International Finance and Payments

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International Finance and Payments
Academy of Economic Studies Faculty of
International Business and Economics

• Course II
• International Financial Markets and Institutions

Lect. Cristian PAUN Email cpaun_at_ase.ro URL
http//www.finint.ase.ro
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International Financial System - review

• IFS ensures the capital transfers between the
  investors and financing beneficiaries (or
  debtors) main function
• IFS is composed by financial markets, financial
  institutions and financial instruments
• Bretton Woods Agreement is the base for actual
  IFS
• the evolution of IFS was determined by several
  factors
• EMS was an European alternative for IFS
• BP registers all the commercial and financial
  transactions of a country with the rest of the
  World
• we use this BP to determine the need for
  financial resources for a country
• this BP should be in equilibrium and the
  deficits can be reduced using different policies
• the fixed exchange rate ensures an automatic
  equilibrium for a BP.

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Financial System - structure
Financial transactions
Private companies
Government
Financial Institutions
Financial transactions
Financial transactions
Population
Financial Markets
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Financial Markets - characteristics
FINANCIAL MARKETS

• Money Markets (maturity lt 1 year)
• very liquid
• transactions with credit instruments
• small fluctuations for the securities prices gt
  low risk

• Capital Markets (maturity gt 1 year)
• transactions with debt and equity securities
  (bonds, equities)
• higher prices fluctuations

International Credit Markets, Euromarkets and FX
Markets

• Primary market is a financial market in which
  new issues of a security are sold to initial
  buyers
• Secondary market is a financial market in which
  security (previously issued) can be resold by the
  investors for cash.

Exchange offices (NYSE, CBOT)
OTC Markets
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Financial Markets - characteristics
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Financial Resources for a company

• - Reinvesting the profits
• - Increasing capital
• Debt to equity conversion
• Amortization.

Internal Resources
Financing Decision
- Credits - Bond issuing - Equity.
External Resources
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Why we should use internal resources ?

• Advantages
• increase the company value
• higher autonomy from financial institutions
• lower costs (such as banking commissions and
  taxes)
• advantages from fiscal regimes applied to
  reinvested profits
• small companies or new business
• leveraged companies (high debt).
• Disadvantages
• opportunity costs
• taxation.

Real cost for internal financial resources
Internal resources are the most expensive
financial resources !!!
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Why we should use external resources ?

• Advantages
• mature business cash-flow cows
• less costly then own financial resources
• important financial resources that can be
  obtained
• higher maturity
• fiscal regimes in case of the interest paid to a
  bank
• Disadvantages
• additional costs (taxes, commissions applied)
• the dependence from the financial institutions
• the reimbursement program
• a good projection for your business development
  (future income and cash-flow prediction).

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Direct Financing vs. Indirect Financing
Financial Intermediaries
Indirect Financing
Debtor (Beneficiary)
Investor or Creditor
Direct Financing
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Direct Financing vs. Indirect Financing

• Advantages for indirect financing
• a good information about capital resources
• lower risks (some institutions share or cover
  the financial risks)
• financing consultancy
• financing facilities
• different financing alternatives
• financing condition imposed by the financial
  institutions
• lower transaction costs.
• Disadvantages for indirect financing
• higher operational costs
• inexistence of a direct contact with financial
  markets
• historical relations with a financial
  institution.

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Services provided by financial institutions

• selling and buying financial securities
• international payments
• international financing (incl. export
  financing)
• financial consultancy
• international markets surviving (rating
  agencies)
• insurance against financial risks
• guarantees for financial transactions
• managerial expertise
• companies surviving (competitors, clients)
• portfolio management
• investment funds management.

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Financial Institutions

• I. International Financial Institutions
• International Monetary Fund
• World Bank (IBRD, IDA, IFC, IMGA)
• EBRD
• European Investment Bank
• Bank for International Settlements
• II. Government Institutions
• Export Credit Agencies
• Export Guarantee Credit Agencies
• Export Insurance Agencies
• III. Depository Institutions
• Commercial Banks
• Savings and Loans Associations
• Mutual Savings Banks
• Credit Unions.
• IV. Non depository Institutions
• Investment Banks
• Mutual Funds
• Pension Funds

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Primary Assets and Liabilities of Financial
Intermediaries
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Type of intermediaries
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Financial Instruments

• A financial instrument is a contract between
  lender and borrower
• This particular contract establish
• the financing mechanism
• the role of each institution / participant in
  the mechanism
• the amount
• the maturity
• the currency
• the financing cost (interest rate) and the
  payment method
• the risk allocation between the participants
• the payback of the loan
• other aspects (special clause).

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Financial Instruments
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Money market instruments

• Treasury Bills
• Negotiable bank certificates of deposit
• Commercial papers
• Bankers acceptances
• Repurchase Agreements
• Federal Funds.

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A. Treasury Bills

• short term debt instruments
• maturity of 3, 6 or 12 month
• have no interest payments (initially sold at a
  discount)
• the most liquid financial instruments
• the safest financial instrument (no default
  risk)
• can be issued in different currencies (usually
  are issued in local currency)
• risk free rate instruments

B. Negotiable Bank Certificate of Deposits

• debt instrument sold by a bank to depositors
  (one of the most important capital source for
  banks)
• pays annual interest
• at maturity pays back the original purchase
  price
• can be negotiable now

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C. Commercial Papers

• short term instruments issued by banks or well
  known companies
• a high growth rate for this instruments (2000
  between 1970 1996 in US)
• no interest payments (usually issued at a
  discount)
• interest rates are related to the issuers risk

D. Bankers Acceptances

• were developed in accordance with international
  trade development
• represent banks drafts (a promise of payment
  similar to a check) issued by a company for a
  future date and guarantee for a fee by the bank
• the bank acceptance the guarantee
• these instruments are often resold on secondary
  market at a discount
• high growth rate (250 in US between 1970 and
  1996)

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E. Repurchase Agreements - repos

• short term loans based on a collateral
• this instruments were introduced in 1961
• increase the liquidity for financial instruments
• reverse repos

F. Federal Funds

• overnight loans between banks and Central Bank
• the banks pay an interest rate
• federal funds rate (refinancing rate)

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Capital market instruments

• Stocks (common stocks, preferred stock)
• Mortgages
• Treasury Bonds
• Municipal Bonds
• Corporate bonds

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Financial Instruments risk classification