INTERNATIONAL FINANCIAL MARKETS

The international sources of finance, and uses for finance in different countries constitute the capital markets of the world. Each country has its own capital market. However, national capital markets are partly linked and partly separated. The fact that national capital markets are at different stages of development and  have different depth and sizes, have varying prices and availability of capital makes the international finance very exciting. 

 Therefore, the international financer has wide opportunities for arbitrage. He looks for the cheapest sources of funds, and the highest return, without increasing risk. Since financial markets are not perfectly connected, the ways and routes through which foreigners enter domestic capital markets, and domestic sources of capital, or users of funds go other countries.

These are the two essential aspects of international financial management. Another important aspect is that domestic claims and liabilities are expressed in national currencies which must be exchanged for one another for capital to move internationally as the relative values depend on demand and supply, the international financers encounters exchange risk. The currency of denomination of assets and liabilities has separated from the country of jurisdiction. Such removal of currencies from their domestic countries is the Euromarket phenomenon.

Every investor or borrower faces four sets of markets as domestic, foreign, euromarket and the foreign currency market which must be crossed as one enters the world of finance. Each country has imperfect interfaces with every other country and with the Euromarket. The linkages of each country with its Euroarket segment are very crucial, since home and Euromarket instruments are close substitutes and no foreign exchange market intervenes them. The linkages within the Euromarket are perfect, being differentiated only by currency of denomination which are linked through the spot and forward foreign exchange markets.