Mitchell Crafton

International asset trades can be exchanged for many different types of assets. Many of these assets are traded in the international capital market as bonds and deposits denominated in different currencies, shares of stock and other financial instruments such as stock or currency options.

In asset trades, there are two distinctions between debt instruments and equity instruments.

Bonds and banks deposits are debt instruments

They specify that the issuer of the instrument must repay a fixed value

A share of stock is an equity instrument It is a claim to a firm’s profits, rather

than a fixed payment By choosing how to divide their

portfolios between debt and equity instruments: firms, individuals and nations can arrange to stay close to chosen consumption and investment levels despite unknown eventualities that could occur

The main contributors within the international capital market are:

1.Commercial banks2.Corporations3.Nonbank financial institutions4.Central banks and other government

agencies

Transactions in the international capital market has increased very rapidly since the early 1970s.

The major factor for this is countries removing barriers to private capital flows across their borders.

A important reason for this development is related to exchange rates

We already have seen that a country that fixes its currency’s exchange rate while allowing international capital movements gives up control over domestic monetary policy.

This sacrifice shows the impossibility of a country’s having more than two items from the following list:

1.Fixed exchange rate2.Monetary policy oriented toward

domestic goals3.Freedom of international capital

movements

This is term is used to describe the business that bank’s foreign offices conduct outside of their home countries

Banks may conduct foreign business through any of three types of institutions:

1.An agency office located abroad, which arranges loans and transfers funds but does not accept deposits

A subsidiary bank located abroad. A subsidiary of a foreign bank differs from a local bank only in that a foreign bank is the controlling owner

A foreign branch, which is simply an office of the home bank in another country

Branches carry out same business as local banks and are usually subject to local and home banking regulations

The growth of offshore currency trading coincides with that of offshore banking

An offshore deposit is simply a bank deposit denominated in a currency other than that of the country in which the bank resides

They are also referred to as Eurocurrencies

Example: Yen deposits in a London bank

Eurodollars were born in the late 1950’s from a response to the needs generated by a growing volume of international trade

Most banks in the US could server these needs but Europeans found it cheaper and more convenient to deal with local banks familiar with their circumstances

Many other currencies became readily available after 1950s, and offshore markets sprang up for them also

U.S. reserve requirements shows how regulatory asymmetries can operate to enhance the profitability of Eurocurrency trading

Regulatory asymmetries explain why those financial centers whose government impose the fewest restrictions on foreign currency banking have become the main Eurocurrency centers.