Global Financial System (BFIB233)

Unit I Environment of Global Financial System 6 Hours

Introduction – Global Financial System vs Domestic Financial System, Rise of
Multinational Corporation- Internationalization of Business and Finance-
Participants - Technological Advances and Other Developments

Unit II The Economic Environment 10 Hours

Introduction - Factors Determining Economic Activity- The Economic Cycle and
Economic Policy - Balance of Payments (BoP) and Exchange Rates Country Risk
Analysis Measuring Political
Risk- economic and political factors underlying country risk-Key Indicators of
Country Risk and Economic Health-Country Risk Analysis in International lending

Unit III Global Financial Securities- I 8 Hours

Equities/Stocks- Company Formation and Features and Benefits of Shares- The
Risks of Owning Shares- Corporate Actions- Bonds – Introduction- Characteristics
of Bonds- Types of Bonds- Asset-Backed Securities (ABSs)- International Bonds-
Yields- Other Financial Assets- Cash Deposit
Unit IV Global Financial Securities -II 8 Hours
Investment Funds-: Open-Ended Funds, Closed-Ended Investment Companies,
Exchange-Traded Funds (ETFs), Alternative Investment Funds (AIFs)- Derivatives

Unit V Global Financial Markets 10 Hours

Primary and Secondary Markets- Depositary Receipts- World Stock Markets-
Stock Market Indices- Settlement Systems. Money Markets- Property- Foreign
Exchange (FX)

Unit VI Global Financial Services 10 Hours

Financial Advice- Budgeting- Borrowing- Protection- Critical Illness Insurance
Cover- Investment and Saving- Legal Concepts in Financial Advice- The Financial
Advice Process- Other Financial Service: Wealth Management- Portfolio
Management- Brokerage Services-Credit Rating- Investment Banking- Factoring-
Depositories
Unit VII Regulation and Ethics 8 Hours
Need- Regulatory Principles- Financial Crime- Insider Trading and Market
Abuse- Integrity and Ethics in Professional Practice

Essential Reading:
• Shapiro Alan. C.(2012), Multinational Financial Management(9ed), Prentice
Hall, New Delhi.

