Looking for a Tutor Near You?

Post Learning Requirement »
x

Choose Country Code

x

Direction

x

Ask a Question

x

Hire a Tutor
Abu Dhabi

Financial Markets-03

Loading...

Published in: Finance | Finance: Banking | Finance: Corporate
43 Views

International finance is a branch of economics that deals with monetary interactions between countries. It focuses on understanding how money flows across borders and how this affects economies and businesses globally. Financial markets are platforms where people and institutions buy and sell financial assets, like stocks, bonds, currencies, and commodities. These markets play a crucial role in the economy by allowing funds to move from those who have it to those who need it for productive purposes.

Namal I / Dubai

10 years of teaching experience

Qualification: BA(Economics)Special (Hons)(2nd Class). MA(Economics), MA(Financial Economics),M.Econ, MBA, PGD in Information Technology, MIT-Master of Information Technology, NVQ Level 4: Diploma in Computer Networking.

Teaches: Personality Development, Maths, Basic Computer, Computer Science, Economics, Business, Management Science, CMA, CIMA, IGCSE/AS/AL, Business Studies, Statistics, Management, Business Finance, Advanced Excel, Animation, CCNA Certification, Corel Draw, CSS Training, Digital Marketing, Dreamweaver, Facebook Applications, HTML Training, ICT Training, Illustrator, Joomla Training, MS Office, Networking, Photoshop, Video Editing, Web CMS, Web Designing, Web Development, Wordpress Training, Computer Basics, Desktop Publishing, Graphic Design, HTML, Powerpoint, Website Design, MS Access, Graphics, Hardware, Computer, Social Studies, Mathematics, Humanities Social Sciences

