Global Financial System (BFIB233)

Unit I Environment of Global Financial System 6 Hours

Introduction – Global Financial System vs Domestic Financial System, Rise of
Multinational Corporation- Internationalization of Business and Finance-
Participants - Technological Advances and Other Developments

Unit II The Economic Environment 10 Hours

Introduction - Factors Determining Economic Activity- The Economic Cycle and
Economic Policy - Balance of Payments (BoP) and Exchange Rates Country Risk
Analysis Measuring Political
Risk- economic and political factors underlying country risk-Key Indicators of
Country Risk and Economic Health-Country Risk Analysis in International lending

Unit III Global Financial Securities- I 8 Hours

Equities/Stocks- Company Formation and Features and Benefits of Shares- The
Risks of Owning Shares- Corporate Actions- Bonds – Introduction- Characteristics
of Bonds- Types of Bonds- Asset-Backed Securities (ABSs)- International Bonds-
Yields- Other Financial Assets- Cash Deposit
Unit IV Global Financial Securities -II 8 Hours
Investment Funds-: Open-Ended Funds, Closed-Ended Investment Companies,
Exchange-Traded Funds (ETFs), Alternative Investment Funds (AIFs)- Derivatives

Unit V Global Financial Markets 10 Hours

Primary and Secondary Markets- Depositary Receipts- World Stock Markets-
Stock Market Indices- Settlement Systems. Money Markets- Property- Foreign
Exchange (FX)

Unit VI Global Financial Services 10 Hours

Financial Advice- Budgeting- Borrowing- Protection- Critical Illness Insurance
Cover- Investment and Saving- Legal Concepts in Financial Advice- The Financial
Advice Process- Other Financial Service: Wealth Management- Portfolio
Management- Brokerage Services-Credit Rating- Investment Banking- Factoring-
Depositories
Unit VII Regulation and Ethics 8 Hours
Need- Regulatory Principles- Financial Crime- Insider Trading and Market
Abuse- Integrity and Ethics in Professional Practice

Essential Reading:
• Shapiro Alan. C.(2012), Multinational Financial Management(9ed), Prentice
Hall, New Delhi.

Recommended Reading
1. Apte P.G (2011) , International Financial Management(6 ed), Tata McGraw
Hill, New Delhi.
2. Jeevanandam. C. Foreign Exchange and Risk Management. New Delhi: Sultan
Chand & sons.
3. Vij, M (2010). International Financial Management (3 ed). New Delhi: Excel
Books
 Chapter 1
Environment of Global Financial System
• Domestic Finance works to support equitable
and sustainable economic growth and
financial stability through policies to increase
the resilience of financial institutions and
markets, and to increase access to credit for
small businesses and low-to-moderate income
communities.
The global financial system is the worldwide framework of
legal agreements, institutions, and both formal and
informal economic action that together facilitate international
flows of financial capital for purposes of investment and trade
financing.
Since emerging in the late 19th century during the first modern
wave of economic globalization, its evolution is marked by the
establishment of central banks, multilateral treaties,
and intergovernmental organizations aimed at improving
the transparency, regulation, and effectiveness of
international markets.
 Rise of Multinational Corporation
• Market Expansion : The growth of GDP and per capita income in various countries led to
increasing demand for goods and services. Companies in developed economies, explained their
operations overseas to exploit the expanding markets abroad.

• Marketing Superiorities : Multinationals enjoy the following marketing superiorities over the
following over the domestic companies :
a) Availability of more reliable and up-to-date information about market conditions.
b) Reputation in the market due to popular brands and image.
c) More effective advertising and sales promotion techniques.
d) Wide distribution network.
e) Quick transportation and warehousing facilities.

• Financial Superiorities : Multinationals are financially superior to domestic companies in the

following respects :
a) Huge financial resources.
b) More effective and economical utilisation of funds through transfer of excess funds from one
country to another.
c) Easy access to foreign capital markets.
d) Easy mobilisation of high quality resources of different types.
e) Access to international banks and financial institutions.
Technological Superiorities : Multinationals have strong R & D
departments. They can invent and innovate new products and
processes more easily and frequently. This provides them an edge
over national companies. Developing countries invite multinationals
for advanced technology due to the following reasons :
a) Developing countries do not have the resources to develop
advanced technology and the level of industrialization is low.
b) They are unable to exploit their rich mineral and other natural
resources due to shortage of funds and low level technology.
c) They do not have adequate foreign exchange reserves to import
raw materials, capital equipment and technology on their own.
d) They face difficulty in marketing their products in highly
competitive world markets.
 Drivers to become multinational
• By locating overseas, firms ensure access to raw materials at
reduced prices and lower labour, energy and property costs.
• Expanding overseas provides access to large markets, e.g.
Asian markets.
• Increasing scale of operations results in internal and external
economies of scale and spreading of risk.
• ‘First-mover advantage’: getting into markets first provides
marketing and distribution advantages.
• ‘Foreign’ brands may be more desirable, allowing premium
pricing.
• Government grants and tax incentives.
• New communication technologies.
 Internationalization of Business and Finance
• Internationalization describes designing a product in a way that it may be
readily consumed across multiple countries. This process is used by
companies looking to expand their global footprint beyond their own
domestic market understanding consumers abroad may have different tastes
or habits.

• Financial internationalization refers to the state and process of the

financial activity entity of an economy participating in the financial
activities of another economy across administrative divisions, or vice
versa, the core of which is “the process and state of financial integration in
the world”.

