International Financial Markets and Institutions

¶ … 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 change in the capital market due to many factors and elements, the report below tends to discuss and analyse the impacts of financial deregulation and capital control on financial globalization and international diversification. This will allow understanding of how these two elements are supporting the financial globalization. A part from this, the report will also analyze the role of financial innovation and advancements and technologies on international investments. Moreover, the risks and benefits that are associated with the carry trade strategy will also be defined in the below report. In the end, the report will also discuss and analyse the view that by borrowing in the international capital markets, whether or not a company can increase its share prices and reduce the cost of capital.

The Impacts of Financial Deregulation and Capital Control on Financial Globalization:

International Diversification: Within the last couple of decades the countries and economies across the world have become more devitrified. Especially when it comes to the financial and economical context, there are many new approaches and techniques that have been adopted by the countries to ensure that they efficiently manage to support their economies and produce the effective results and outcomes. Since the economies have adopted the international diversification mode, this has allowed the economies to reduce the level of risks in the context of investments (Collier & Dollar, 2002). The international diversification enables the countries to invest their capital into more than one country and minimize the risks and threats (Buch, 2004).

Analysis: While assessing the theoretical aspects of the capital control, it has been noted that long discussions are already done on the same topic. Some analysts declared the capital control approach very efficient and effective. According to them the capital control method reduces the level of risks and threats and provides the stronger and efficient bases to work on (Panitch & Leys, 2005). At the other some of the analysts declared that the capital control approach does not create any differences at all. But the concluded point that has been noted in all the researches and report is that when it comes to control the affects, the capital control approach impacts in short-term and sue to the passage of time, the control does not produce the results and become less result oriented (Panitch & Leys, 2005).

At the other end, the capital control has also observed to been influencing on the financial globalization and international diversification. The basic idea of the capital control is to reduce and minimize the effects of the fluctuation and rapid changes in the stock markets across the world (Collier & Dollar, 2002). Therefore the elements and fundamental points that have been described under the regulation of capital control restrict the internal capital markets to operate in appropriate manner and these defined elements allow them to minimize the risks and threats that may influence the investors (Buch, 2004).. According to the Frankel (1999), the proposals can simple be divided into four different classes; (a) control the transactions that are performed in the foreign exchanges, (b) control the short-term inflows, as this allows to reduce the risks and threats associated with the short-term debts, (c) control the outflows, to restrict the investors to take the capital investments outside the countries and (d) control and manage the collective inflows, because this allows the capital markets to maintain and retain the foreign investments rather than taking them back to their own or other countries (Collier & Dollar, 2002).

Impacts of Financial Deregulation: While assessing the impacts of the financial deregulation in the financial globalization and international diversification, it has clearly been observed that the banks and financial institutes across the world may easily come into off limit businesses which may include asset management, insurance, financial securities etc. (Buch, 2004). The financial institutes that are not involved in the traditional banking operations are in efficient before the traditional banks but since the financial deregulation has come into implementation, these financial institutes are now able to understand, analyze and adopt the most effective and efficient approaches, techniques and methods that are purely for the risk management and these innovative approaches and techniques mainly include the bridge loan and syndication of loans through new developed financial models and techniques and approaches (Buch, 2004).

Especially when it comes to the developing countries i.e. Iran, India and China, the financial deregulation has been creating many opportunities and chances for the potential international and global organizations to expand their business operations and contribute towards the development of the local economies (Buch, 2004).. The most important and benefited element that has been observed is that since the financial institutions are being privatized across the world, the foreign investment banks have also been enjoying the benefits of it and expanding their operations into local financial markets. These important elements lead the financial and economical systems towards the more development mode, create more advanced and developed business environment and create many opportunities and generate the key and stronger fundamentals that can attract the potential foreign investors (Sundaram, 2011).

