International financial markets consist of mainly international banking services and international money market. The banking services include the services such as trade financing, foreign exchange, foreign investment, hedging instruments such as forwards and options, etc. All these banking services are provided by international banks. International money market includes the Eurocurrency markets, Euro credits, Euro notes, Euro commercial Paper etc.
International financial markets, as we saw, can broadly be classified into international banking and international money market. International markets are accessed by multinational corporations more than anybody else. Traders or businesses having import and export transaction also have frequent access to these markets.
International banking is quite different from the domestic banking as there are several services which are required only in an international environment and are provided by international banks. Following are such services:
- Trade Financing: Several trade financing services are required by importers and exporters. An importer importing goods from outside may
wish to open a letter of credit to be given to the exporter from another country. The importer is not known to the exporter and therefore the deal is routed through the banks.
Documentary collection is another in which the exporter of goods provides the bank with all the documents required for releasing the goods under shipment. They are handed over to the importer only after the payment is made to the bank.
A trader who is not a place invest a lot of money into his debtors can avail factoring and forfeiting services. Under this service, the trader hands over his accounts receivables into a bank or third party’s hand for collection. The trader effectively sells his debtors at a discount and frees his money.
- Foreign Exchange: International businesses have frequent transactions in foreign currencies and therefore have payables or receivables in those currencies. To close such transactions the businesses need foreign exchange which is provided by international banks and institutions. These institutions have their bid and ask rates for such currency buying and deposits. They buy or accept currencies at a bid price which is less than their ask price at which they sell. These banks have the privilege to trade foreign exchange in international markets.
- Hedging Exchange Rate Risk: It is known fact that the dealing in foreign currency is risky. The risk is assumed because the prices of currencies are very fluctuating. The price at which a deal is struck may not remain constant till all the transactions are over. Here is where the hedging plays an important role. With the help of hedging instruments such as forwards and options, such risk can be mitigated and planned profits may be attained. Such instruments are the contracts which lock the prices of currency on a particular day in future.
International Money Market:
International money market mainly deals in Eurocurrency deposits, Euro credits, Euro notes, Euro commercial Papers etc. All these involve foreign currencies. Eurocurrency deposits are deposits of foreign currency in a bank situated in a country which is different from the country of that foreign currency. An Indian depositing US dollars in Chinese bank situated in China is called Eurocurrency deposit.
Euro credits are a kind of loan extended to corporations in a currency other than the home currencies. These are normally short term to the medium term loan and are extended by a syndicate of banks because the quantum of loan is too big and the risk cannot be assumed just by one bank.
Likewise, the other money market instruments include euro notes, euro commercial papers etc.
In essence, the international financial market is even bigger a market available for multinational and other domestic companies. A growing business when reaches international heights also has a lot of services to be offered by international banks and financial institutions. These markets provide a business with a platform to take their businesses to a different height.