BUCAS GRANDE FOUNDATION COLLEGE

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LEARNING MODULE-4

in

ENT 13
INTERNATIONAL BUSINESS AND TRADE

(Bachelor of Science in Entrepreneurship)

2ND Semester, AY 2021-2022

Prepared by:

Jackylou Hingpit Canta

Instructor

ENT 13 – INTERNATIONAL BUSINESS AND TRADE 1

 TABLE OF CONTENTS

Module 4 Topics Pages

Understanding of International Financial Markets ---------------------------------- 3

Types of Financial Markets ------------------------------------------------------------- 4
Foreign Exchange Market and its Important Functions ---------------------------- 5

ENT 13 – INTERNATIONAL BUSINESS AND TRADE 2

TITLE: INTERNATIONAL FINANCIAL MARKETS

Learning Objectives
In this lesson, the learners will be able to:
a. Classify numerous types of financial markets;
b. Understand the roles of financial markets ;
c. Explain each important functions of foreign exchange market.

Learning Activities
Read and comprehend the whole concept.

Understanding the Financial Markets

A financial market is the mechanism that facilitates the transfer of funds from
lenders (surplus units) to borrowers (deficit units). The institutions & instruments are
integral part of financial market. When funds flow across national boundaries and the
transfer is between parties residing in different countries, there comes into existence
the international financial markets. The international financial market is the
worldwide marketplace in which buyers and sellers trade financial assets, such as
stocks, bonds, currencies, commodities and derivatives, across national borders.
Financial markets play a vital role in facilitating the smooth operation of capitalist
economies by allocating resources and creating liquidity for businesses and
entrepreneurs. The markets make it easy for buyers and sellers to trade their financial
holdings. Financial markets create securities products that provide a return for those
who have excess funds (Investors/lenders) and make these funds available to those
who need additional money (borrowers).
The stock market is just one type of financial market. Financial markets are
made by buying and selling numerous types of financial instruments including equities,
bonds, currencies, and derivatives. Financial markets rely heavily on informational
transparency to ensure that the markets set prices that are efficient and appropriate.
The market prices of securities may not be indicative of their intrinsic value because of
macroeconomic forces like taxes.
Some financial markets are small with little activity, and others, like the New
York Stock Exchange (NYSE), trade trillions of dollars of securities daily. The equities
stock market is a financial market that enables investors to buy and sell shares of
publicly traded companies. The primary stock market is where new issues of stocks,
called initial public offerings (IPOs), are sold. Any subsequent trading of stocks occurs
in the secondary market, where investors buy and sell securities that they already own.

ENT 13 – INTERNATIONAL BUSINESS AND TRADE 3

Types of Financial Markets

A. Stock Markets
Perhaps the most ubiquitous of financial markets are stock markets. These are
venues where companies list their shares and they are bought and sold by traders and
investors. Stock markets, or equities markets, are used by companies to raise capital via
an initial public offering (IPO), with shares subsequently traded among various buyers
and sellers in what is known as a secondary market.

B. Over-the-Counter Markets
An over-the-counter (OTC) market is a decentralized market—meaning it does
not have physical locations, and trading is conducted electronically—in which market
participant’s trade securities directly between two parties without a broker. While OTC
markets may handle trading in certain stocks (e.g., smaller or riskier companies that do
not meet the listing criteria of exchanges), most stock trading is done via exchanges.
Certain derivatives markets, however, are exclusively OTC, and so make up an
important segment of the financial markets. Broadly speaking, OTC markets and the
transactions that occur on them are far less regulated, less liquid, and more opaque.

C. Bond Markets
A bond is a security in which an investor loans money for a defined period at a
pre-established interest rate. You may think of a bond as an agreement between the
lender and borrower that contains the details of the loan and its payments. Bonds are
issued by corporations as well as by municipalities, states, and sovereign governments
to finance projects and operations. The bond market sells securities such as notes and
bills issued by the United States Treasury, for example. The bond market also is called
the debt, credit, or fixed-income market.

D. Money Markets
Typically the money markets trade in products with highly liquid short-term
maturities (of less than one year) and are characterized by a high degree of safety and
a relatively low return in interest. At the wholesale level, the money markets involve
large-volume trades between institutions and traders. At the retail level, they include
money market mutual funds bought by individual investors and money market accounts
opened by bank customers. Individuals may also invest in the money markets by buying
short-term certificates of deposit (CDs), municipal notes, or U.S. Treasury bills, among
other examples.

E. Derivatives Markets
A derivative is a contract between two or more parties whose value is based on
an agreed-upon underlying financial asset (like a security) or set of assets (like an
index). Derivatives are secondary securities whose value is solely derived from the
value of the primary security that they are linked to. In and of itself a derivative is
worthless. Rather than trading stocks directly, a derivatives market trades in futures
and options contracts, and other advanced financial products, that derive their value

ENT 13 – INTERNATIONAL BUSINESS AND TRADE 4

from underlying instruments like bonds, commodities, currencies, interest rates, market
indexes, and stocks.
F. Forex Market
The forex (foreign exchange) market is the market in which participants can buy,
sell, hedge, and speculate on the exchange rates between currency pairs. The forex
market is the most liquid market in the world, as cash is the most liquid of assets. The
currency market handles more than $6 trillion in daily transactions, which is more than
the futures and equity markets combined. As with the OTC markets, the forex market is
also decentralized and consists of a global network of computers and brokers from
around the world. The forex market is made up of banks, commercial companies,
central banks, investment management firms, hedge funds, and retail forex brokers and
investors.