Financial Innovations and Technology on International Investments:

Technology and Business: The advancements in the technology sector has boosted the business sector as it promises to provide the organization with effective and efficient business methods, and this is applicable to every business sector even the financial sector across the globe. Moreover in past few decades it can be observed that the financial markets are driven by the enhancements in the technological factors (Panitch & Leys, 2005). The term innovation is usually referred to bring the change; the change in the financial sector means to have more efficient and effective methods to conduct activities in the financial sector. Since the innovative methods provide the business the opportunity to be more effective and efficient in the business processes, which means that the company can reduce the cost and the number of resources can be saved too, and on the other hand the profits rises, therefore such market attract huge investments, and similar can be observed in the financial sector (Fabozzi, 2002).

Technology and Financial Sector: The innovation in the financial sector is triggered from the hurdles and the barriers that the banks usually face in order to adopt their goals and objectives, the hurdles can be further categorized into competition and regulations. The most appropriate example which can be observed is the innovation and development of the ATM machines throughout the world, the core reason behind this machine was the implications of regulations forced by the authorities for the branch banking. First this was initiated in the U.S. And soon captured the entire world. In the shape of ATM, the banks gained some great benefits like low cost human teller, machine which can transact and work all day and night, accurate and also the machine could work on without the support of any branch. From this perspective it can be observed that due to the innovation, the target market become attractive, and moreover the country can than target investments from international resources.

Analysis: It can also be observed that the enhancements and advancements in the technological factors across the globe enables the organization and banks to have more appropriate and adequate steps in order to increase the profitability. One more example can be observed as the Citibank made its way in the Indian Market despite having strict rules against the expansion of business in the country. The organization in India wanted to increase the market share and therefore it needed to have more branches which is prevented by the rules, and also the world's 2nd largest democratic population is the hurdle, and for any organization these can be the most threatening factors in order to attain the company objectives. The central bank of the country holds very strict and tight policies against the expansion of foreign banks in the country and the regulations also focuses on the distribution of the bank networking system.

But as the development in the technological factors have enabled many of the businesses sector to initiate the process which provides the organization more profit. Similar approach was adopted by the Citibank which has more than 40 branches and more than 450 ATMs across the country. The organization initiated a complete program with the country's famous telecommunication company enabling the consumers to conduct different nature of transactions from their cell phones. The bank has tested this technology in the city of Bangalore and seeks to target more than 60 million mobile consumers without expanding the business network in the shape of branches.

Moreover the development in the technological factors has enabled the users to conduct transactions online, by this they can save money and process is also secure as compared to carry amount with you. As it can also be observed that what Citibank did in the India market is also on example of online transactions. Furthermore the users are now able to transact money through their mobile devices. One more amazing feature which can be observed is that users will be able to deposit money through ATM machines by this the burden on the branch networking will be lowered. The development in the technological field have provided users several methods to transact whichever suits them the best, hence more consumer focused exercises are being conducted these days.

It can be observed that advancements in the technological factors enable the financial institutions to provide the customers better services and best response in timely manner.

Risks and Benefits of Carry Trade Strategies:

Within the last couple of decades, there have been many changes in the techniques and approaches in the field of investments. In the past, there were very simple approaches that were adopted by the entrepreneurs and potential investors, but today, due to changes in global economical and financial environment etc., the investment approach has been modified too. And since the new approach of 'Carry Trade', the investors enjoy the highest possible benefits in terms of high and positive return. But at the other end, the investors also have to face some of most critical risks and issues and threats that can spoil the entire investments and instead of generating the positive outcomes, the investors will have to face the losses.

Although, the risks and threats in this approach are quite high, but since the carry trade strategy has been introduced, it has become the most popular approach among all the potential investors because if the right moves are taken at the right time, the return will surely be positive and within the best interest of all the stakeholders. One of the most important fundamentals to note here is that this approach can only be used if the investment amount is quite large. Therefore the risk factors that are associated with this strategy are high too. But since the huge capital and investment is required, only the large sized organizations and entrepreneurs play with this strategy (Henderson, 2006).

