Financial markets provide a market place where traders participate in buying and selling off assets such as bonds, currencies, equities, and derivatives. Financial markets are found in almost every nation in the world. These markets provide transparency in pricing, trading and cost regulations and also market forces that determine the prices of securities that are in the trade. Major financial markets such as the New York Stock Exchange (NYSE) trade trillions of dollars on a daily basis while some smaller financial markets trade less due to the few numbers of investors. Financial markets are grouped into; capital markets, money markets, commodity markets, spot markets, derivatives markets and foreign exchange markets. It is through these categories of financial markets that enables investors to access and trade a wide range of financial products.
Financial markets play an important role in the in the economic development of a country. History shows that a strong financial system is a necessary ingredient for a growing and prosperous economy (Fabozzi, Frank J, and Pamela Peterson Drake).A dynamic financial market creates opportunities for national growth, investment, entrepreneurship growth, industrial development and saving mobilization. In the last two decades, financial institutions all over the world have experienced many changes. The changes are mainly due to technological advances along with globalization of commerce and banking (Fabozzi, Frank J, and Pamela Peterson Drake). Due to these changes, global competition has risen, and internationally linked markets emerged. As a result, many financial markets around the world have developed changes in their financial structures to compete in the financial market. This assignment seeks to describe the USA and the International financial market as well as draw their similarities and differences.
The U.S.A Financial Markets and Financial Customs
The U.S financial system constitutes the financial markets, the banking system, and nonbank financial institutions. The financial markets in the US are highly developed and are among the most liquid and influential financial markets on the world economy (Fabozzi, Frank J, and Pamela Peterson Drake).They are broad-based and very active and are crucial to the implementation of federal reserve policy. The vast financial markets in the U.S are used to create and redistribute debt and equity. The U.S financial markets enable the federal reserve to buy and sell treasury debt instruments in carrying out open market operations (Fabozzi, Frank J, and Pamela Peterson Drake). These markets constitute a wide array of instruments and techniques for lending and borrowing that facilitate consumption, investment, saving and convenience in the timing of sale and purchase of goods and services. In the U.S, the borrowers are mostly individuals, businesses and governmental units that require funding for their operations. On the other hand, lenders are individuals or businesses with excess cash or savings to invest. Many entities, however, fall into both categories. Financial companies such as commercial and investment banks and insurance companies intermediate between lenders and borrowers. Total trading in the U.S financial markets for 2011 amounted 25 trillion U.S dollars in stock markets, 225 trillion U.S dollars in bond markets and about 480 trillion U.S dollars in derivative markets (Leonidov, Andrey). In 2015, 7.2% (1.293 trillion dollars) of U.S.A gross domestic product was represented by finance and insurance alone.
The active financial markets in the U.S provide an opportunity to potential lenders and borrowers to secure the most profitable terms and interest rates. In the recent past, the outstanding debt has drastically increased as a result of the availability of a wide range of choices for lending and borrowing and the highly developed nature of financial markets in the U.S.A (Fabozzi, Frank J, and Pamela Peterson Drake). The huge debt is most likely a sign of financial and economic vigor, but it can also be a cause of worry in case of economic retrenchment. In addition, the development of financial markets in the U.S has pushed the integration of various financial instruments. This outcome might promote the transfer of credit-related problems from one sector of the financial market to another.
The financial markets in the U.S direct capital to consumers with the highest urgent demands. Financial firms and such as depository institutions, government institutions, and nonfinancial institutions all borrow from or deposit funds the money market. They again use the market to defer long-term borrowing or lending to a more advantageous time (Fabozzi, Frank J, and Pamela Peterson Drake). For borrowing and investment purposes, these firms and institutions in the U.S use the longer term capital markets. Lenders may deposit fund for long periods of time, or they may buy a security with the aim of selling it to the secondary market when in need of cash. The active secondary markets enable the Federal reserve bank to carry out open market operations. At the federal reserve, Depository institutions exchange the reserve balances among themselves.
Financial markets in the U.S comprises of separate markets that suit the wide range of products that the diverse trade platforms offer. Among them are equities markets, money markets, future markets, options markets, foreign exchange markets and debts markets.
