Businesses today require more diversified portfolios for investments because this will reduce their investment risks and increase the probability of future capital flows.
Increased capital mobility has increased the importance of exchange rates which is serving as a monetary policy channel in some industrialized economies. In mid 2000s, there was a sharp shift in the flow of international investments and savings (geographic pattern) resulting in the segmentation of current account imbalances. This was also a major contributing factor. Additionally, the domestic financial markets were also affected by the change in regulatory environment. The two important factors for this are as follows:
1. Rapid growth of OTC (over-the-counter) markets of derivatives in terms of complexity as well as volume of transactions. During the period of April 1995-2007, the daily increment in interest rate and foreign exchange contracts turnover in OTC was $3.1 trillion. Between 1995 and 2007, the outstanding OTC amounts increased 10 times with 20% per year as an average rate. This is attributed to increased volumes of plain villa contracts with new complex products proliferation.
2. BAB (Banking Across Borders). There was a drastic increase in the foreign activities of most of the banks with an intervention of banking markets and international capitals. This resulted in a very positive change in the international banking scenario. Due to the launch of flexible financial instruments, customers and banks both got some relief from stresses and this helped customers to manage the volatility of interest rates and exchange rates during the recent past. (Ranciere and Westermann 2003 pp.33-35)
The international financial system has been transformed by the increase in the pace of deregulation, innovation and the structural change. Most of the newly introduced financial instruments are playing a vital role in the global financial system; there is a shift of loans offered by banks to international flow of credits into the direct credit market; multiplication in the daily volume of transactions; close integration in the financial system has been increased globally; flow of capital do not consider the boundaries and is much more mobile. The fast-paced growth in the transaction volume being settled down through payment system can pose a threat of potential systematic risk. Due to innovation and technology, transaction costs have been reduced dramatically. According to a rough estimate, there is a 90% decline in the costs of transactions just because of innovation and technological advances in the global financial system. (Klein 2005 pp.19-21)
Portfolio transformation services as well as global liquidity re-distribution has been produced by the Euro-banks for their sovereign and corporate customers. A secular discontinuity has been marked by the financial innovations and technology in the Euro-banking has resulted in banking revolutions, related to deregulation, competition and the funding of wholesale financial market. Thus we can say that innovations and technological advances have played a vital role in spread of international investments; thus making international investment opportunities easier and less risky.
Benefits and Risks of a Carry Trade Strategy
Carry-trade is one of the most profitable investment strategies for a Forex investor to maximize profits. In a carry-trade, purchase of high interest rate currency is done by selling the currency having low interest rate. In this transaction, the interest rate differential is the net difference in the two currencies interest rates. Although, high return on investment is one of the biggest advantages of a carry-trade strategy but there are also certain risks associated with this type of trading strategy.
Exchange rates are uncertain and this is the most obvious disadvantage or risks of carry-trade strategy. Due to this reason, it is necessary for the investor to consider other factors except interest rates on currencies. Pairs' directional movement is one of the factors to be considered for finding out whether investments in these pairs are profitable or not. It is a fact that if there is a decline in the percentage more than the interest rate gain, an investor can make a gain on interest rate while losing on capital. As a result, an overall loss is expected although there is a gain on differential on interest rates.
There are a couple of objectives of carry-trade. Firstly, an investor expects to gain money on differential of interest rate. Secondly, an investor has the chance to make profits from the appreciation of capital. If there is an appreciation in carry-trade pair, the return on investment would be better. In case, any objective is left behind or investor does not meet anyone objectives, there is a risk. There is a definite risk...
International Financial Markets and Institutions: Throughout the globe, today's landscape of international financial market and institutions has continued to experience several changes that require practitioners to examine new models. The need for practitioners to examine new models that are relevant to the state of these markets and institutions has also been necessitated by the recent events that contribute to financial crises, which have been very dramatic. Actually, the recent financial crisis
While this strategy is effective in some situations, the use of bond markets by an investor requires the development of an effective strategy that will help him/her to achieve a specific financial objective. For an investor seeking to maximize the profit-generating aspects of bonds, the most effective strategy is a passive buy-and-hold bond strategy. As the name suggests, it involves buying individual bonds and holding them until maturity. The
Inappropriate exchange rates can spell disaster. A fixed exchange rate is ideal. There are sharp mismatches in the financial and the banking sectors of the countries. The national debts of countries have also become subjects of alarm and controversy. "The global economic upturn seems to be gathering pace -- it certainly is in Asia, now the world's fastest growing region. A period of economic growth offers a chance for
due to changes in the economical, financial, political and technological changes, the capital markets across the world are highly influenced by the changes. As compared to the past, the development in the financial sector has been observed to be at the highest rates. In order to understand and analyze the changes in the global capital markets the below report has been constructed. Based on the theme idea, which is the
International Financial Crises and the IMF Demand failures are a major economic problem, and one that cannot necessarily be addressed by cutting interest rates as once believed. Small economies, such as those known as the Asian "tigers" are not invulnerable to international speculation. They may, in fact, resist cutting their interest rates -- raising them instead in an effort to keep their currencies from collapse. Failed economies financed poor investments with
International Equity Markets Advantages and disadvantages of cross listing on stock exchanges When a company lists its stock exchange on many stock exchanges in different countries, it is referred to as cross listing. It entails exchanging in more than one country. However, a company can list its stocks on two stock exchanges in the same country. The administration is likely to be widened besides the generation of great pool of possible investors.
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