Contact this Tutor
  1. INTERNATIONAL FINANCE AND FINANCIAL MARKETS
  2. OBJECTIVES •To understand The distinction between international trade and international finance The external sector and the external accounts Balance of Payments International Investment Position
  3. WHAT IS INTERNATIONAL FINANCE OPPOSED TO INTERNATIONAL TRADE)? • International trade: • Microeconomic approach (many goods and factors). How cross country differences in factor endowments and technology affect specialization in production and international trade in goods and services.
  4. WHAT IS INTERNATIONAL FINANCE OPPOSED TO INTERNATIONAL TRADE)? • International trade: • Distribution of economic resources and technological levels among nations are different. • International trade is a method which enables nations to specialize and increases the productivity of their resources. • Therefore, nations' production capacities can be increased, their production possibility frontier will move rightward. • The international economy is very complex. • Each country has a unique pattern of trade. • But every one of them must benefit from the trading in order for them to do that.
  5. Production Possibilities Curve The Production Possibilities Curve illustrates the trade-offs facing an economy producing two goods. The production possibilities frontier (the line) shows all the oossible combinations of the two products usin2 all the available resources. Since we are using all available resources, increasing the production of one of the goods means decreasing the production Of the other good (illustrates the idea Of trade- Offs). Possibilities Good X Good Y
  6. PRODUCTION POSSIBILITY FRONTIER Rewrces 0 in aakn Figure
  7. WHAT IS INTERNATIONAL FINANCE OPPOSED TO INTERNATIONAL TRADE)? • International finance: • Macroeconomic approach. Determination of aggregate output, saving and trade balance in open economies. Determinants of international trade in assets. i.e. across states of nature and time • Money is one such asset. National prices denominated in terms of national monies the exchange rate affects the relatiVé prie—f foreign assets measured in units of home mo ey. International Trade as a sub account of Balance of Payments.
  8. EXTERNAL SECTOR • External sector is "the rest of the world' • non-residents of an economy • economic transactions financial claims financial liabilities
  9. EXTERNAL ACCOUNTS Balance of Payments (BOP) International Investment Position (IIP) Balance Of Payments and Interna ti Onal Investment Position Manual BOP • economic transactions • with the rest of the world • during a period of time • • • IIP stock of financial assets and liabilities on and to the rest of the world at a point in time
  10. THE BOP The BOP records: the transactions of an economy... • with the rest of the world • during a specific period of time Flows associated to transactions
  11. RECORDED TRANSACTIONS • • • • • food, energy, vehicles Goods Services font" ism, franspor±afi011, legal, IT Factors of production labour, land Non-produced non-financial assets proper f! riol/lfs Financial assets and liabilities loans, bonds, equi±ies Must occur between residents and non-residents
  12. RESIDENCY Residency is based on center of predominant economic interest (not on citizenship) Implies that the entity is already engaged in economic activities and transactions in the country on a significant scale for a period of one year or more, or intends to do so. • Households and individuals reside for Olne qear or 10110er • Enterprises significant Of prod',tc+i014 The government of a country resideblf, 12M defamlf reside*s of country where flaeq have Non-profit organizations • International organizations leoallq accorded recoovnited
  13. RESIDENCY Residency is based on center of predominant economic interest (not on citizenship) The following are residents of their home economies even if they were to stay out or work outside for periods longer than a year: Travelers or visitors, seasonal workers, border workers, staff of international organizations locally recruited staff of foreign embassies and consulates and crews of ships, aircraft, or other mobile equipment operating partly or wholly outside the economic territory. • However long they study abroad, students are treated as residents of their countries of origins • so are medical patients.
  14. Exchanges: two-sided (either mone+ry or non-monetary) Transfers: one-sided (either mlonetary or non-monetary) good Still, there involves two entries (credit and debit) as per accounting principles
  15. RECORD TRANSACTIONS Real transactions (reflecting flows of goods, services, and income, including transfers) • Current Account a. Account on goods b. Account on services c. Primary income account d. Secondary income account • Capital Account Financial transactions (reflecting transactions in assets, and the creation, repayment or extinction of claims and liabilities) • Financial Account a. Direct investments b. Portfolio investments c. Other investment d Reserve assets Balance of Payments and International Imestrrent Posat•an Manual 6th edition of the IMF BOP Manual (2009)
  16. UNIT or ACCOUNTING The BOP is generally reported: • in domestic currency • in a foreign currency EXTERNAL SECTOR DEVELOPMENTS AND POLICIES of under BPM6 Format (a)
  17. DOUBLE-ENTRY ACCOUNTING TRANSACTIONS 2 entries: • equal value opposite sign CREDIT Accounting Principles DEBIT e BOP records both Sides of a transaction. the value of what is transacted "how this is id."
