The Size and Structure

of Europe and Asian

Markets : Regulatory
Systems of Foreign
Exchange : Major
Instruments

Presented by :

Kritika Kaushik

19609005
Introduction (European Market):
– The term European markets is used generally in a broad sense which includes both the
money market and the Capital Market.
– There are chances for this European markets to develop at any part of the world subject
to legal regulations.
– Allowing such to organize and continue and also there is enough attraction from the
potential users of the European markets services.
– Most of the advanced countries in Europe have a well – developed domestic markets but
are reputed internationally.
– There are also some countries whose domestic markets are not so efficient and
advanced but buy acquired a lot of international reputation, such as Luxemburg,
Switzerland etc., due to their favourable conditions. Essential users of the European
markets services.
– The term European market represent to such markets which primarily deal in short term
claims, with a maturity period of not exceeding 1 year.
Introduction (Asian Market) :

– Ever since the Silk Road was first established as a trading route between the East and the
West over a thousand years ago, Asian markets have presented Westerners with an
interesting and unusual trading and investment opportunities.
– The Asian financial markets today are attracting an unprecedented level of interest from
Western firms, particularly now that those markets have become more accessible than ever
before.
– Asian markets have grown significantly in size since the early 1990s, driven by strong
international investor inflows, growing regional financial integration, capital account
liberalization, and structural improvements to markets.
– The development of equity markets provides a more diversified set of channels for financial
intermediation to support growth, thus bolstering medium-term financial stability.
Functions of European Money Market

– European Money Market provide the means through which the central bank
can influence its monetary policy, for example, if the central Bank, through its
open market operations involving in the purchases and / or rules of government
securities, it affects commercial Bankers reserves and their credit – creating
capacities and money supply.
– It also provides the direct resources from the sectors with surplus funds to the
deficit – sectors. For example, generally the surplus – sector consists of
individuals, while the deficit – sectors consist of companies and governments.
Emergence of Asian Market

– Asian equity markets are sizable and fast growing. Since 1990, Asia’s
capitalization has more than doubled in U.S. dollar terms to $13.7 trillion, 30
percent of world capitalization.
– Excluding Japan and Australia, it has risen almost tenfold.
– The financial hubs of Hong Kong SAR, Singapore, and Japan dominate the
region, accounting for two-thirds of Asian equity assets.
– Markets in some other countries, such as India, Malaysia, and Taiwan Province
of China, are also sizable. But, for the most part, market capitalization remains
well below industrial country levels.
Characteristics of the European
Currency Instruments
– They can be bought and sold immediately.
– There is usually a very active secondary market for these
instruments.
– The costs of transacting in these assets is usually lower and also
relatively lower than their domestic counterparts (in case of
international instruments).
– They possess highest liquidity with them which is next only to the
actual currencies.
– They are rightly given the name as “Near Money”.
Nature of European Money Markets

– Any typical money market is highly competitive.

– There is almost a perfect knowledge available with the rates
published on a daily basis news papers, also available on
telephone.
– The participants vary and they have a wide range of securities
which they can choose from within their own money markets of a
foreign nation.
International Bank Market

– Under the Structure of European markets the developmental activity

undertaken by almost all countries after the Second world war.
– (both the war – affected and the Third world countries) necessitated the world
economics to come closer and act as a united world economy.
– In the pre – 1944 period, there had not been much scope for international
banking activity excepting providing foreign exchange and facilitating foreign
trade – New activities, financial techniques etc have been incorporated since
them.
International European Capital
Market
– The structure and size of the European Market includes international capital
markets, International investor, the Bond issue Drill and the instruments in New
York and Tokyo markets.

– Countries need to borrow externally in the European market due to:

a. The gap between the current external receipts and payments.
b. The gap between domestic savings and investments.
c. These external funds come in the form of grants loans and equity investments.
The International Investor in
European Market
– There are 2 categories among the International investors
(1) The Institutional Investor
(2)The individual Investor.
– The first category includes big mutual funds and personal funds. They are keen to diversify
investments all over the world and willing to invest a part, small of their portfolios, in third
world companies and stock markets.
– From the pure financial point of view, investors ought to consider the possibility of
expanding their investments beyond the geographical limit of their own countries.
– If the investment is larger than the assets in one country as large as the U.S.A, the investors
may be able to reduce the risk of their investment portfolio by diversifying across countries.
– Portfolio investments, on the other hand are aimed at capital appreciation and
the portfolio investors also do not bring in any technology.

