International Financial Market Instruments: Neenu T. Hari Shiji Prem

INTERNATIONAL FINANCIAL
MARKET INSTRUMENTS
Neenu T. Hari
Shiji Prem
FINANCIAL MARKET
• In economics, a financial market is a mechanism
that allows people to buy and sell financial securities ,
commodities and other items of value at low
transaction costs.
• Financial markets can be domestic or they can be

international.
2 Types of international Financial Market
Instruments:
 Money market instruments.
 Capital market instruments.

Money Market
The money market is a component of the financial
markets for assets involved in short-term borrowing
and lending with original maturities of one year or
shorter time frames.
Common money market instruments
 Bankers’ acceptance and Letters of credit.
 Repurchase agreements.
 Eurodollars.
 Federal funds.
 Municipal notes.
 Treasury bills.
 Certificate of deposits.
 Euro bonds.
Banker’s Acceptance And Letters Of
Credit
 A bankers' acceptance, or BA, is a time draft drawn on
and accepted by a bank
 Before acceptance, the draft is not an obligation of the
bank; it is merely an order by the drawer to the bank to pay
a specified sum of money on a specified date to a named
person or to the bearer of the draft.
 Upon acceptance, which occurs when an authorized bank
accepts and signs it, the draft becomes a primary and
unconditional liability of the bank
 A bankers acceptance is also a money market instrument –
a short-term discount instrument that usually arises in the
course of international trade
 Bankers' acceptances are considered very safe assets, as

they allow traders to substitute the bank's credit standing
for their own. They are used widely in international trade
where the creditworthiness of one trader is unknown to
the trading partner.
 Letters of credit are documents issued by banks in which
the bank promises to pay a certain amount on a certain
date, if and only if documents are presented to bank as
specified in terms of the credit. A letter of credit is
generally regarded as a very strong legal commitment on
the part of banks specified in terms of letters of credit.
Repurchase Agreement
 Repurchase agreements (RPs or repos) are financial
instruments used in the money markets and capital
markets. A more accurate and descriptive term is Sale and
Repurchase Agreement
 Cash receiver (seller) sells securities in return for cash, to

the cash provider (buyer), and agrees to repurchase those
securities from the buyer for a greater sum of cash at some
later date, that greater sum being all of the cash lent and
some extra cash (constituting interest, known as the repo
rate).
 A reverse repo is simply a repurchase agreement as
described from the buyer's viewpoint, not the seller's.
Hence, the seller executing the transaction would describe
it as a 'repo', while the buyer in the same transaction would
describe it a 'reverse repo'.
 A repo is economically similar to a secured loan, with the

buyer receiving securities as collateral to protect against
default. However, the legal title to the securities clearly
passes from the seller to the buyer, or "investor".
 Although repos are typically short-term, it is not unusual

to see repos with a maturity as long as two years.
Eurodollars
 U.S. dollars held as deposits in foreign banks
 Dollar denominated deposits are referred to as Eurodollars
 The Eurodollar market is relatively free of regulation,

banks in the Eurodollar market can operate on narrower
margins than banks in the United States.
Federal funds
 Short-term funds transferred (loaned or borrowed)
between financial institutions, usually for a period of one
day.
 Used by banks to meet short-term needs to meet reserve
requirements (over night).
 Banks may borrow the funds to meet the reserves required
to back their deposits.
 Participants in federal funds market include commercial
banks , savings and loan associations , government
sponsored enterprises , branches of foreign banks in the
US , federal agencies and securities firms.
Municipal notes
 Bond issues by a state , city , or other local govt. or their
agencies.
 The method and practices of issuing debt are governed by
an extensive system of laws and regulations , which vary by
state.
 The issuer of the municipal bond receive a cash payment at
the time of issuance in exchange for a promise too repay
the investor over time.
 Repayment period can be as short as few months to 20 ,
30 , 40 years or even longer.
 Bond bear interest at either fixed or variable rate of
interest
 Interest income received by bond holders is often
exempt from the federal income tax and income
tax of state
 Municipal bond holders may purchase bonds
either directly from the issuer at the time of
issuance or from other bond holders after
issuance.
Treasury bills
 Treasury Bills are short term (up to one year)
borrowing instruments of the union government. It is
a promise by the Government to pay a stated sum after
expiry of the stated period from the date of issue
(14/91/182/364 days i.e. less than one year). They are
issued at a discount to the face value, and on maturity
the face value is paid to the holder. The rate of
discount and the corresponding issue price are
determined at each auction.
Certificate of deposits
 A certificate of deposit is a promissory note issued by
a bank or a credit union
 The insurer are FDIC or NCUA
 Usually a fixed interest rate is paid by the institution

Rates
General rules for interest rates
 The larger the principal, the higher the interest
 The longer the term, higher the interest
 The smaller the bank the higher the interest

Working
 A passbook is received by the purchaser
 No certificate
 At maturity the investors are informed

Eurobond
 The Eurobonds are the international bonds which is
issued in a currency other than the currency of the
country or market it is issued
 Generally issued by international syndicate of banks

and financial institutions.

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INTERNATIONAL FINANCIAL

• Financial markets can be domestic or they can be

 Money market instruments.

 Capital market instruments.

 Bankers' acceptances are considered very safe assets, as

 Cash receiver (seller) sells securities in return for cash, to

 A repo is economically similar to a secured loan, with the

 Although repos are typically short-term, it is not unusual

 Dollar denominated deposits are referred to as Eurodollars

 The Eurodollar market is relatively free of regulation,

 The insurer are FDIC or NCUA

 Usually a fixed interest rate is paid by the institution

 The longer the term, higher the interest

 The smaller the bank the higher the interest

 At maturity the investors are informed

 Generally issued by international syndicate of banks

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