Recommended Reading
1. Apte P.G (2011) , International Financial Management(6 ed), Tata McGraw
Hill, New Delhi.
2. Jeevanandam. C. Foreign Exchange and Risk Management. New Delhi: Sultan
Chand & sons.
3. Vij, M (2010). International Financial Management (3 ed). New Delhi: Excel
Books
 Global Financial Markets
• The term primary market refers to the marketing of new shares in a
company to investors for the first time. Once they have acquired shares, the
investors may at some point wish to dispose of some or all of their shares
and will generally do this through a stock exchange.
• This latter process is referred to as dealing on the secondary market.
• Primary markets exist to raise capital and enable surplus funds to be
matched with investment opportunities, while secondary markets allow the
primary market to function efficiently by facilitating a two-way trade in
issued securities.
• A stock exchange is an organised marketplace for issuing and trading
securities by members of that exchange. Each exchange has its own rules
and regulations for companies seeking a listing, and continuing obligations
for those already listed. All stock exchanges provide both a primary and a
secondary market.
 Functions of Primary Market
• Raising capital
The primary market is a vital source of capital for
companies looking to expand their operations, invest in
new projects, or pay off existing debt. By issuing new
securities in the new issues market, companies can raise
the funds they need to grow their businesses.
• Price discovery
The new issues market helps to establish the fair market
value of newly issued securities by setting the initial price
through the IPO or other mechanisms. This process helps
to ensure that investors are paying a fair price for the
securities they are buying.
• Facilitating the transfer of risk
In the primary market, the risk is transferred from the company to the
investors who purchase the newly issued securities. This allows companies
to reduce their financial risk and transfer it to investors who are willing to
take on that risk in exchange for the potential for higher returns.
• Providing investment opportunities
The new issues market offers a range of investment opportunities to
investors, including equity shares, bonds, and other debt instruments. These
securities can be purchased by individuals, institutional investors, and other
market participants who are looking to diversify their portfolios and
achieve their investment objectives.
• Regulations of primary market
The primary market is regulated by government bodies such as the
Securities and Exchange Board of India (SEBI) in India. These regulatory
bodies are responsible for ensuring that securities issuances are conducted
in a fair, transparent, and efficient manner. Furthermore, that investors are
protected from fraud and other abuses.
 Functions of secondary market
1. Trading Securities
• Trading various types of securities can be a profitable strategy to improve
your financial health; however, these transactions can be risky if not done
properly.
• Secondary market depositories, such as the National Stock Exchange
(NSE) and Bombay Stock Exchange (BSE), monitor all listings and trades
as per the guidelines of the Securities and Exchange Board of India
(SEBI).
2. Economic Boost
• Businesses and individuals invest capital in secondary markets in the hopes
of turning a profit. Investing and reinvesting the returns results in a
repetitive cycle. This boosts the economic growth of a nation and also
ensures proper utilisation of the capital of a nation.
3. Pricing Parameter
• Secondary capital markets set a margin for the right value of securities
based on market demands. This helps to ensure the balanced trading of
securities in the economy.
4. Credit Quality
• The value of investment portfolios in the secondary market helps
the Government and lenders understand the creditworthiness of the
nation’s population.
5. Easy Access to Securities
• Primary and secondary capital markets provide retail investors
access to various types of securities that are associated with high
liquidity.
• Most retail investors fail to tap into the primary market for various
reasons. Hence, the secondary market gives retail investors the
chance to invest in liquid securities with minimum capital.
6. Easy Liquidity Gateway
• Secondary markets have various investment instruments with
different features. Most instruments in secondary capital
markets offer high liquidity to investors. This allows investors an
easy gateway during a financial crunch.
 Depositary Receipts
• American depositary receipts (ADRs) were introduced in 1927
and were originally designed to enable US investors to hold
overseas shares without the high dealing costs and settlement
delays associated with overseas equity transactions.
• An ADR is dollar-denominated and issued in bearer form, with
a depository bank as the registered shareholder. They confer
the same shareholder rights as if the shares had been
purchased directly.
• The depository bank makes arrangements for issues such as
the payment of dividends, also denominated in US dollars, and
voting via a proxy at shareholder meetings. The beneficial
owner of the underlying shares may cancel the ADR at any
time and become the registered owner of the shares.
 Benefits and Advantages of ADR’s
Cost Savings
• There are significant cost savings in legal expense and
transaction costs by resolving a claim promptly. Carriers are
also able to reduce their open claims inventory.

Quality Neutrals
• ADR Options neutrals are former judges and accomplished
attorneys. They are experienced mediators and arbitrators who
can help you resolve your dispute in a professional manner.

Customer Service
• Guarantee customer satisfaction regarding the scheduling,
confirmation, billing and professionalism of our services.
Clients consistently give customer service the highest rating.
Efficiency
• A claim can be resolved through ADR Options regardless of whether a suit
has been filed. In fact, the greatest savings are achieved by resolving a claim
before a lawsuit is filed.

Privacy
• ADR Options proceedings are held in private and the press does not have
access to your proceeding.

Control
• The parties decide all aspects of a claim:
• type of proceeding
• arbitrator or mediator
• date, time and place