  18. DOUBLE-ENTRY ACCOUNTING Credits (+) • Exports of goods & services • Return accrued for providing labor, financial assets, and natural resources to non-residents • Disposal of assets (gold and claims) on the world • Incurrence of liabilities to the world • Donations received Debits (-) Imports of goods & services Return payable for using labor, financial assets, and natural resources of non- residents Acquisition of gold and claims on the world Decrease in liabilities to the world Donations made
  19. ERRORS AND OMISSIONS IN PRACTICE Sum of credits sum of debits "Errors and omissions" restore the balance, with opposite sign but equal value to the overall residual of credits - Sun of debits + Errors and 01Missions = O
  20. EXAMPLE I • Goods_of value 100 are imported. These are paid by drawing down 10 of foreign curren osits, and obtaining trade credit for oods (Impo ) Assets, curren and deposits Aabilities, trade credits Credit 10 100 Debit 100 100
  21. EXAMPLE 2 •The economy receives a donation in goods (med' ines) for a value of 20. It also donateSfO-æåÉn currency to a thir country for a value of 50. Goods (Imports) Current transfers .sets, currency and deposits Credit 50 Debit 70
  22. EXAMPLE 3 • 200 of repayme_nt of long-term debt fall due; 50 is paid using foreigngurrencydepQ>lts, and 150 is paid by b rrowin short term Assets, currency and deposits Liabilities, long term loans Vbilities, short term loans Credit 50 150 ZOO Debit 200 200
  23. ERRORS AND OMISSIONS (goods) (liabilities) Errors and Omissions (goods) (assets) Errors and Omissions Credit 80 Credit 80 20 Debit 100 Debit 100
  24. TIME or RECORDING Accrual basis • Goods and services: when change of ownership and provision occurs • Primary income: when claim arises or becomes due • Secondary income: when made • Financial: when ownership changes, claim created, liabilities when incurred, repayments when due VALUATION Transactions are recorded at the value and exchange rate of they day when they accrue.
  25. CURRENT ACCOUNT Current Account a. Goods and Services account •Goods • Services b. Primary income account c. Secondary income account
  26. CURRENT ACCOUNT BALANCE Current Account Balance Balance on Goods and Services Total Credit (exports) x WI Total Debit (imports) Balance on Primary income Balance on Secondary income ST?
  27. GOODS AND SERVICES Transaction of Goods Transaction of Services Goods Exports Imports Services Transportation Manufacturing IT/ KPO/BPO Travel Maintenance and repair
  28. PRIMARY INCOME Compensation of employees investment income Returns for Of which: Dividends providing labor, Reinvested earnings financial assets, Interest and natural Other primary income resources Of which: Rent Taxes/subsidies on products
  29. SECONDARY INCOME Current transfers Secondary income Of which: Personal transfers Taxes on income, wealth International cooperation Social benefits and contribution
  30. CAPITAL ACCOUNT Acquisition/disposal of non-produced nonfinancial assets and capital transfers Capital Account Acq./disposal of non-produced non-financial assets Capital transfers Of which: debt forgiveness
  31. CURRENT AND CAPITAL ACCOUNT BALANCE Current Account Balance Capital Account Balance < D paid in cas borrowinos asse+s labiliF s Nef acoptisi±ion of financial assefs < D Nef incurrev,ce of liabili+ies
  32. FINANCIAL ACCOUNT Financial Account a. Direct Investment b. Portfolio Investment OFinancial Derivatives (other than reserves) and Employee Stock Options d. Other Investment e. Reserves
  33. CLASSIFICATION or CREDIT AND DEBIT ENTRIES Credits (+) • Disposal of assets (gold and claims) on the world • Incurrence of liabilities to the world Debits (-) • Acquisition of gold and claims on the world • Decrease in liabilities to the world • Nef acquisition of asse+s = acquisition-(debits-disposals of credi+) • Ne+ incurrence of liabilities = incurrence —(credi±-decrease of debit)
  34. DIRECT INVESTMENTS • Investment reflecting long lasting interests in an enterprise • Direct Investments • Equity and investment fund shares • Equity other than reinvested earnings • Reinvested earnings • Debt instruments
  35. PORTFOLIO INVESTMENTS • Transactions in equity and debt securities that are note direct investment • Portfolio Investments • Equity and investment fund shares • Debt securities
  36. DRIVATIVE • Transactions in financial derivatives and employee stocks
  37. OTHER INVESTMENTS • Other claims/ liabilities on the rest of the world (loans/borrowings) • Other investments • Net acquisition of assets • Net incurrence of liabilities • Trade credit and advances • Currency and deposits • other
  38. RESERVE Reserve assets consists of assets that are: • Under the control of the central bank • Readily available • Usable for direct financing of payment imbalances Reserves • Monetary gold • SDR • Reserve position in the IMF • Foreign exchange assets • Other assets
  39. FINANCIAL ACCOUNT BALANCE + = -NEO Current account balance + Capital account balance = < D final,ocial balmce = I iM Vie* acqmisi±i011 of flinancial assets - Inef ilncmrrance of liabilities
  40. THE INTERNATIONAL INVESTMENT POSITION (IIP) •The International Investment Position (IIP) records: • external assets (gold and claims on the rest of the world) • liabilities to the rest of the world • outstanding at the end of the period • at value prevailing at the end of the period • in the same currency as the BOP is recorded Stock Position
  41. IIP STRUCTURE • Assets • Direct investment • Portfolio investment • Financial derivatives and E.S.O. • Other investment Reserve assets • Liabilities • Direct investment • Portfolio investment • Financial derivatives and E.S.O. • Other investment
