Trade at a discount to what a company’s performance might otherwise indicate.  Example: financial, healthcare, and energy companies, tend to outperform during the period of economic recovery, as they usually generate income streams. JP Morgan Chase, prizer, 5. INCOME STOCKS Equities that provide regular income by distributing a company’s profits, or excess cash through dividends that are higher than the market average. Pays regular, often steadily increasing dividends. Example Jollibee, 6. BLUE CHIP STOCKS Are well-established companies that have a large market capitalization. Have a long successful track record of generating dependable earnings and leading within their industry or sector. Ex. Apple, nike, Microsoft Disney, Jollibee, ayala corp., Aboitiz, URC, PLDT etc 7. CYCLICAL STOCKS Are directly affected by the economy’s performance and typically follow economic cycles of expansion, peak, recession, and recovery. Usually display more volatility and outperform other stocks in times of economic strength when consumers have more discretionary income. Are those whose fortune swing as per the business cycle of an economy. Ex. Automotive industry, airlines, luxury goods makers, hospitality stocks Note: Discretionary income: the amount of an individual's income that is left for spending, investing, or saving after paying taxes and paying for personal necessities, such as food, shelter, and clothing. money spent on luxury items, vacations, and nonessential goods and services. Volatility: when a market or security experiences periods of unpredictable, and sometimes sharp, price movements. 8. NON-CYCLICAL STOCKS Operates in recession proof industries that tend to perform reasonably well irrespective of the economy. Are companies from which people will continue to consume their products even during an economic downturn. Ex. Consumer goods, food, gasoline ,utilities, healthcare 9. DEFENSIVE STOCKS Provide consistent returns in most economic conditions and stock market environments. This companies typically sell essentials products and services, such as consumer staples, healthcare, and utilities. Can also be a value, income, non-cyclical or blue chip stocks. Other types of stocks: 1. IPO Stocks (initial public offering) 2. Penny stocks 3. ESG stocks (Environmental, social, and corporate governance) OVER-THE -COUNTER MARKETS is a decentralized market in which market participants trade stocks, commodities, currencies, or other instruments directly between two parties and without a central exchange or broker. Stocks that are traded over-the-counter usually belong to small companies that lack the resources to be listed on formal exchanges. do not have physical locations; instead, trading is conducted electronically. o In an OTC market, dealers act as market-makers by quoting prices at which they will buy and sell a security, currency, or other financial products. A trade can be executed between two participants in an OTC market without others being aware of the price at which the transaction was completed. In general, OTC markets are typically less transparent than exchanges and are also subject to fewer regulations. Because of this, liquidity in the OTC market may come at a premium. o Risk of OTC MArket ▪ While OTC markets function well during normal times, there is an additional risk, called a counter-party risk, that one party in the transaction will default prior to the completion of the trade or will not make the current and future payments required of them by the contract. Lack of transparency can also cause a vicious cycle to develop during times of financial stress, as was the case during the 2007–08 global credit crisis. o Dealers in OTC ▪ Retail brokerage houses, investment companies, banks, and individuals BOND MARKETS: (debt, credit, or fixed-income market) A bond is a security in which an investor loans money for a defined period at a pre-established interest rate. Is a marketplace for debt securities. Covers both government-issued and corporate -issued debt securities. It allow capital to be transferred from savers or investors to issuers who funds for projects or other operations. Debt securities: o a debt instrument that has its basic terms, such as its notional amount, interest rate, and maturity date, set out in its contract. Note: Example of debt securities: Government bonds o a type of debt-based investment, where you loan money to a government in return for an agreed rate of interest. o Government use them to raise funds that can be spent on new projects or infrastructure, and investors can use them to get a set return paid at regular interval. Corporate bonds o debt issued by a company in order for it to raise capital. o An investor who buys a corporate bond is effectively lending money to the company in return for a series of interest payments, but