Download - Global Fin System
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Once you start working on something,dont be afraid of failure and dont
abandon it. People who work sincerelyare the happiest. - Chanakya
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International Financial Operations
Foreign exchange operations buying and selling ofcurrencies
Banking transactionsdeposits and advances
Capital market operations issuance of securities
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Global financial systemInternational Market segments
Money markets exchange related transactions Credit markets deposit taking / lending
Capital markets issuance of securities
Equity markets issuance of international equities
Financial markets a mechanism of all the aboveactivities
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Classification of Financial Markets Fixed amount claim
Debt instrument
Debt market
Fixed income market
Preferred stock
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Classification of Financial Markets Residual or equity claim
Common stock
Preferred stock
Equity (stock) market
Common stock market
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Classification of financial markets (by
maturity) Debt instruments
Maturity 1 year or less
Money market
Maturity greater than 1 year
Capital market
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Classification of financial markets (by
maturity) Common stock and preferred stock
Capital market
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Classification of Global Financial Markets Internal Market (National market)
Domestic market
Foreign market
External market (International market)
Off shore market or Euro market
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Global financial system Deals with exchange of different currencies
Deals with promises to pay in the future
Deals with contingent contracts, where paymentsdepend on some future event
Contingent contracts include futures, options, lettersof credit, forward contracts etc.
International trade paves the way for Internationalfinance
International finance integrates international trade
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Global financial system International financial system revolves around the foreign
exchange market
Eurocurrency market permits the separation of the currency of
denomination from the country of jurisdiction International capital market consists of the global bond and
equity markets
Global derivatives market derivatives are contracts for futureperformance derived from cash instruments such as bonds,
stocks and deposits International equities and commodity markets link into the global
capital market
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Global financial system
Foreignexchange financeOfficial Channels
Bilateral funding arrangements Multilateral financial Institutions
Commercial Channels ( Debt)
Euro-currency market
National financial market
Buyers / Suppliers credit
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Global financial systemCommercial Channels ( Equity)
Euro equity issues
Off shore country funds
Portfolio Investments
Direct foreign investment
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Global financial system Primary markets
Private placements
Secondary markets
Direct search markets
Brokered markets
Dealer markets
Auction markets
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Global financial system
History of Globalisation
Bretton woods conference in 1944 at New Hampshire
Establishment of IMF and IBRD ( World Bank) in1945 (known as Bretton woods twins)
Formation of GATT in 1948
Uruguay Round 1986 to 1994
World Trade Organisation - 1995
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Global financial system
Concept of circular flow in an economic system
Consumer / Household
Business Government
Goods/services/income
Payments
Goods/services/taxes Services/payments
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Global financial system
Concept of circular flow in an economic system
Inputs of one sector become the output of anothersector
Explain the theory of free enterprise
Theory more applicable in the case of capitalisticsociety
Role of the government is viewed differently bysocialists and communists
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Global financial system
Role of Government
Proactive role of the government
Protects investors Guidelines on disclosure and transparency
Promote healthy competition
Promote stability and growth of financial institutions
Provide level playing field by regulating the activitiesof multinational corporations
Provide support and stimulus to the markets
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Global financial system
Role of Government
Disclosure regulations
Regulations on financial activity
Regulations on financial Institutions
Regulations on Foreign participations
Monetary policy and banking regulations
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Global financial system - IMF
Promotion of international monetary co-operation
Expansion of international trade
Promoting exchange stability
Establishment of multilateral system of payments
Provide resources to nations having balance ofpayment difficulties
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Global financial system - IMF
Founded in 1945
Global membership of 185 countries
Membership prerequisite for world bank (IBRD)membership
Three major functions :regular financialconsultative
Works closely with World Bank, WTO and BIS (Bankfor International settlements)
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World Bank
International Bank for Reconstruction andDevelopment (IBRD)
Focuses on middle income and credit worthy poor
countries
International Development Association (IDA)
Focuses on the poorest countries in the world
Provide low interest loans, interest free credit andgrants to developing countries
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Asian Development Bank (ADB)
Set up in Manila in 1966
Promote investment in asian region
Provide public and private capital for development
Poverty alleviation and environmental protection
Funded by developed countries
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International Chamber Of Commerce(ICC)
Voice of the world business
Estd in 1919
Open market for goods and services Free flow of capital
Fighting corruption and combating commercial crime
Business self regulation of e-commerce
Publications like UCPDC ICC 600, INCOTERMS2000 etc.