The different types of equities in the U.S markets are warrants, stocks, and preferred stocks. They represent a specific percentage of ownership for a business enterprise. The major U.S equities markets are the New York Stock Exchange(NYSE) and the American Stock Exchange(AMEX). Some of the stocks are however not listed on a formal exchange, and their trade occurs in over-the-counter markets(OTC), for example, the National Association of Securities Dealers Automated Quotation system(Nasdaq) (Fabozzi, Frank J, and Pamela Peterson Drake). Regulation of the securities markets is by securities and exchange commission(SEC). The security investor's protection corporation functions to license and subscribe all the securities businesses.
They include bonds, asset-backed securities, and municipal securities.
They provide liquidity where investors lend or borrow funds on a short-term basis.
It comprises commodity and financial futures. Major futures exchanges in the U.S are the New York futures exchange, Chicago Board of Trade and Chicago Mercantile Exchange.
The most common and widely traded options markets in the U.S financial markets are index options, equity options, commodity options, interest-rate options and currency options. Clearance of all listed options is through the Options Clearing Exchange. Trade of options Markets takes place in the NYSE, AMEX and Chicago Board of Options Exchange.
OTC Foreign Exchange Markets
Foreign exchange is available in both forward and stock markets, and there are no specific licenses required to deal in foreign exchange (Fabozzi, Frank J, and Pamela Peterson Drake).
An important aspect of financial markets in the U.S is the financialization of the state's economy. This transformation is evident in decline in the role of various depository institutions such as traditional banks as the main credit providers and the rise of shadow banking. The shadow banking system consists of the mutual funds, finance companies, real estate investment trusts, hedge funds and similar entities (Fabozzi, Frank J, and Pamela Peterson Drake). To regulate the financial market, the U.S government created the office of finance market headed by the united states department of the treasury. The office advises the treasury department on matters of financial markets, domestic, finance, credit policies, privatization as well as state and local finance. In July 2010, the former U.S president, Barrack Obama, signed into law the Dodd-Frank Wall Street reform and consumer protection act (Fabozzi, Frank J, and Pamela Peterson Drake). The act aims at regulating and stabilizing the financial system of the U.S. This has, in turn, enabled the small-scale banks to successfully compete under the current environment. Internationally, the U.S dollar is still the dominant currency and serves the main source of foreign exchange.
International Financial Market
In the last two decades, the global economy has grown rapidly. The global domestic product has increased from 75.93 trillion dollars to approximately 79.91 trillion dollars between the year 2013 and the year 2014 (Leonidov, Andrey). The basic function of the international financial markets is to link savers to investors beyond their domestic financial markets which also promotes diversity on the financial market platform. Global interconnection of financial markets promotes global economic growth by directly enhancing trade flows and indirectly by creating wealth to individual investors who in turn raise their demands for commodities and services. International financial markets mainly comprise the international money market and international banking service. In basic terms, the international money market consists of Euro credits, Eurocurrency markets, Euro notes, Euro credits and Euro commercial papers. On the other hand, the banking service consists of main services such as foreign exchange, trade financing, foreign investment and hedging instruments such as forward and market options (Grabbe, J. Orlin).
Nature and functions
International financial markets transfer the purchasing power from investors and lenders to individuals or parties who desire to purchase assets that will yield future benefits. International financial transactions involve exchange of assets between residents of different financial centers across national boundaries (Grabbe, J. Orlin). International financial centers are savings' reservoirs and direct the saving to their most suitable use irrespective of they are generated. These markets are divided into money and capital markets just like the domestic financial markets. The money markets cater for assets traded or created with short maturity periods which in most cases are less than one year. The capital markets, on the other hand, deals with instruments or commodities that lack a definite maturity period or whose maturity period exceeds one year.
Transactions involved in the international markets facilitates and helps in the expansion and growth of international trade as a result of welfare benefits based on the level of income among the nations involved. In addition, the expansion of international financial markets has facilitated the growth of cross-country financial flows which in turn contributes to efficient resource allocation. Efficiency in use rather than the origin of or abundance governs the allocation of resources internationally (Grabbe, J. Orlin).
Categories of markets
The international financial markets contain an international market for Euro currencies, foreign exchange, and Euro bonds. In recent years and largely due to the globalization of financial markets, the international financial markets are divided into five types of markets. They include foreign exchange markets, internationally arranged swaps, trading and issue of equity securities, financial and lending institutions and lastly trading and issue of negotiable instruments of debt (Choi, Woon Gyu, and David Cook). Due to the fluctuation of foreign exchange and interest rates, the derivative instruments in the international markets are traded in over-the-counter markets as well as in organized exchanges to lower losses arising from these changes.
As mentioned above, the broad categories of international financial markets are the international money...
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