Modules

121
International financial markets

Prerequisite – 94 Principles of banking

This subject examines the structure and operations of international financial markets through an analysis of the economic principles underlying the evolution of market practice and instruments. The internationalisation of capital flows has enhanced global liquidity and the price sensitivity of markets, so leading to new hedging and investment opportunities. By examining the activities of institutions when trading positions to hedge or invest, the syllabus develops an understanding of the risk/reward relationship that drives the growth of these markets.

Introduction to international financial markets: the growing importance of international markets; the size and classification of the markets; operations in the markets.

Interest rates in international markets: the term structure of interest rates – expectations theory, liquidity preference and segmentation theory; determination of international interest rates.

Foreign exchange markets: exchange rates and the FOREX markets; contracts in the market; movements in spot rates; contracts in organised exchanges; quotations of rates.

International money markets: the Eurocurrency markets; the growth of the Eurodollar markets – interest rates, lending and country risk; Euronotes and Eurocommercial paper.

International bond markets: composition and evolution of the markets; issuing; private placements; bought deals; floating rate notes; global bonds.

International equity markets: international equity investments; emerging stock markets; portfolio investment in developing countries; issuing international equity.

Diversification in international markets: fundamentals of the theory of investments; benefits of international diversification; optimal allocation of assets in international markets.

Risks in international markets: exchange and interest rate volatility; identifying and measuring risk; interest rate risk; exchange rate risk.

Financial derivatives: forwards and futures contracts – payoff, quotations and forward rate agreements; options contracts – payoff, pricing, quotations, options on futures; interest rate and currency swaps.

International banking: international activities of banks; foreign exchange trading; trade financing; international lending; risk management products; capital adequacy.