International Financial Markets and Institutions Essay

Pages: 8 (2559 words)  ·  Style: Harvard  ·  Bibliography Sources: 10  ·  File: .docx  ·  Level: College Senior  ·  Topic: Economics

SAMPLE EXCERPT . . .

Unlike the other categories, directional funds permit portfolios to take on market risk and usually include general market direction intentionally through systematic or discretionary manager decisions. The main aim of non-directional or absolute-return fund is to generate steady returns despite of market events whereas directional funds focus on generating higher-than-expected returns. The absolute-return funds use some investment techniques that may not be used in other hedge funds such as low liquidity or distressed securities.

Borrowing in the International Capital Markets:

International capital market is the financial market of center in which bonds, shares, currencies, mutual funds, debentures, hedge funds and other long-term securities are bought and sold ("International Capital Market," 2010). In addition to being group of various capital markets in a country, the international capital markets provide international investors and companies with a place to deal in bonds and shares of different countries. As these financial markets link with each other through the Internet, almost all financial markets across the globe have been transformed into international capital markets since the discovery of computer and the Internet. The transformation of nearly all markets to international capital markets can also be attributed to the revolution of financial markets in 2010.

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While the international capital markets began with dealing of foreign exchange, companies are required to obtain certificates to transact business in them because of globalization of the financial sector. For many companies, international capital markets are good options when they are considering investments of their money. These investments can be done through buying shares and bonds of companies from other countries and investing in bonds of companies from other countries. As a result of the numerous investment opportunities they provide to companies and investors, the daily turnover of international capital markets is over $5 trillion.

TOPIC: Essay on International Financial Markets and Institutions: Assignment

The overall risk of investment in these markets can be lessened through a certain technique when a country is experiencing losses or undergoing a financial crisis. There is a likelihood of a company or investor to suffer losses when investing in such a country because of the different business environments in different countries. However, the losses can be avoided by investment in other country's investment in the international capital market. Therefore, these markets are beneficial in minimizing the risk of small companies in international markets because these firms can purchase shares, mutual funds, and debentures of companies from different countries. This has contributed to the view that borrowing in the international capital markets can generally increase a company's share price and lessen its cost capital.

Borrowing in the international capital markets is regarded as one of the techniques of increasing the share price of a company and lessening the cost of the firm's capital. However, the process of borrowing from international capital markets requires the understanding of the organization's financial leverage and capital structure first. On the hand, borrowing from international markets by a company in order to lessen the cost of capital requires an understanding of the weighted cost of capital (Kumar, 2011). Through obtaining cheap loan in the international capital market, the company or investor will have low cost of debt that lessens the overall weighted average cost of capital.

As a company generates high return on investment, it can get increasingly cheap loans from anywhere across the globe. The existing shareholders of that company will enjoy high earnings on their investments after the firm has paid small fixed interest to debenture holders. As a result, this will contribute to the increase in the company's share price within the stock market because of borrowing from international capital markets.

Cross-listing initiatives is part of borrowing from the internal capital markets that helps in enhancing the liquidity of the existing shares and sustain a liquid secondary market for issuance of new equity in foreign markets. It helps in increasing a company's share price by trouncing mispricing in a domestic capital market that is illiquid and segmented ("International Capital Markets," n.d.). In order to achieve these objectives of cross listing, a firm must select at least one stock market in which it will cross-list its shares and sell the new equity.

Borrowing in international markets also enables companies to lower the cost of capital by providing a series of investment opportunities that allow the firm to develop portfolios of global investments that diversify risks ("The Global Capital Market," n.d.). Unlike a purely domestic market, these markets don't have restrictions in the supply of funds that are available to borrowers because of the huge pool of investors. The cost of capital is lowered through foreign direct investments, acquisitions and mergers, and other global activities.

Conclusion:

The international financial markets and institutions provide places for companies and investors to be involved in several financial activities that contribute to the economic development of a country. Some of the major activities supported by these institutions and markets include investment in hedge funds by companies and borrowing in international capital markets to increase a company's share price and lessen the cost of capital.

References:

Accounting Education (2010), International Capital Market, Accounting Education, viewed 7

June 2012,

Australian Securities Exchange (n.d.), Absolute Return Funds, Australian Securities Exchange,

viewed 7 June 2012,

Centara Capital (2012), What are Hedge Fund Strategies? Centara Capital, viewed 7 June 2012,



Chriss, N.A. (1998), Introduction to Hedge Funds, New York University, viewed 7 June 2012,



College of Business. (n.d.), International Capital Markets and Global Cost of Capital,

University of Nevada - Reno, viewed 7 June 2012,

Fimarkets.com (2009), The Function of Financial Markets in the Economy, Fimarkets.com, viewed 7 June 2012,

Kumar, V (2011), Problem Relating to Borrowing in International Capital Market, Accounting

Education, viewed 7 June 2012,



Mc Graw Hill -- Higher Education (n.d.), Chapter 11 -- The Global Capital Market, Mc Graw

Hill -- Higher Education, viewed 7 June 2012,

Mishkin, F.S. & Eakins, S (2011), Financial Markets and Institutions, Prentice Hall, Boston.

Tesfatsion, L (2012), Introductory Notes on Financial Markets, Department of Economics

Iowa State University, viewed 7 June 2012, [END OF PREVIEW] . . . READ MORE

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