G. Commodities Markets
Commodities markets are venues where producers and consumers meet to
exchange physical commodities such as agricultural products (e.g., corn, livestock,
soybeans), energy products (oil, gas, carbon credits), precious metals (gold, silver,
platinum), or "soft" commodities (such as cotton, coffee, and sugar). These are known
as spot commodity markets, where physical goods are exchanged for money.
The bulk of trading in these commodities, however, takes place on derivatives
markets that utilize spot commodities as the underlying assets. Forwards, futures, and
options on commodities are exchanged both OTC and on listed exchanges around the
world such as the Chicago Mercantile Exchange (CME) and the Intercontinental
Exchange (ICE).

H. Cryptocurrency Markets
The past several years have seen the introduction and rise of cryptocurrencies
such as Bitcoin and Ethereum, decentralized digital assets that are based on blockchain
technology. Today, thousands of cryptocurrency tokens are available and trade globally
across a patchwork of independent online crypto exchanges. These exchanges host
digital wallets for traders to swap one cryptocurrency for another, or for fiat monies
such as dollars or euros.
Because the majority of crypto exchanges are centralized platforms, users are
susceptible to hacks or fraud. Decentralized exchanges are also available that operate
without any central authority. These exchanges allow direct peer-to-peer (P2P) trading
of digital currencies without the need for an actual exchange authority to facilitate the
transactions. Futures and options trading are also available on major cryptocurrencies.

Foreign Exchange Market and its Important Functions

“The foreign exchange market is a place where foreign moneys are bought and
sold.” Foreign exchange market is an institutional arrangement for buying and selling of
foreign currencies. Exporters sell the foreign currencies. Importers buy them.
The foreign exchange market is merely a part of the money market in the
financial centers. It is a place where foreign moneys are bought and sold. The buyers
and sellers of claim on foreign money and the intermediaries together constitute a
foreign exchange market.

ENT 13 – INTERNATIONAL BUSINESS AND TRADE 5

 It is not restricted to any given country or a geographical area. Thus, the foreign
exchange market is the market for a national currency (foreign money) anywhere in the
world, as the financial centers of the world are united in a single market.

The following are the important functions of a foreign exchange market:

1. To transfer finance, purchasing power from one nation to another. Such
transfer is affected through foreign bills or remittances made through
telegraphic transfer. (Transfer Function).
2. To provide credit for international trade. (Credit Function).
3. To make provision for hedging facilities, i.e., to facilitate buying and selling
spot or forward foreign exchange. (Hedging Function).

1. Transfer Function
The basic function of the foreign exchange market is to facilitate the conversion
of one currency into another, i.e., to accomplish transfers of purchasing power between
two countries. This transfer of purchasing power is effected through a variety of credit
instruments, such as telegraphic transfers, bank draft and foreign bills.
In performing the transfer function, the foreign exchange market carries out
payments internationally by clearing debts in both directions simultaneously, analogous
to domestic clearings.

ENT 13 – INTERNATIONAL BUSINESS AND TRADE 6

2. Credit Function
Another function of the foreign exchange market is to provide credit, both
national and international, to promote foreign trade. Obviously, when foreign bills of
exchange are used in international payments, a credit for about 3 months, till their
maturity, is required.

3. Hedging Function
A third function of the foreign exchange market is to hedge foreign exchange
risks. Hedging means the avoidance of a foreign exchange risk. In a free exchange
market when exchange rate, i. e., the price of one currency in terms of another
currency, change, there may be a gain or loss to the party concerned. Under this
condition, a person or a firm undertakes a great exchange risk if there are huge
amounts of net claims or net liabilities which are to be met in foreign money.
Exchange risk as such should be avoided or reduced. For this the exchange
market provides facilities for hedging anticipated or actual claims or liabilities through
forward contracts in exchange. A forward contract which is normally for three months is
a contract to buy or sell foreign exchange against another currency at some fixed date
in the future at a price agreed upon now.
No money passes at the time of the contract. But the contract makes it possible
to ignore any likely changes in exchange rate. The existence of a forward market thus
makes it possible to hedge an exchange position.
Foreign bills of exchange, telegraphic transfer, bank draft, letter of credit, etc.,
are the important foreign exchange instruments used in the foreign exchange market to
carry out its functions.

ACTIVITY
Instruction: Answer the following questions below. Write your answers in a piece of
paper.
1. What are the main functions of financial markets?

2. Who are the main participants in financial markets?

3. What might be the possible outcomes if the financial market will fail?

4. What is the most significant role of financial market?

5. Why financial markets are very indispensable?

ENT 13 – INTERNATIONAL BUSINESS AND TRADE 7

REFERENCES:
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important-functions/26067
[Link]
[Link]

ENT 13 – INTERNATIONAL BUSINESS AND TRADE 8