these bonds may also actively trade on the secondary market. Municipal bonds o are debt securities issued by states, cities, counties and other governmental entities to fund day-to-day obligations and to finance capital projects such as building schools, highways or sewer systems. o The issuer promises to pay the investor interest over the term of the bond (usually twice a year) and then return the principal to the investor when the bond matures. For example, if you invest $5,000 in a 10-year municipal bond paying 5% interest, you've loaned $5,000 for 10 years. Collateralized bonds o a type of structured debt security that has investment-grade bonds as the underlying assets backed by the receivables on high-yield or junk bonds. o the use of a valuable asset as collateral to secure a loan. If the borrower defaults on the loan, the lender may seize and sell the asset to offset their loss. Zero-coupon bonds o bonds that do not pay interest during the life of the bonds. Instead, investors buy zero coupon bonds at a deep discount from their face value, which is the amount the investor will receive when the bond "matures" or comes due. o For example, you might pay $3,500 to purchase a 20-year zero coupon bond with a face value of $10,000. Face value: The face value of a bond is the price that the issuer pays at the time of maturity, also referred to as “par value.” MONEY MARKETS: One of the pillars of global financial system. It involves overnight swaps of vast amounts of money between banks and the Government specifically the US government. The majority of transactions are wholesale transactions that take place between financial institutions and companies. Examples: bank accounts transactions such as:  o Terms of certificates of deposits ▪ the length of time that you agree to leave your funds deposited to avoid any penalty. (6 months, 1 year, 18 months, term ends on the maturity date) o Interbank loans (loan between banks) ▪ a loan from one bank to another. o Money market mutual funds ▪ is a kind of mutual fund that invests in highly liquid, near-term instruments, cash, and cash equivalents. Low risk on the investment. o Commercial paper ▪ an unsecured, short-term debt instrument issued by corporations. EX. Promissory notes o Treasury bills ▪ short-term secure investments issued by the Philippine government through the Bureau of Treasury (BTr). o Securities lending and ▪ is the practice of loaning shares of stock, commodities, derivative contracts, or other securities to other investors or firms. ▪ It involves the borrower to provide collateral for the security that they are borrowing. The collateral can be in the form of either cash, bonds, shares or letter of credit o Repurchase agreement (repos) ▪ a transaction in which the borrower temporarily lends a security to the lender for cash with an agreement to buy it back in the future at a pre-determined price. Ownership of the security does not change hands in a repo transaction. DERIVATIVES MARKETS: A contract between two or more parties whose value is based on an agreed-upon underlying financial asset (ex. Security) or set of assets (ex. Index). o Security: financial instrument whose value depends upon the value of another assets. ▪ Ex. Convertible bonds ( As an example, let's say Exxon Mobil Corp. (XOM) issued a convertible bond with a $1,000 face value that pays 4% interest. The bond has a maturity of 10 years and a convertible ratio of 100 shares for every convertible bond.) o Index: is a group or basket of securities, derivatives, or other financial instruments that represents and measures the performance of a specific market, asset class, market sector, or investment strategy. ▪ Ex. Dow Jones Industrial Average (DJIA), the Nikkei Stock Average, the S&P 500, the Nasdaq Composite, and the Wilshire 5000. These financial instruments help you make profits by betting on the future value of the underlying asset. Rather than trading stocks directly , it trades in future and options contract and other advanced financial products that derive their value from underlying instruments like o bonds,  o commodities, ▪ agricultural products such as wheat and cattle, energy products such as oil and natural gas, and metals such as gold, silver and aluminum. o currencies, o interest rates , o market indexes, and o stocks. Example of derivatives: Future contracts o a contract between two parties where both parties agree to buy and sell a particular asset of specific quantity and at a predetermined price, at a specified date in future. Option contracts o a contract that gives the buyer the right, but not the obligation, to buy or sell the underlying asset by a certain date (expiration date) at a specified price (strike price). Credit default swaps o a financial derivative that allows an investor to swap or offset their credit