Assignment 1: Discussion Questions—International Capital Market
The financial system brings together people or organizations that have excess funds with those who need funds. The system includes the banking industry as well as the capital markets. The capital markets are commonly used to support the purchase of long-term assets through the issuance of bonds and stock. This system exists domestically and internationally.
Research international capital markets using your textbook, University online library resources, and the Internet. Respond to the following:
International Capital Market
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International Capital Market
Assignment 1: Discussion Questions—International Capital Market
“Greed and fear are both good and healthy for an investor and capital markets as a whole” are a famous quote by Naved Abdali. According to Thaler (2018), the international Capital Market refers to financial markets and institutions that provide financing to individuals, businesses, and governments across national borders. It is a crucial component of the global economy, enabling the flow of funds from countries with surplus capital to those in need of capital. The international capital market offers a range of financial instruments, such as bonds, stocks, and currencies, that are traded on global stock exchanges and over-the-counter (OTC) markets (Thaler, 2018). Thaler also stated that one of the most significant advantages of the international capital market is the ability to diversify investment portfolios. Investors can spread their risks across different countries, currencies, and financial instruments, reducing their exposure to individual market risks. The international capital market also offers investors access to a broader range of investment opportunities, including the ability to invest in emerging markets, which can provide higher returns and risks (Thaler, 2018). According to Abraham (2018), another benefit of the international capital market is the ability to raise capital on a global scale. Companies and governments can access a broader pool of investors, including those from other countries, to finance their operations and growth; This can result in lower borrowing costs and improved access to financing, which can support economic growth and job creation (Abraham, 2018). Additionally, the international capital market provides a mechanism for recycling surplus capital from rich to poorer countries, helping address global economic imbalances. This paper discusses why an international business would use an international capital market, the essential features of the foreign exchange market, and why is foreign exchange market is critical for international businesses.
The international capital market provides companies access to a broader pool of capital from investors worldwide; This means businesses can raise more funds than they would be able to in their home country alone, which can help support their growth and expansion plans. According to Fatica (2018), by tapping into the resources of a wider range of investors, businesses can secure the funding they need to grow and expand and access new and diverse sources of capital that may not be available in their home market. Access to a broader pool of capital can provide international businesses with the financial resources they need to grow and expand. In many cases, businesses may have limited access to capital in their home market and may need funding from other sources to meet their financial needs (Fatica, 2018). By accessing the resources of an international capital market, businesses can secure the funding they need to expand into new markets, develop new products and services, and grow their operations. Thus, the international capital market gives companies access to a broader pool of capital from investors worldwide.
Diversification of funding sources is a critical reason an international business may use an international capital market. According to Nguyen (2021), by tapping into a wider range of funding sources, businesses can reduce their reliance on a single funding source and increase the stability and resilience of their operations. Diversification of funding sources can help businesses mitigate the risks associated with relying on a single funding source. For example, suppose a business depends on a single large investor or bank for its funding. In that case, it may be exposed to significant risk if that investor or bank experiences financial difficulties or decides to withdraw its support (Nguyen, 2021). By accessing a wider range of funding sources in an international capital market, businesses can reduce their dependence on any single funding source and increase the stability and resilience of their operations. Thus, diversification of funding sources is a critical reason an international business may use an international capital market.
The foreign exchange market is decentralized, which is considered one of its most essential features. According to Hameed et al. (2021), a decentralized market allows for high flexibility and adaptability. In a decentralized market, there is no central exchange, and transactions are conducted between parties directly or through intermediaries; This allows for a highly flexible and adaptive market, which can respond quickly to market conditions and demand (Hameed et al., 2021). It can be essential in the foreign exchange market, where exchange rates can fluctuate rapidly, and businesses need to be able to respond quickly to changes to protect their financial interests. Thus, the foreign exchange market is decentralized, which is considered one of its most essential features.
The foreign exchange market is known for its 24/7 trading feature, considered one of its most essential characteristics. According to Lee et al. (2021), 24/7 trading allows businesses to respond quickly to market changes. The foreign exchange market is a highly dynamic and rapidly changing environment. Exchange rates can fluctuate rapidly in response to geopolitical tensions, economic news, and central bank policy (Lee et al., 2021). With 24/7 trading, businesses can respond quickly to these changes, and take advantage of market operations globally, as they may need to make currency conversions at any time of the day or night. Thus, the foreign exchange market is known for its 24/7 trading feature.
The foreign exchange market is essential for facilitating international trade, as it allows businesses to convert one currency into another to pay for goods and services in the country where they operate. According to Wiedman et al. (2018), facilitating international trade is critical for businesses engaged in it, enabling them to manage the financial risks associated with currency fluctuations. The foreign exchange market can also support the global expansion of international businesses by providing them access to capital from investors around the world; This can help businesses fund their growth and expansion plans and increase their competitiveness in the global marketplace (Wiedman et al., 2018). Thus, the foreign exchange market is essential for facilitating international trade.
The foreign exchange market allows businesses to manage the currency risk associated with international trade and investment. According to Leo et al. (2019), a business operating in multiple countries may use hedging strategies such as currency forwards, options, or swaps to reduce its exposure to currency fluctuations; This is also because the foreign exchange market provides international businesses with greater flexibility in managing their finances (Leo et al., 2019). For example, a business that operates in multiple countries can use the foreign exchange market to manage its cash flows and reduce its exposure to currency fluctuations. Thus, the foreign exchange market allows businesses to manage currency risk.
In conclusion, the international capital market plays a critical role in the global economy, enabling the flow of funds between countries and providing investors with various investment opportunities. The international capital market offers international businesses a range of benefits, including access to a broader pool of capital and diversification of funding sources. Access to a broader pool of capital is a key reason an international business may use an international capital market. By tapping into the resources of a wider range of investors, businesses can secure the funding they need to grow and expand and access new and diverse sources of capital that may not be available in their home market. Diversification of funding sources is a critical reason an international business may use a global capital market. By accessing a wider range of funding sources and investors, businesses can reduce their reliance on a single source of funding, increase the stability and resilience of their operations, and benefit from a more favorable cost of capital. The decentralization of the foreign exchange market is an important feature that helps to ensure that the market is flexible, transparent, competitive, and liquid; This can help to increase the confidence of businesses in the market and can make it easier for businesses to participate in the foreign exchange market and access the funding they need to grow and expand.
Abraham, F., Cortina Lorente, J. J., & Schmukler, S. L. (2019). The rise of domestic capital markets for corporate financing. World Bank Policy Research Working Paper, (8844).
Fatica, S. (2018). Business capital accumulation and the user cost: Is there a heterogeneity bias? Journal of Macroeconomics, 56, 15-34. https://doi.org/10.1016/j.jmacro.2017.12.004
Hameed, Z., Shafi, K., & Nadeem, A. (2021). Volatility spillover effect between oil prices and foreign exchange markets. Energy Strategy Reviews, 38, 100712. https://doi.org/10.1016/j.esr.2021.100712
Lee, N., Choi, W., & Pae, Y. (2021). Market efficiency in the foreign exchange market. Economics Letters, 205, 109931. https://doi.org/10.1016/j.econlet.2021.109931
Leo, M., Sharma, S., & Maddulety, K. (2019). Machine learning in banking risk management: A literature review. Risks, 7(1), 29. https://doi.org/10.3390/risks7010029
Nguyen, B., & Canh, N. P. (2021). Formal and informal financing decisions of small businesses. Small Business Economics, 57, 1545-1567.