  42. NET IIP NTT Y + > D > (Inef creditor) < D L + > (Inef borrower) The net IIP indicates if a country is a net creditor or borrower to the rest of the world
  43. CHANGES IN AND LIABILITIES AQ++I, A? Ae Change in net IIP=transactions + va uation changes + other volume changes
  44. IIP BOP +rnnsac+ions ill A — transactions in L+ VC+ OVC - NTL + VC + OVC
  45. BALANCE 6ÜP-C+T+X-M GTP - -X -M Trade Balance = GDP —Absorptions Is domestic production sufficient to meet the overall demand for consumption and investment goods?
  46. CURRENT ACCOUNT BALANCE NP=C+T+X-M 6NV1 CA BALANCE = S-1 Is the country a net saver or borrower? • If CAB 2 0 the country is a net saver • If CAB 0 the country is a net borrower
  47. CURRENT ACCOUNT BALANCE + KB? - + NEO D + + NEO ANTI? + VC + OVC CAB is almost equal to change in net IIP • If CAB + KAB 2 0 the country is a net saver and its net foreign assets increase • If CAB + KAB O the country is a net borrower and its net foreign assets decrease
  48. OVERALL BALANCE Overall CA? + - + NEO Overall balance Are capital flows sufficient to finance the current account or does the country need to use the central bank reserves?
  49. BOP RISKS Financing Needs x -Borrowing and other inflows - (Net) sale of other assets - Sale of reserves outflows inflows
  50. STOCK INDICATORS • Net IIP position • 00 of • Stock of external debt • '00 of ftp • 00 of exports • Debt service payments • 00 of6TP • 00 of expor+s Reserves • Monflns of imports • 00 of shor+ *erm debt at remainino ma+mriå-q OTHER INDICATORS OF DEBT • Implicit interest rate = interest paqmeffs+/averaoe sfock of deb++l f • Average maturity Stock of debf+_l/hlmor+ita+iovl+ • Roll-over rate Visb&trseme11+/Amor+ita+i014+ 00
  51. EXPORT & IMPORT PRICES VOLUMES Export Price and Import Price Indexes • Export and import price indices • Export and import volume indices • Terms of trade: ratio of export prices to import prices • Value 100 in the base year • Update using % change of the underlying variables • The change value reflects the change in both the price and the volume. EXPORT PRICE INDEX IMPORT PRICE INDEX Couttry Japan orot 1990 100 100 100 1990 150 175 167 51)
  52. PRICES - DETERMINANTS • The size of the country - whether a price taker or price maker • Diversification of the export/ import base • Volatility of the prices of the exported and of the imported goods
  53. EXPORT VOLUMES - DETERMINANTS • Supply • Capacity of production • Macroeconomic developments • Other factors such as credit availability, business cycles • Demand • Relative prices — real exchange rate • External demand — income abroad • Elasticity of exports to relative prices and to income matter for demand.
  54. IMPORT VOLUMES DETERMINANTS • Supply • Capacity of production abroad • Macroeconomic developments abroad • Demand • Relative prices — real exchange rate • Domestic demand - disposable income • Elasticity of imports to relative prices and to income matter for demand.
  55. US N rent account deficit of Eu-28 —t —t of GW UK Current account Of GDP
  56. China's Current Account Surplus a share of China' GDP) payments. C rgnt China's Foreign Exchange Reserves and Exchange Rate
  57. BALANCE AND THE EXCHANGE RATE téxppkö
  58. EXCHANGE • Exchange rate is the rate at which one currency can be traded for another. Units of domestic currencies per one unit of foreign currency (direct quotation) US$ Rs. 180.55 -E deprecia+ibll of Rs Units of foreign currency per one unit of d 1 pound sterling - US$ 1.28 tic currency (indirect quotation) • In practice, except for few currencies, i.e. the pound sterling, euro, the Australian dollar and the New Zealand dollar, all other currencies are expressed using the direct quotation system in the international market When comparing the currencies of two countries, the supply of one currency equals the demand for another currency
  59. USE EXCHANGE RATE • Exchange rate allows to: • express prices in a common currency, making easier cost comparisons • Suppose you wish to compare the prices of a good sold in two locations, SL and US • It sells in Sri Lanka, expressed in Rs. • It sells in the United States, expressed in • The currency units differ • The only meaningful way to compare the prices in different countries is to convert prices into a common currency • In Sri Lanka, the price of an item in dollar terms is I/E * Ps • For example, if the price of the item in Sri Lanka is Rs. and the exchange rate between the Sri Lankan rupee and the US$ (ERs/$) is Rs. 180, the US$ value of the item in Sri Lanka is $277.77
  60. EXCHANGE • If exchange rate P* = price level in foreign country price level in domestic country, If REER increases, there is a real appreciation. If REER decreases, there is a real depreciation.
  61. EXCHANGE RATE • Rate of exchange for real goods and services across countries • relative value/price/cost of goods and services across countries • Real exchange rates are based on price indexes of "baskets" of goods. • real exchange rate is usually defined by using the consumer price indices (i.e., CPI) • Assume that each country produces a single good. For nom is the nominal exchange rate; • is the price of foreign goods, measured in the foreign currency; • P is the price of domestic goods, measured in nominal currency. 61)