Analysis: Below some of the key risks and benefits are discussed in details that are associated with the carry trade strategy;

Risks Associated with the Carry Trade Strategy:

As discussed above the carry trade strategy is no doubt very efficient and effective approach to generate the positive results and outcomes in terms of high return and secure profit, but at the other end, there are many elements that are considered to be the threats and serious issues and could seriously harm the investors. Below the report will discuss the key risks and issues;

Currency Risk: It is a fact that the approach of carry trade is held unhedged. This clearly indicates when the sum of capital has been invested; the return rate must be higher than the adverse exchange rate activities. But in case of the activities that are performed in the market offer high than the carry trade strategy, the investor will make loss. Although, there are many fundamental approaches and techniques that are currently being used by the professionals in the market, but it is to not that due to changes in the economical and financial conditions, the calculations may not work.

Leverage Risk: A part from the above, the potential investor and forex trader will also have to keep in mind that once the investment has been made, the unfavourable changes and fluctuation in the market may also generate the huge losses. Therefore the strategy has to be handled quite efficiently and professionally.

Interest Rate Shift Risk: Moreover, the most important and critical element that is observed to the highest risk for the investors is the changes and fluctuation in the interest rates. In case if the interest rate decreases, the investors will have to face the risks of losing the returns and profits.

Benefits Associated with the Carry Trade Strategy:

Cheap Borrowing Costs: If the investors manage to borrow the currencies on the low rate, the returns will probably be high. But it is not easy as it seems, it needs efficient approach to ensure that the borrowings are at the cheap costs.

Flexibility of Investment Yield Choice: Once the currencies are borrowed, the investors have flexibility to avail the opportunity in investing in the currencies that may offer high interest rates.

Ability to Leverage on Borrowings: The investors always have right to borrow the currencies at the low rate and invest them to generate the high interest and produce the high incomes.

Example of Carry Trade:

In order to understand the concept of the carry trade, an example of mortgage refinancing will be the best approach to understand. Say for example if a person refinances its mortgage at lower rate and buys a car. The performance and efficiency of the car can be assumed to be the return because the loan for the car is at higher rate and the person cannot afford to but the car with the new car loan. But once the mortgage was refinanced, the borrowed amount is not at the low rate and he can easily buy the desired car.

International Capital Markets:

As the globalization has influenced the business sector across the globe, it has removed the local boundaries and now world is being observed as the single market where the freedom of trade is possible, by this approach the business sectors tend to take their operational activities across the local boundaries and gain the competitive advantage provided by the new country. Similar can be observed in the financial sector, as the boundaries between the capital markets have been removed and now companies tend to invest in other stock markets which in other countries (Watson, 1986).

The pace of globalization in the financial sector especially in the capital markets have made it possible to realize the flow of money from around the world, at first the capital markets of the countries were separated in terms of rules and regulations which lead towards the difficulty in obtaining the foreign capital. As soon as these barriers were removed, many companies started to take participate in the international capital markets as it possesses some major benefits for the organization, like the cost of capital is being reduced since the company is able to invest in the diversified portfolio of stock exchanges, as international capital markets provide the companies to participate in various stock exchanges at the same time, by this the companies have the opportunity to invest in various instruments and financial papers, moreover the fluctuation in the same company's share not necessarily will be equal to the variation in the other country. By this the threat of losing money is reduced so is the risk that the company bears by investing money in different shares (Hussain, 2000).

Analysis: the companies are also able to reduce the risk associated with the investment, as the companies can invest in highly diversified portfolio of business which makes them to seek various options for investment, and investing in several assets always disperse the risk associated with the investment. The other benefits for the company to work in the international capital environment are the fact that local and international markets do have common methods and procedures that needs to be followed. However the international market for capital provides much more benefits to the company as compared to the local market. The investors and the borrowers are connected in by the market services and it makes the company to operate with equity and debt (Hussain, 2000).