Portfolio investments are of 4 types.

1. Close – Ended Country Funds Floated Abroad They operate in the same way as
domestic mutual funds.
2. Open Ended Country Funds These are also mutual funds but with no specific
maturity date.
3. Foreign Institutional Investors (FIIs) They invest directly in stock markets.
4. Equity (or Conversable Bond) Issues in Foreign Markets Portfolio investments to
developing countries have more than doubled between 1989 and 1991 from $3.4
Billions to $7.3 Billions, accordingly to the world Bank Research Observer (January
1993)
Bond Market :
– Bond is a promise, under seal, to pay money.
– This term is generally used to designate the promise made by a corporation, either public or private, to
pay money to the bearer.
– The public issue of bonds can be divided between those issued by Governments or their agencies and
those issued by private institutes.
Euro Bonds :
– When the Bonds are sold principally in countries other than the country of the currency in which the
issue is denominated, it is called as Euro Bond issue.
for example, a Dollar Bond issued in Europe is a Euro (Dollar) Bond in the Euro – Bond market, The rates of
one – currency bond are directly related to the long – term rate in the home country of the currency, the
Euro – rate for short maturities of that currency, the rates in other currencies, and currency regulations
and restrictions.
Foreign Bonds :
– A foreign bond is an international bond sold by a foreign borrower, but denominated in the currency of
the country in which it is placed.
– It is under written and sold by a national underwriting syndicate in the lending country.
For example, an Indian company might float a Bond Issue in the U.S. Capital market, where it will be
quoted and traded.
International Investor Diversification
of Asian market
– Equity flows into emerging Asia have soared
(Figure).
– International investors now play a key role
in many Asian markets.
– Such investors are concentrated in markets
such as Korea, Hong Kong SAR, Taiwan Province
of China, India, and Singapore, with
portfolio allocations to ASIAN countries relatively small.
– However, even in countries in which foreign holdings of stock are relatively small.
– Inflows have been especially strong in recent years, notwithstanding occasional outflows.
– By end-2004, international investors had invested some $638 billion in emerging Asia equity markets—a
twelvefold increase over 1990s levels.
PERFORMANCE OF ASIAN
EMERGING MARKETS
There are three aspects of Asian emerging-market equity performance over recent
years.
– First, it examines price performance relative to other markets, and considers
some possible drivers.
– Second, it looks at recent trends in volatility and the possible relationship with
capital account liberalization.
– Third, it explores correlations with global and regional markets, to provide a
perspective on the integration of Asian markets with other equity markets.
A. Price Performance

– Over the past five years, Asian emerging markets have outperformed mature markets
but lagged other emerging markets.
– Overall, stock prices generally remain well below pre-Asia-crisis peaks, whereas equity
indices in Latin America, emerging Europe, and the Middle East exceed their 1990s
highs
– The run-up in Asian stock prices has reflected a period of good economic fundamentals
in the region.
– Economic growth has been strong in a number of countries, in the context of a robust
global expansion, not with standing periodic spikes in oil prices.
– Moreover, corporate profits have been solid.
B. Correlation with Global and Regional Markets

