Nowadays, it is significant for managers and CEOs to understand the structure of international financial markets as well as instruments available to use in their framework. Since business environment tends to become diverse affected by globalization, one observes ever-changing exchange rates and other economic obstacles (Cavusgil, Knight, Riesenberger, Rammal, & Rose, 2014). The project to be summarized focuses on explaining the structure of international financial markets based on the critical review of the existing literature in the given field.
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The main purpose of the project is to explore global financial markets, institutions, and instruments to reveal the role and types of foreign exchange exposure. To achieve the mentioned purpose, the following research questions are posed: what are foreign exchange exposure and the structure of international financial markets? The process of the research begins with the identification of relevant literature and web sources. Namely, six sources are selected to support the research with credible arguments. In the process of collecting data, a researcher uses such keywords as Multinational Corporations (MNCs), international financial markets, foreign exchange exposure, and so on. To ensure trustworthiness of sources, the articles and books published recently are selected.
This section provides the summary of findings discovered in the course of the literature review. As noted by the Editorial Board (2015), an international financial market may involve stock market, currency market, derivatives market, bond market, and commodity market. Among international banking services, one may note correspondent banks, foreign branches, offshore banks, international banking facilities, etc. The institutions outlined by the Editorial Board (2015) such as international loan syndicates or banks operating globally. In case financial institutions are not regulated, they are called shadow institutions belonging to shadow banking.
For instance, offshore banks may be regarded as those composed of money market funds along with hedge funds. Speaking of instruments traded therein mentioned banks and institutions, it is essential to focus on London Interbank Offered Rate (LIBOR) or U.S. dollars deposited outside the United States (Eurodollars). The former is defined as a certain rate, at which one London bank provides interbank deposits to another bank in terms of international currencies (Duffie & Stein, 2015). Taking into account that the use of euro may be confusing in some cases, the above definition seems to be the most appropriate solution. Eurodollars as an instrument of international financial markets, as a rule, represent interest-bearing accounts (Frieden, 2015). There are two pivotal factors that affect the above instrument, including a lending rate of a bank and a rate of return available on U.S. money market. Such instruments are useful to regulate and monitor international financial markets.
MNCs have to encounter various types of foreign exchange exposure. Currency exchanges risk is the likelihood of financial losses as a result of a change in the exchange rate that may occur between signing a contract and its actual implementation. Among the key factors affecting the exchange rate, it is necessary to identify the state of the balance of payments, the level of inflation, and liquidity of short-term capital (Mancini, Ranaldo, & Wrampelmeyer, 2013). In general, it is measured depending on the movement of exchange rates that is affected by the ratio of demand and supply of each of currencies involved in the international financial market.
In its turn, transaction exchange exposure is associated with the risk of a decrease in profit in the performance of transactions that engage the transfer of one currency to another (Hutson & Laing, 2014). If the goods are exported, the costs for their production are in the national currency, and sales – in foreign currency. Therefore, it is particularly undesirable for the supplier of the goods that the exchange rate of foreign currency is reduced as this decreases the profit. The risk of transactions is measured as the probability of cash foreign exchange losses for specific transactions in foreign currency. The risk of transactions arises from the uncertainty of the value in the national currency of a foreign currency transaction in the future (Cavusgil et al., 2014). The above type of risk exists both in concluding trade contracts and obtaining or granting loans expressed in the possibility of changing the amount of income or payments while recalculating in national currency.
Summarizing the section of discussion, one should emphasize that international financial markets present various institutions and instruments that help to regulate them and realize transactions between MNCs. In general, the authors of the scholarly sources used in the project provide relevant data and arguments to explain terms and issues. The main contribution of this project is that it clarifies the contemporary tendencies occurring in the international financial markets and helps to understand them in an in-depth manner. More to the point, it outlines key risks associated with such markets, including foreign exchange exposure, namely, liquidity and transactional risks. The limitation of the project refers to the restricted number of sources used. Therefore, to enlarge the project in the future, it seems appropriate to focus on more sources that would include researches of different international markets.
Cavusgil, S. T., Knight, G., Riesenberger, J. R., Rammal, H. G., & Rose, E. L. (2014). International business: The new realities (2nd ed.). Melbourne, Australia: Pearson Australia.
Duffie, D., & Stein, J. C. (2015). Reforming LIBOR and other financial market benchmarks. Journal of Economic Perspectives, 29(2), 191-212.
Editorial Board. (2015). Global financial management. Schaumburg, IL: Words of Wisdom.
Frieden, J. (2015). Banking on the world: The politics of American international finance. New York, NY: Routledge.
Hutson, E., & Laing, E. (2014). Foreign exchange exposure and multinationality. Journal of Banking & Finance, 43(1), 97-113.
Mancini, L., Ranaldo, A., & Wrampelmeyer, J. (2013). Liquidity in the foreign exchange market: Measurement, commonality, and risk premiums. The Journal of Finance, 68(5), 1805-1841.