Low Cost
• Our prices are considerably below the cost involved in bringing and
defending a claim. These fees are set forth in our Fee Schedule. Settlement
Days are available to resolve many claims in a full or half day format.
 Review Question
• Role of financial market in the economic
growth of the country.
 Money Market
• The money market is a component of the economy that
provides short-term funds. The money market deals in
short-term loans, generally for a period of a year or less.
• As short-term securities became a commodity, the money
market became a component of the financial market for
assets involved in short-term borrowing, lending, buying
and selling with original maturities of one year or less.
 Features of money market
• High Liquidity- One of the key features of these financial assets is
high liquidity offered by them. They generate fixed-income for the
investor and short term maturity makes them highly liquid. Owing
to this characteristic money market instruments are considered as
close substitutes of money.
• Secure Investment- These financial instruments are one of the
most secure investment avenues available in the market. Since
issuers of money market instruments have a high credit rating and
the returns are fixed beforehand, the risk of losing your invested
capital is minuscule.
• Fixed returns- Since money market instruments are offered at a
discount to the face value, the amount that the investor gets on
maturity is decided in advance. This effectively helps individuals
in choosing the instrument which would suit their needs and
investment horizon.
 Types of money market instruments
• Treasury bills- are short term borrowing instruments issued by the Government
of India. These are the oldest money market instruments that are still in use. The
Treasury bill does not pay any interest, but are available at a discount of face value
at the time of issue. Treasury Bills can be classified in two ways i.e. based on
maturity and bases on type. These are the safest instruments as they are backed by a
government guarantee. The rate of return, also known as risk-free rate, is low for
treasury bills like T-364, T-182 and so on, as compared to all other instruments.

• Commercial papers- commercial papers is an unsecured money market

instruments issued in the form of promissory note. It was introduced In India in
1990 with the objectives of enabling corporate borrowers diversify their sources of
short-term borrowing and to provide an additional investment instrument to
investors. Commercial paper is a money-market security issued (sold) by large
corporations to obtain funds to meet short-term debt obligations and is backed
only by an issuing bank or company’s promise to pay the face value on the maturity
date specified on the note.
• Certificate of Deposit- A certificate of deposit (CD) is issued directly by a
commercial bank, but it can be purchased through brokerage firms. It comes with a
maturity date ranging from three months to five years and can be issued in any
denomination. Most CDs offer a fixed maturity date and interest rate, and they
attract a penalty for withdrawing prior to the time of maturity.