– Asian equity markets have become more synchronized with global markets since the
– early 1990s.
– The same is true for emerging markets as a group, suggesting that globally rising integration
may be at play.
– Indeed, Asia’s correlation with developed markets has moved closely with the overall
emerging markets correlation.
– Correlations have also risen significantly for individual Asian countries.
– The share of internationally tradable stocks in the global index rises, the share held in global
portfolios should rise, and it’s exposure to global market developments should increase.
ARE ASIAN MARKETS
OVERHEATING?
– An examination of valuation measures and risk-adjusted performance can shed light on whether Asian markets may
have become overheated.
– Measures such as price-earnings (PE) ratios (here, based on historical earnings) and dividend yields provide some
sense of whether prices are broadly in line with the relevant underlying cash flows.
– Measures of risk-adjusted performance can help in gauging whether recent market performance has been unusual.
– The expected real dividend growth implied by current valuations also appears to be generally in line with medium-
term GDP growth forecasts.
– A deeper look at valuations compares expected real dividend growth extracted from dividend yields with GDP growth
as a simple benchmark.
– Dividends should grow basically in line with GDP, if in the long run corporate earnings are stable as a share of GDP and
dividends are stable as a share of earnings.
– To sum up, equity markets do not generally show signs of overheating.
– Some exploration of the relationship between equity prices and economic activity can provide some forward-looking
perspective on the development of equity markets, and shed light on the attendant possible policy implications.
DEVELOPMENT OF EQUITY
DERIVATIVES ASIAN MARKETS
– Equity derivatives more generally, can convey benefits but also entail risks to be managed.
– Derivatives are an alternative to trading the underlying security and supplement cash markets by providing
hedging tools and low-cost arbitrage opportunities.
– Equity derivatives on single stocks or indices strengthen the liquidity in cash equity markets, improve price
discovery and lower the cost of equity listings for firms.
– Global exchange-based trading in equity derivatives has almost doubled over the last three years from $54 trillion
in 2002 to $114.1 trillion of notional value.
– The volume of global trading in 2006 had already reached $96.1 trillion as of August.
– On Asia’s exchanges, equity derivatives have witnessed the most rapid growth of all traded derivative products
(foreign exchange, interest rate, equity, commodities, and credit derivatives).
– Equity derivative trading in emerging Asia has mushroomed from $16.5 trillion in 2002 to $40.3 trillion in 2005 and
now represents 38.6 percent and 43.9 percent of worldwide equity derivatives turnover by notional value and
number of trades.
– This mainly represents very rapid growth in Korea, which hosts the world’s most active derivatives market––the
Korean Futures Exchange
Regulatory Systems of Foreign
Exchange
The well – established Regulatory System of foreign exchange is spread over in all the activities of the
foreign exchange market. Some of them are :
– Foreign Exchange Derivations
A “derivative” is a financial contract whose value depends on the values of one or more underlying assets,
or indices of the asset values. The underlying assets could be :
(1) Equities
(2) Currencies
(3) Commodities
(4) Interest Rates
(5) Price Index.
The derivations account for approximately 80% of the financial market activity in the developed world –
North America, Europe, and East Asia. Derivatives are almost like insurance.
– Derivatives can be classified as options, futures, swaps and of course, the forward exchange
contracts.
– There are hybrids like swaptions, option and futures etc., But we confine ourselves to the
recent but emerging as the dominant instruments or products to manage risk in the arena of
international finance, namely
(a) Currency options (b) Currency futures (c) Currency swaps.
Currency Options
A currency option is an arrangement between an option holder and an option writer. The option
holder is the buyer and the option writer is the seller of an option. A currency option gives the
buyer the right, but not the obligation to either buy or sell a specified quantity of one currency
in exchange for another.
Features of Currency Options :
Currency options are of 2 types, namely
(1) Over – the – counter (OTC) options
(2) Exchange – Traded options.
The OTC options can be arranged individually with a bank whereas the exchange - traded
options can be purchased only through a broker on an options exchange such as Phildelphia
stock Exchange (PHLX), Chicago Mercantile Exchange (CME) etc.,
Currency Futures :
A currency future is a contract for the purchase or sale of a standard quantity of one
currency in exchange for another currency at a specified exchange rate, to be
delivered at a specified future time. Normally the maturity dates of currency futures
are 10th March, 10th June, 10th September and 10th December. These are bought
and sold on a future exchange at the stock exchange.
Currency Swaps
These are the agreements to exchange payments in one currency for these in
another. The structure of a currency swap in similar to a forward contract or futures
contract in foreign exchange, most of these swaps involve the U.S. $ on one side of
the transaction.