  62. APPRECIATION AND DEPRECIATION A real appreciation is an increase in the real exchange rate. • With real appreciation the same quantity of domestic goods can be traded for more foreign goods. • SL residents receive more foreign goods per unit of the SL good • SL residents have an incentive to buy more foreign goods relative to SL goods A real depreciation is a drop in the real exchange rate.
  63. REL EXCHANGE RATE AND THE TRADE BALANCE • IF real exchange rate increases (decreases), domestic goods become more (less) expensive (in real terms) relative to foreign goods • Over the medium term: • A real exchange rate depreciation is likely to lead an improvement in the trade balance (external demand for exports increases and domestic demand for imports decreases) • A real appreciation is likely to lead toa deterioration in the trade balance
  64. OTHER SECTORS cm Fiscal policy G o vernment Sector Real Sector Total production Domestic Demand Current Account Monetary Sector Monetary and exchange rate policies 64
  65. EXCHANGE POLICY Fixed exchange rate time Financial Account Current Account Official Reserves Flexible exchange rate time
  66. OTHER SECTORS AND BOP Fiscal polic G o vernment Sector Real Sector Total production Domestic Demand Monetary and exchange rate Monetar} olicies Sector Current Account Financial Account
  67. The Difference Between 1 BALANCE OF PAYMENTS DEFICIT • The country imports more goods. services & capital than it exports. • It must borrow from other countries to pay for its imports. • In the short-term, this fuels economic growth. • In the long-term, it will have to go into debt to pay for consumption. 1 BALANCE OF PAYMENTS SURPLUS • The country exports more than it imports. • Country provides enough capital to pay for all domestic production. • A surplus boosts economic growth in the short term. • In the long run, it becomes too dependent on export-driven growth.
  68. IMBALANCES • Refers to the phenomenon of persistent current account surpluses or deficits for some countries, that leads eventually to the accumulation of assets or financial liabilities from those countries How does this come about?
  69. GLOBAL IMBALANCES S OF WORLD GDP Signs of trouble External imbalances peaked before the global financial crisis. The IMF's annual external assessments seek to identify risks early, before imbalances become disruptive. • Defkil [989 Asian Crisis 1992 Financial Crisis Eurozone Crisis 1980 1 1983 z-m7 2010 2013 • US • • Oil podi_m • •
  70. GLOBAL IMBALANCES Global current account imbalances have remained unchanged since the post-GFC narrowing... Current (percent of world GOP) 1992 1994 EA (other) Oil zojo 2c02 21:04 2010 E Ms AE Exp 2012 2014 2016 Ottw cit surplus AES AE SAR AE c—sty EMS
  71. GLOBAL IMBALANCES ...with a rotation of imbalances towards advanced economies... Current 2013-16 1/ (percent Of World ) Real Effective Rate. 2013•16 2/ t Change) AE C — Exp 06 og * F stat' a WEO 2/ 2016 2013 USS GDP 71)
  72. GLOBAL IMBALANCES ...leading to a widening of stock imbalances Net positiom 1990-2016 Ox•rcent of world GDP) 1992 1994 196 1998 20m 201M 2m: 2010 2012 2014 2016 EMS AE ap LOA Ottw DE u,'NLD AES '—Other Surplus
  73. GLOBAL IMBALANCES Since 2013, excess imbalances have been persistent, rotating towards advanced economies ESR Countries: Overall Excess Imbalances (in percent of World GOP)
  74. GLOBAL IMBALANCES Going forward, the projected persistence of flow imbalances will further widen stock positions Selected ESR Economies. Current Account and NLP, 2002-21 current Sad Net International o' GDP} 2" 2010 2C1g 2020 WEO
  75. GLOBAL IMBALANCES The current configuration of imbalances entails new risks Persistent excess imbalances Concentration of excess deficits in a few advanced economies Diverging stock positions & reliance on demand from debtor countries Weak automatic adjustment mechanisms Continuation Of imbalances Lower deficit-financing risks Greater risk of trade policy actions Risk to global recovery Risk of future disruptive adjustment
  76. THE NEED FOR GLOBAL REBALANCING •Global rebalancing essential • Sustaining world growth • Liquidity trap and risks of insufficient global demand • Reducing external vulnerabilities • Legacy of crisis still with us for years to come • Multilateral approach needed • Adjustment cannot rely exclusively on demand compression in deficit countries
  77. HOW TO GO ABOUT IT? • Target structural and policy distortions (macro, financial, trade) • ...but narrow trade lens inappropriate given complexity of underlying factors • Real exchange rates need to adjust and will adjust, whether through nominal rates or prices •Be mindful of cyclical vs structural considerations • "second-best world"
  78. GLOBAL IMBALANCES ...although persistent imbalances also point to the importance of addressing structural distortions. Excess Surplus Countries •Expand social safety nets •Encourage elderly labor (Ge-mam,•. Sinqavwe) •gamers to foreign competition (inc. in Saving •Balance sheet the Nethedandsj Excess Deficit Countries m Net æfom to mdmte nominal wage growth (France. Italy Spain) •Lowering Of business Italy, Russia) •Improving workforce bag and (Canada. France. UK, US) • the generoOty Of Turkey)
  79. • Source: Various sources, including various materials of IMF.

Need a Tutor or Coaching Class?

Post an enquiry and get instant responses from qualified and experienced tutors.

Post Requirement

Related PPTs

Upload PPTs

If you have your own PowerPoint Presentations which you think can benefit others, please upload on MyPrivateTutor. For each approved PPT you will get 100 Credit Points and 100 Activity Score which will increase your profile visibility.

Upload Now
Home > PowerPoint Slides > Financial Markets-03