Setting rules and standards for world business
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Financial Intermediaries
Depository Institutions
Commercial Banks
Savings Institutions
Credit Unions
Non-Depository Institutions
Finance Companies
Mutual Funds
Investment banks, brokers and dealers
Pension Funds
Insurance Companies
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Indian Financial System
Unorganised
Indigenous bankers
Money lenders
Traders
Landlords
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Indian Financial System
Organised
Reserve Bank of India
Commercial Banks
Non banking financial institutions
Financial Institutions
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Commercial Banks
Deposit mobilisation
Fund transfer
Extension of credit
Investments
Creation of money
Miscellaneous functions
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Non-banking financial institutions(NBFCs)
Financing by way of loans,advances
Acquisition of shares/ stocks/
bonds/ debentures/securities
Hire-purchase
Lease finance
Stock-broking, Insurance
etc. Chit funds
Collection of money by wayof subscriptions/ sale of units
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Syndicated Euro Credits (SEC)
These are large loans put together by a group ofinternational banks, each of which takes aparticipation in the single loan.
It provided funding to international corporations,governments, multinational agencies like ADB thanany other single market.
Credits are for medium term and long term periods.
Club loansprivate arrangement between the lendingbanks and a borrower.
Syndicated loans
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Syndicated Euro Credits (SEC)
Draw-down facility of the SEC
Interest rates LIBOR, LIBID or Limean
Lead Manager Co-lead Manager, Co-manager and participants
Underwriting
Documentation
Execution Loan administration
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Euronote
Euronotes, also called Eurocommercial paper areshort term unsecured promissory notes.
Priced in relation to LIBOR, but trade at a discount topar.
Allows investors to explore the capital market,beyond the interbank market.
Medium and long term funds can be raised with theunderwriting by financial intermediaries.
Minimal documentation formalities.
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Commercial Paper
European commercial paper (ECP) emerged as anextension of Euronote.
It is a short term unsecured promise to repay a fixedamount representing borrowed funds plus interest ona future date and at a specified place.
Promissory Eurodollar bearer note issued by acorporate.
It can be issued at a discount price or as an interestbearing note.
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Commercial Paper
Negotiable promissory notes
Unsecured by nature and stand on the credibility ofthe borrower
No underwriting support
Pricing is with reference to LIBOR
Can be issued for 7 days to 365 days
In US markets, CPs are issued through Dealerplaced method and Directly placed method
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Debt Vs equity claims
The claims of the holder of a financial asset may beeither a fixed amount or a varying or residual,amount.
In the former case, the financial asset is referred toas a Debt Instrument.
An Equity Claim (also called a residual claim)obligates the issuer of the financial asset to pay the
holder an amount based on earnings, after theholders of debt instruments have been paid.
Eg: common stocks, partnership share
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Debt Vs equity claims
Fixed amount claim
Debt instrument
Debt market
Fixed income market
Preferred stock
Equity
Common stock
Common stock market Equity market
Preferred stock
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Insurance
Insurance companies promise to pay specified sumscontingent on the occurrence of future events, suchas death, accident, legal claims etc
Types of Insurance
life insurance
Health insurance
Property and causality insurance
Liability insurance Disability insurance
Investment oriented products (ULIP)
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Types of Life Insurance
Term Insurance
Pure life insurance
Beneficiary receives death benefit
no cash value or investment value accrues
Policy holder cannot borrow
Whole life insurance
Pure life insurance along with cash value or investment
value Cash value can be withdrawn
Can be borrowed against by the owner of the policy
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Interest Rates
Measure of price paid by a borrower (debtor) to a
lender (creditor) for use of resources during some
time interval
Base interest rate or bench mark interest rate orminimum interest rate is that investors demand forinvesting in a non-treasury security
Risk premium is the spread which reflects the
additional risks the investor faces by acquiring asecurity
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Interest Rates
Base rate = real rate of interest + expected rate ofinflation
Real rate rate that would prevail in the economy ifprice levels remain constant, and are expected to beconstant indefinitely
Interest rate = base rate + risk premium