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Internation Financial Management
Internation Financial Management
TERM-IV
ASSIGNMENT-2
2 GOURI KHANDUAL 18
3 PRIYANKA PRIYADARSHINI
JIT
4 SHRUTI WADICHAR
5 USHARANI BEHERA
INTERNATIONAL FINANCIAL MARKET:-
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.
The global economy is massive and growing. According to the World Bank, global Gross
Domestic Product (GDP) had grown from $71.83 trillion in 2012 to approximately $74.91
trillion in 2013. The United States accounted for over 22% of global GDP in 2013, but this
percentage has been declining over time owing to the emergence of the economies in India,
China, Brazil, and other developing countries. A sometimes overlooked factor in this global
growth is that it is facilitated by ever-growing and increasingly complex economic
interconnections between countries. Economist Frederick Hayek referred to this phenomenon
as Catallaxy—specialization of tasks and functions that leads to the exchange of specialties
among specialists and, consequently, economic growth. One can observe that Catallaxy is now
occurring at the national level—some nations are specializing in fostering innovation in some
industries, others are specializing in providing the infrastructure for large-scale manufacturing,
and yet others are serving as hubs for the provision of services. The global flow of goods and
services produced by this phenomenon is large. Manyika et al. (2014) report that the global
flow of goods, services, and finance was almost $26 trillion in 2012, or 36% of global GDP
that year. Figure 1 shows the growth of these flows over time.
While such global flows increase the size of the global economic pie, they also engender greater
interconnectedness among the financial systems of the world because an increasing share of
global economic activity takes place across borders. The McKinsey Global Institute
Connectedness Index measures the connectedness of 131 countries across all flows of goods,
services, finance, people, and data and communication. It reflects the level of inflows and
outflows adjusted for the size of the country. The data show that connectedness has been on
the rise in most countries and that global financial flows accounted for almost half of all global
flows in 2012. An important reason for this is the growing significance of the financial sector
as a percentage of the overall economy in developed countries, and the development of
financial markets in the emerging countries to support their rapidly growing economies and
burgeoning trade flows.
Financial capital was highly mobile in the nineteenth century. The early twentieth century
brought two world wars and the Great Depression. Many governments implemented controls
on international capital flows, which fragmented the international financial markets and
reduced capital mobility. Post war efforts to increase the stability and integration of markets
for goods and services included the creation of the General Agreement on Tariffs and Trade
(the GATT, the precursor to the World Trade Organization, or WTO). Until recently, no
equivalent efforts addressed international trade in securities. The low level of capital mobility
is reflected in the economic models of the 1950s and 1960s: economists felt comfortable
conducting international analyses under the assumption of capital immobility. Financial
innovations, such as the Eurocurrency markets, undermined the effectiveness of capital
controls.1 Technological innovations lowered the costs of international transactions. These
factors, combined with the liberalizations of capital controls in the 1970s and 1980s, led to the
development of highly integrated world financial markets. Economists have responded to this
“globalization” of financial markets, and they now usually adopt perfect capital mobility as a
reasonable approximation of conditions in the international financial markets.
Multilateral Development Banks:-
Multilateral development banks (MDBs) provide financial assistance to developing countries
in order to promote economic and social development. The United States is a member, and
donor, to five major MDBs: the World Bank and four regional development banks, including
the African Development Bank, the Asian Development Bank, the European Bank for
Reconstruction and Development, and the Inter-American Development Bank. The MDBs
primarily fund large infrastructure and other development projects and provide loans tied to
policy reforms by the government. The MDBs provide non-concessional financial assistance
to middle-income countries and some creditworthy low-income countries on market based
terms. They also provide concessional assistance, including grants and loans at below market
rate interest rates, to low-income countries.
World Bank
The World Bank is the oldest and largest of the MDBs. The World Bank Group comprises
three sub institutions that make loans and grants to developing countries: the International Bank
for Reconstruction and Development (IBRD), the International Development Association
(IDA), and the International Finance Corporation (IFC). The 1944 Bretton Woods Conference
led to the establishment of the World Bank, the IMF, and the institution that would eventually
become the World Trade Organization (WTO). The IBRD was the first World Bank affiliate
created, when its Articles of Agreement became effective in 1945 with the signatures of 28
member governments. Today, the IBRD has near universal membership with 189 member
nations. Only Cuba and North Korea, and a few micro-states such as the Vatican, Monaco, and
Andorra, are non-members. The IBRD lends mainly to the governments of middle-income
countries at market-based interest rates. In 1960, at the suggestion of the United States, IDA
was created to make concessional loans (with low interest rates and long repayment periods)
to the poorest countries. IDA also now provides grants to these countries. The IFC was created
in 1955 to extend loans and equity investments to private firms in developing countries. The
World Bank initially focused on providing financing for large infrastructure projects. Over
time, this has broadened to also include social projects and policy-based loans.