International Financial Markets Essay Example | Topics and Well Written Essays - 2500 words

International Financial Markets - Essay Example They lend such surplus fund to the borrowers like households, businesses, governments who want to finance their personal expenditures like purchase of houses, cars and furniture. This kind of flow of funds form the lenders to the borrowers follows two ways known as direct finance and indirect finance. In the former concept the borrowers have access to the finance from the lenders directly. They do this by selling their fiscal tools which represent a claim on the potential proceeds and assets of the borrower. Financial instruments are assets for individuals who buy them and are liabilities for individuals who sell them. Through this process of buying and selling of securities the flow of money is occurs in the economy which is very vital for the economy. Hence financial markets are the medium through which such transactions happen. The financial markets comprises of equity market, debt market, derivative market and foreign exchange market. Each of this market acts as the medium of flo w of fund in the economy. This report will analyse the importance of the financial markets and the role which they play in the development of international trade and economic development. Discussion Financial System Structure The financial system of an economy comprises of three components Financial markets Financial institutions Financial regulators Each of the above components has a specific role in the economy. The financial institutions are important players in the financial markets since they perform the role of an intermediary and hence they determine the flow of funds. The financial regulator’s role is to monitor and regulate the participants of the monetary system. At the heart of this is the fiscal market. It facilitates in the flow of funds in the economy (Cho, 1989, pp. 88-92). Figure 1: Structure of Financial System The financial institutions use financial instruments to regulate the flow of funds in the economy. Financial assets or financial instruments are intan gible assets that are expected to provide future benefits to the owner of the instrument in the form of future cash. Some financial instruments are known as securities which include bonds and stocks (Fry and Maxwell, 1995, p. 282). Financial markets and their economic importance Financial market is a place where there is exchange or trading of financial instruments. The major economic functions of the financial markets are Liquidity Price discovery Reduction of transaction costs. Liquidity The financial markets provide an opportunity to the investors to sell their financial instruments. Liquidity means the ability of an investor to sell an asset in the market at its fair market value anytime he wants. Without this liquidity, an investor had to hold on to the financial instrument till the conditions arise to sell it or the issuer of the asset is contractually obligated to clear the obligation (Stiglitz, 1989, pp. 55-61). The liquidity of an equity instrument is until the company is l iquidated voluntarily or involuntarily. For a debt instrument liquidity comes when it matures. All international financial markets provide some liquidity to the investors though they have different degrees of liquidity associated with it (King, Robert and Ross, 1993, pp. 717-723). Price discovery It denotes to the determination of the price of a traded asset in a financial market by means of transactions between