risk with that of another investor. o a CDS is similar to an insurance contract, providing the buyer with protection against specific risks. FOREX MARKETS: (FOREIGN EXCHANGE) It is where participants can buy, sell, hedge, and speculate on the exchange rates between currency pairs. The most liquid market in the world, being cash as its most liquid assets. It is decentralized and consists of a global network of computers and brokers worldwide. The world’s largest financial market. It is an over-the-counter market. the major trading centers are located in major financial hubs around the world, including o new York o London o Frankfurt o Tokyo o Hongkong, and o Sydney Transactions are executed 24 hours, five days a week. One of the most accessible financial markets. Market participants range from tourists and amateur traders to large financial institutions (including central banks), and multinational corporations. FACTORS THAT AFFECT FOREIGN EXCHANGE RATES: Economic conditions  o Government economic policies o Trade balances o Inflation o Economic growth outlook Political conditions o Political instability o Political conflicts Psychological conditions o The psychology of forex market/ THE Participants influence ▪ forex trading is a journey that involves mastering one's emotions to build a resilient trading psychology. To succeed, investors must overcome false confidence, greed, fear, anger, and revenge. These emotional challenges force forex traders into impulsive decisions that heighten losses. PARTICIPANTS IN FOREIGN EXCHANGE MARKET: IMPORTERS A person or business that sources goods or services into a nation from overseas in order to sell them. EXPORTERS A person, nation, or business that exports goods or services to another nation in order to make sales. PORFOLIO MANAGERS is responsible for investing a fund's assets, implementing its investment strategy, and managing the day-to-day portfolio trading. COMMERICAL BANKS is a bank that makes loans, takes deposits, and provides checking and savings account services. Banks handle uncertain trades from their own trading desks and assist customers with forex transactions. The bid-ask spread shows the bank's earnings when they serve as dealers for customers. BROKERS: Bring buyers and sellers together for a small commission thereby helping to preserve the anonymity. ARBITRAGERS: Seek to earn riskless profit from price differences in different foreign exchange markets. SPECULATORS: Buy and sell in the hope that a price change will result in a profit. GOVERNMENTS: Central banks, treasury departments and other government agencies sometimes participate in the market in order to influence the exchange rate of a particular currency. NOTE: HEDGE: refers to holding two or more open positions when trading. If there are any losses from your first investment position, you’ll be able to offset these with gains from the second. a trade that is made with the purpose of reducing the risk of adverse price movements in another asset. THREE COMMON STRATEGIES IN HEDGING o Direct hedging involves opening two opposing positions on a single asset at once.... o Pairs trading is another common strategy that also involves taking two positions, but this time it involves two different assets.... o Safe haven trading is a third hedging strategy to try. (EXAMPLE. Gold) COMMODITIES MARKETS: Are venues where producers and consumers meet to exchange physical commodities such as: o Agricultural products (corn, livestocks, soybeans) o Energy products (Oil, gas, carbon credits) o Precious metals (Gold, silver, platinum) o Soft commodities (cotton, coffee, and sugar). Also known as Spot commodity markets where physical goods are exchanged for money. CYPTOCURRENCY MARKETS: Thousands of cryptocurrency tokens are available and traded globally across a patchwork of independent online crypto exchanges. These exchanges host digital wallets for traders to swap one cryptocurrency for another or for fiat monies such as dollars or euros. Types of Cryptocurrency: 1. Bitcoin 2. Binance coin 3. Stablecoins 4. Ethereum 5. Cardano 6. XRP 7. Tether 8. Dogecoin  9. litecoin MOTIVES FOR THE INTERNATIONALIZATION OF FINANCIAL TRANSACTIONS: DIFFERENCES IN INTEREST RATES o Higher interest rates tend to attract foreign investment, increasing the demand for and value of the home country's currency. o lower interest rates tend to be unattractive for foreign investment and decrease the currency's relative value. INTERNATIONAL DIVERSIFICATION o The attempt to reduce risk by investing in more than one nation. ▪ Investing across countries with non-perfectly correlated economic cycles allows investors to generally lower return variability. Variability: (pagkakaiba-iba), ack of consistency or fixed pattern; liability to vary or change. Example: quality, market ECONOMIC GROWTH