• Banker’s acceptance- a banker’s acceptance is a document that promises future

payment that is guaranteed by the commercial bank. It is considered to be a
very safe investment option and is widely used in foreign trade, bankers acceptance
are time drafts which are accepted and guaranteed by the banks and drawn on a
deposit at the bank. The maturity period of banker’s acceptance can range from 30
to 180 days.
• Repurchase Agreements- Also known as repos or buybacks, Repurchase
Agreements are a formal agreement between two parties, where one party sells a
security to another, with the promise of buying it back at a later date from the
buyer. It is also called a Sell-Buy transaction. The seller buys the security at a
predetermined time and amount which also includes the interest rate at which the
buyer agreed to buy the security.
 Property
Property as an asset class is unique in its distinguishing features:
• Each individual property is unique in terms of location, structure and design.
• Valuation is subjective, as property is not traded in a centralised marketplace,
and continu ous and reliable price data is not available.
• Property is subject to complex legal considerations and high transaction costs
upon transfer. • It is relatively illiquid as a result of not being instantly
tradeable.
• It is also illiquid in another sense: the investor generally has to sell all of the
property or nothing at all. It is not generally feasible for a commercial
property investor to sell, for example, one factory unit out of an entire
block (or at least, to do so would be commercially unattractive) – and a
residential property owner cannot sell their spare bedroom to raise a little
cash.
• Since property can only be purchased in discrete and sizeable units,
diversification is made difficult.
• The supply of land is finite and its availability can be further restricted by
legislation and local planning regulations. Therefore, price is
predominantly determined by changes in demand
 Some key differences between
commercial and residential property
 Foreign Exchange (FX)
The FX market refers to the trading of one currency for another. It is by far the largest
market in the world.
There are several types of transaction undertaken in the FX market, particularly:
• Spot transactions – the spot rate is the rate quoted by a bank for the exchange of one
currency for another with immediate effect.
• Forward transactions – in this type of transaction, money does not actually change
hands until some agreed future date. A buyer and seller agree on an exchange rate
for any date in the future, for a fixed sum of money, and the transaction occurs on
that date, regardless of what the market rates are then. The duration of the trade can
be a few days, months or years.
• Futures – foreign currency futures are standardised versions of forward transactions
that are traded on derivatives exchanges in standard sizes and maturity dates. The
average contract length is roughly three months.
• Swaps – a common type of forward transaction is the currency swap. In a currency
swap, two parties exchange currencies for a certain length of time and agree to
reverse the transaction at a later date. These are not exchange-traded contracts and,
instead, are negotiated individually between the parties to a swap. They are a type
of OTC derivative
 Forward Exchange Rates
• A forward exchange contract is an agreement between two
parties to either buy or sell foreign currency at a fixed
exchange rate for settlement at a future date. The forward
exchange rate is the exchange rate set today, even though the
transaction will not settle until some agreed point in the future,
such as in three months’ time.
• The relationship between the spot exchange rate and forward
exchange rate for two currencies is given by the differential
between their respective nominal interest rates over the term
being considered (the nominal rate is simply the quoted
interest rate). The relationship is purely mathematical and has
nothing to do with market expectations as these are reflected in
the spot rate.
 Settlement Systems
• Settlement is the procedure through which
the shares are transferred from the seller's
account to the buyer's account, and the funds
are transferred from the buyer to the seller.
These two processes are carried out on T+1
Day. This is the core clearing and settlement
process in a stock exchange.
 Stock market indices
• The indices are performance indicators that indicate the
performance of a certain market segment or the market as a
whole. A stock market index is constructed by choosing
equities from similar companies or those that match a
predetermined set of criteria.
• https://www.moneycontrol.com/markets/glo
bal-indices/
• A stock market index - it is a statistical source that
measures financial market fluctuations. The indices
are performance indicators that indicate the
performance of a certain market segment or the
market as a whole.
• A stock market index is constructed by choosing
equities from similar companies or those that match a
predetermined set of criteria. These shares are already
listed on the exchange and traded. Share market
indexes can be built using a range of variables,
including industry, segment, or market capitalization.
 Types of Stock Market Indices
a) Sectoral Index
• Both the BSE and the NSE have some strong indicators that gauge
companies in a given sector. Indices like the S&P BSE Healthcare
and NSE Pharma are known to be good indicators of changes in the
pharmaceutical sector. Another notable example is the S&P BSE PSU
and Nifty PSU Bank Indices, which are indices of all listed public
sector banks. However, neither exchange is required to have equivalent
indexes for all industries, yet this is a key cause in general.

b) Benchmark Index
• The Nifty 50 index, which consists of the top 50 best-performing
equities, and the BSE Sensex index, which consists of the top 30
best-performing stocks, are indicators of the NSE and the Bombay
Stock Exchange, respectively. This group of equities is known as a
benchmark index since they employ the best standards to regulate the
companies they select. As a result, they are regarded as the most
reliable source of information about how markets work in general.
c) Market Cap Index
• Few indices select companies on the basis of their market
capitalization. Market capitalization refers to the stock
exchange market value of any publicly traded corporation.
Indices such as the S&P BSE and NSE small cap 50 are
companies with a lower market capitalization as defined by the
Securities Exchange Board of India (SEBI).

d) Other Kinds of Indices

• Several additional indices, such as the S&P BSE 500, NSE 100,
and S&P BSE 100, are slightly larger and have a greater number
of stocks listed on them. You may have a low-risk appetite,
but Sensex stocks may have a high-risk appetite. Investment
portfolios are not designed to fulfil all demands. As a result,
investors must remain focused and invest in areas where they feel
secure.
 REVIEW QUESTION
• Discuss the functions and operations of Global
Financial markets?
• How to find good companies as there are many
publicly listed companies in the Indian stock market?