American and European Option :

An American option can be exercised on or before its expiry date, for example: a 3
months American option purchased on January 1st can be exercised on any day on or
before the expiry date i.e. on 1st April, European option, on the other hand, can be
exercised only on the expiry date. For instance, in the above example, if it were to be
a European option, it can be exercised only on the expiry date i.e. 1st of April.
Major Instruments

The Major instruments constituting the U.S. Money market are Federal Funds, Treasury Bills and
government Agency Paper, Euro – Dollars, certificates of Deposits (C.D.S.) and re – purchase
agreement :

1. Federal Funds
2. Treasury Bills
3. Euro – Dollars
4. Certificates of deposits
5. Bankers Acceptance
6. Commercial paper
Federal Funds
– These are popularly called as “Fed Funds”.
– These funds are used by the commercial Banks in meeting the reserve requirement norms
efficiently.
– From time to time the Federal Reserve Bank (U.S. Central Bank) changes the minimum reserve
to be held by the commercial banks as a part of its monetary policy.
– These Fed Funds are the most liquid assets which bear some interest.
– There is very little credit risk and the borrowers and lenders are known to each other.
– The interest risk on these Fed Funds serves as the base rates of the entire money market.
Treasury Bills
– These treasury bills (otherwise called as T. Bills) consist of a set of securities issued, by the
treasury, on behalf of the government to meet the latter’s spending obligations.
– There 120 are 3 categories of securities under the T. Bills – short – medium and long term
maturities.
– These are called as “Bills” (if the original maturity is less than 1 year) “Notes” (if it is between
1 – 10 years) and “Bonds” (if it is more than 10 years).
Euro – Dollars
– Due to certain regulations in the U.S. money market, the Euro – Dollar market came into
existence.
– Euro – Dollars are traded outside the territory of U.S.A. In the post – war period, the
strained relations between the former soviet Union and U.S. has, to large extent, changed
the nature of the Euro – Dollar market.
– The balances held by the entire Eastern block of countries were transferred from banks of
New York to mainly London following apprehensions of attachment by U.S. Government.
Certificates of Deposits (CDs)
– The commercial Banks have started using these certificates of deposit (CDs) from late 1960s
mainly to counter the corporate treasures from the large scale use of commercial papers
and denominations of $1,00,000 and more.
– The original maturities of 2 weeks to 5 years or more, suggest that they are short to
medium term instruments.
– The rate of interest on the CDs is paid on the basis of the face values. Normally institutions
and companies are the major investors who prefer liquid low – risk investments.
Banker’s Acceptances (B.A.)
– A Banker’s acceptance is an unconditional order in writing to pay a specified sum
to the bearer or any other designated party, by him at a particular time in future
(i.e. not instantly) if it is accepted by a bank, it implies that the bank has
guaranteed payment and it becomes a negotiable (tradable) instrument.
– In most of the countries, the BAs are used to finance international trade. In some
cases, as in U.S.A. a part of the international trade is also financed using the BAs.
The mechanism involved is simple.
Commercial Paper
– A commercial paper (CP) is an unsecured promissory note issued by very large
private companies and financial companies having a short and fixed maturities.
– Majority of CPs have 30 days or less of original maturity; while most of the CPs
have 270 days of the original maturity.
– The securities and exchange commission (SEC) may rarely permit some comanies
to issue CPs of more than 270 days.
Conclusion

European Markets :
– International money market is technically the “Euro – Currency” market. The prefix “Euro” is
used for historical reason because of the U.S.
– Dollar were largely deposited outside 122 U.S.A. in Europe particularly in London, Again the
currency which is forming the larger share in the Euro – Currency markets happens to be the
U.S. Dollar.
– The Euro-currency market is operated by foreign banks called Euro Banks and U.S. Bank’s
foreign branches (operating in other countries).
– Generally, there is some amount of ambiguity between the 2 markets namely, the Euro –
currency and Euro – Bank markets.
– The Euro – currency markets enable the investors to hold short – term claims are commercial
banks
Contd :

Asian Markets :
– Asia is rapidly growing into the world’s largest stock market.
– In 2018, 51% of all equity capital raised through initial public offerings (IPOs) went to Asian companies.
– Today more than half of the world’s listed companies are from Asia.
– This development is reshaping global stock market in several ways:
• Households outside of Asia have increased their investments in Asian companies through pension funds, mutual
funds and other intermediaries.
• It is increasingly common that listed companies are majority owned by the public sector or by other private
companies.
• Smaller growth companies from Asia are using capital markets to raise money more extensively than smaller
companies from the rest of the world.
– Asian companies has been an increasing role of Asian markets in global equity financing.
– The share of capital raised in Asian markets has grown steadily during the past 20 years, from representing 19% of
the global volume of public equity raised between 2000 and 2002 to 42% during the last 3 years