Globalization of International Markets

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Forward Transactions

Forward foreign exchange market is also over-the-counter (OTC) market. Forward transaction is contract drafted today for future purchase or sale of foreign exchange. A forward transaction requires delivery at a future value date of a stated amount of one currency for a stated amount of another currency. Forward transactions can be quoted same as spot price but premium is usually higher that spot price.

Swap Transactions

Swap transactions provide a means for the bank to diminish the currency exposure in a forward trade. Swap transaction market is where two or more parties exchange currencies for a definite length of time and agree to reverse the transaction at a later date. The most common swap transaction is spot against forward, where the dealer buys a currency in the spot market & sells the same back in forward market.

Futures

Futures contracts are contracts specifying a standard volume of a particular currency to be exchanged on a specific settlement date. Foreign currency futures are forward transactions with standard contract sizes and maturity dates.

Option

The option market is the deepest, largest & most liquid financial market in the world. It is also very versatile. An option is a contract, which gives any buyer the right, but is not obligated, to buy or sell asset or instrument at a specified price on or before a specified date.

This exercise has helped me understand the importance of the foreign exchange market. People and many large businesses widely use forex trading to make money by trading currencies. International Finance cannot be studied without understanding foreign exchange market & its functionality is not limited to stock market. Hence this exercise has unfolded that international trade is not only restricted to stock market or globalized trade but Forex plays an important role too.

Financing Issues confronted by the Global firm

Since last 3 decades, globalization has been an integral part of both economic growth & economic risk. Financial markets became more accessible to governments & large firms to invest freely in global market. This free-flowing capital made global market highly volatile. The brewing of the financial crisis started in midst of 2007. The bursting of housing bubble with the collapse of Bear Stearns, Lehman Brothers, and many more such large financial organizations, lead to the global financial crisis. Stock market crashed around the world. The existing financial crisis is the worst that the World has faced since 1930’s Great Depression. The financial crisis of 2007-2008 shook the entire global market, plunging the world’s most developed markets into recession. Financial crisis not only affected large organizations but also affected banks & common people.

Any global financial crisis affects a firm, which operates in the global market. The global financial crisis has forced business owners and managers to make management decisions that reduce cost but maintain optimum productivity. Few examples of the difficulties faced by firms operating in the global market are listed below

Lack of Cash Flow - Most organizations experiences lack of cash flow from business operations. Due to lack of cash flow many business obtain loan to maintain its production process.

Lack of Flexibility – Financial crisis has affected the flexibility of global financial market.

Layoffs and Unemployment – To maintain the budget of the firm some organizations have to lay off some of their employees. Lay-offs are one of the contributing factors for increase in unemployment.

Business Property Defaults – Due to restricted cash flow & increasing mortgage rates, few organizations had to relocate to further away places, away from resources, which negatively affects productivity.

Reduced Trade – Exports & imports dropped drastically, which resulted in slowing down of global economic growth.

Need for more creative solutions – Operating in financially weak market has forced entrepreneurs, management to come up with unique & innovative ways to create more opportunities.

This exercise has made me understand that surviving financial crisis with creative solution is important but analyzing the pattern of the crisis and mitigating the outcome is more important. There have been many organizations, which filed for bankruptcy but are up and running again, this has become possible only because of efficient management & their constructive and creative ideas. Controlling of any crisis will never be possible in the future but a successful investment requires each investor of financial market to make an informed prediction on the actions of other investors. An effective management is supposed to calculate all the financial risks before entering into global financial markets.

Essentials of Foreign Direct Investment

Foreign Direct Investment is a key element in global economic integration. Foreign Direct Investment can be defined as “An investment made by a company or entity based in one country, into a company or entity based in another country” FDI includes mergers, acquisitions across the globe, joint venture, transfer of technology or expertise. Organizations making a direct investment generally have a substantial degree of control & influence over the company. There are three types of FDI

Horizontal FDI – This arises when a firm replicates its domestic country-based activities in a guest country.

Platform FDI – When home country invests in source country with a drive of trading with a third country.

Vertical FDI – takes place when a organization through FDI; moves either upstream or downstream with unusual value chains i.e. when firms execute value adding activities step by step in a vertical fashion in third country.

FDI has been the source of rapid growth of gross domestic income since 1950’s. U.S being the capitalist country, it always had low barriers for FDI. Which led to its economic growth. FDI was later introduced to developing countries like India & China. FDI is one of the major sources of capital for developing countries, which can get funds from developed countries.

This exercise clearly states that FDI is a very important element for rapid economic growth of any country. It creates

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