PROSPECTS o an improvement in an economy's ability to generate goods and services over time. ▪ Example: Bangladesh, sri lanka, india, Pakistan, vietnam (poor country) EXHANGES RATE FLUCTUATIONS o happen when the value of foreign currencies keeps changing. o Reason: ▪ because each currency's value changes due to a variety of economic factors, any currency can be bought or sold for a different amount of another currency at any given time. SOURCES OF INTERNATIONAL FUNDS: MULTILATERAL DEVELOPMENT BANKS OR AGENCIES o Is an international financial institution chartered by two or more countries to encourage economic development. o Example: ▪ World bank ▪ Asian development bank ▪ American Development bank ▪ Asian Infrastructure Investment bank ▪ Caribbean development bank ▪ Central American bank for economic integration ▪ African development bank ▪ Council of Europe development bank  ▪ European bank for reconstruction and development GOVERNMENT/ GOVERNMENT AGENCIES o Secured by the government from financial institutions and other services. o Example: ▪ USAID (United States Agency for International Development) leads international development and humanitarian efforts to save lives, reduce poverty, strengthen democratic governance and help people progress beyond assistance. INTERNATIONAL BANKS o offer financial services to clients worldwide, including taking deposits, making loans, easing payments, and providing investment products. o Example: ▪ J.P. Morgan Chase & Co. ▪ Bank of America ▪ CitiGroup ▪ HSBC ▪ Standard Chartered SECURITIES MARKET o Is a marketplace where various securities such as bonds, stocks, and derivatives are bought and sold by individuals and organizations. o Two categories of Securities Market: ▪ Primary Buying a new asset directly to a company or government. ▪ Secondary Buying assets that have already been traded at least once before. o Organized as exchanges, over the counter markets or electronic platforms o Examples: ▪ New York stock exchange (NYSE) ▪ London Stock Exchange (LSE) ▪ Frankfurt Stock Exchange (FSE) ▪ Philippine Stock Exchange (PSE) INTERNATIONAL MONETARY SYSTEM: Are sets of internationally agreed rules, conventions and supporting institutions, that facilitates international trade, cross border investment and generally there allocation of capital between nation states. Refers to the system prevailing in world foreign exchange markets through which international trade and capita movement are financed and exchange rates are determined. FEATURES THAT IMS POSSESS:  Efficient and unrestricted flow of international trade and investment. Stability in foreign exchange aspects. Promoting balance of payments adjustments to prevent disruptions associated. Providing countries with sufficient liquidity to finance temporary balance of payments deficits. STAGES IN INTERNATIONAL MONETARY SYSTEM: 1. BIMETALLISM (before 1875) o A “double standard” in the sense that both gold and silver were used as money. o Some countries were on the gold standard, some on the silver standard, some on both. 2. CLASSICAL GOLD STANDARD (1875-1914) o Gold alone was assured of unrestricted coinage. o Gold could be freely exported or imported. o The exchange rate between two country’s currencies would be determined by their relative gold contents. o For example, if the dollar is pegged to gold at U.S.$30 = 1 ounce of gold, and the British pound is pegged to gold at £6 = 1 ounce of gold, it must be the case that the exchange rate is determined by the relative gold contents $30 = £6 $5 = £1 3. INTERWAR PERIOD (1915-1944) o Countries began to depreciate their currencies to be able to export more. Means gaining advantage in the world export market. o A period of fluctuating exchange rates and competitive devaluation. o The world economy characterized by tremendous instability and eventually economic breakdown, what is known as the Great Depression (1930 – 39) Major economic harm was done by restrictions on international trade and payments. ❖ Led to disintegration of the world economy. 4. BRETTON WOODS SYSTEM (1945-1972) o Named for a 1944 meeting of 44 nations at Bretton Woods, New Hampshire. The purpose was to design a postwar international monetary system. The goal was exchange rate stability without the gold standard. o The result was the creation of the International monetary fund (IMF) and the World Bank. IMF: maintain order in monetary system World bank: Promote general economic development. 5. THE FLEXIBLE EXCHANGE RATE REGIME (1973-PRESENT) o Flexible exchange rates were declared acceptable to the IMF members. Central banks were allowed to intervene in the exchange rate markets to iron out unwarranted volatilities o Gold was abandoned as an international reserve asset. o The currencies are no longer backed by gold. 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