• Internationalization in business is the process of tailoring a product,

service or operational offering for entry and growth into international
markets. Globalization may be the ultimate end goal, but
internationalization helps your business get there.
 Participants
1. Investment Banks
2. Custodian Banks
3. Retail/Commercial Banks
4. Savings Institutions
5. Peer-to-Peer (P2P) and Crowd funding
6. Insurance Companies
7. Fund Managers
8. Stockbrokers and Wealth Managers
9. Trade and Professional Bodies
10. Sovereign Wealth Funds (SWFs)
 Investment Banks
• Investment banks provide advice and arrange finance for companies that want to
float on the stock market, raise additional finance by issuing further shares or
bonds, or carry out mergers and acquisitions. They also provide services for
institutional firms that might want to invest in shares and bonds, in particular
pension funds and asset managers.
• Typically, an investment banking group provides some or all of the following
services:
1. Finance-raising and advisory work, both for governments and for companies.
For corporate clients, this is normally in connection with new issues of
securities to raise capital, as well as giving advice on mergers and acquisitions.
2. Securities-trading in equities, bonds and derivatives and the provision of
broking and distribution facilities.
3. Treasury dealing for corporate clients in currencies, including ‘financial
engineering’ services to protect them from interest rate and exchange rate
fluctuations.
4. Investment management for sizeable investors, such as corporate pension
funds, charities and very wealthy private clients. In the larger investment banks,
the value of funds under management runs into many billions of dollars
 Custodian Banks
• Custodians are banks that specialise in safe custody services, looking
after portfolios of shares and bonds on behalf of others, such as fund
managers, pension funds and insurance companies. Activities they
undertake include the following:
1. Holding assets in safekeeping, such as equities and bonds.
2. Arranging settlement of any purchases and sales of securities.
3. Asset servicing – collecting income from assets, namely dividends in
the case of equities and interest in the case of bonds, and processing
corporate actions.
4. Providing information on the underlying companies and their annual
general meetings (AGMs).
5. Managing cash transactions.
6. Providing regular reporting on all activities undertaken that affect
the holdings in a portfolio, including all trades, corporate actions and
other transactions
 Retail/Commercial Banks
• Retail/commercial banks are known by different names in different
countries. They are the financial institutions that provide services, such as
taking deposits from, and lending funds to, retail customers, as well as
providing payment and money transmission services. They may also
provide similar services to business customers.

Savings Institutions
• Most countries also have savings institutions that started off by
specializing in offering savings products to retail customers, but now tend
to offer a similar range of services to those offered by banks. They are
known by different names around the world, such as cajas in
Spanish-speaking countries, credit unions in North America and building
societies in Australia and the UK.
Peer-to-Peer (P2P) and Crowd funding
Crowd funding is the practice of funding a project or venture by raising
small amounts of money from a large number of people. Traditionally,
financing a business, project or venture involved asking a bank or a few
people for large sums of money. Crowd funding switches this idea around,
using the internet to access many potential funders.
Crowd funding can take the following forms:
1. A donation – people simply believe in the cause.
2. Debt crowd funding – investors essentially lend then receive their
money back with interest.
3. Equity crowd funding – people invest in exchange for equity or shares
in the venture.

Peer-to-peer (P2P) lending or debt crowd funding cuts out the banks so that
borrowers often receive slightly lower rates, while savers get far
improved headline rates, with the P2P firms themselves profiting via a fee
 Insurance Companies
• Protection planning is a key area of financial advice, and the insurance
industry provides a variety of products to meet many potential scenarios.
Insurance companies collect premiums in exchange for the coverage
provided. This premium income is invested in equities and bonds and, as a
result, the insurance industry is a major investor in both equity and bond
markets. Insurance companies will also hold a large amount of cash to be
able to satisfy any claims that may arise on the various policies and, if
required, will liquidate investment holdings.

Fund Managers
• Fund managers, also known as investment managers, portfolio managers
or asset managers, run portfolios of investments for others. They invest
money held by institutions, such as pension funds and insurance
companies, as well as wealthier individuals.
 Stockbrokers and Wealth Managers

• Stockbrokers arrange stock market trades on behalf of their clients,

who are investment institutions, fund managers or private investors. They
may advise investors about which shares, funds or bonds they should buy
or, alternatively, they may offer execution-only services, when the broker
executes a trade on a client’s instruction without providing advice.

Trade and Professional Bodies

• The investment industry is a dynamic, rapidly changing business, and one
that requires cooperation between firms to ensure that the views of various
industry sections are represented, especially to governments and
regulators, and that cross-firm developments can take place to create an
efficient market in which those firms can operate. This is the role of the
numerous trade bodies that exist across the world’s financial markets.
 Sovereign Wealth Funds (SWFs)

• SWFs are defined as special purpose investment funds or

arrangements owned by a government.
• Their key characteristics are as follows:
1. SWFs hold, manage, or administer assets to achieve
financial objectives.
2. They employ a set of investment strategies which
include investing in foreign financial assets.
3. The assets of an SWF are commonly established out of
balance of payments surpluses, official foreign currency
operations, the proceeds of privatizations, fiscal surpluses,
and receipts resulting from commodity exports.
 Technological Advances and Other
Developments
• Mobile banking
• Peer-to-peer payment services
• Automated portfolio managers or trading
platforms.
• Blockchain and cryptocurrencies,
• Big data and artificial intelligence,
• Cybersecurity solutions,
• Digital banking.
• A blockchain is a collection of records or an electronic database, like a
spreadsheet. A blockchain holds larger amounts of information, such as
cryptocurrency transaction records, stored in “blocks” or groups, unlike a
regular spreadsheet.
• Cryptocurrency is digital money with market value like other currencies.
Cryptocurrencies can also be used as a store of value like gold.
• Big Data Analytics (BDA) commonly refers to large volumes of data that
can be generated, processed and increasingly used by digital tools and
information systems for making predictive, descriptive and prescriptive
analysis.
• Artificial intelligence (AI), but the term is often used to refer to IT
systems that perform functions usually performed by human
capabilities. AI can ask questions, discover and test hypotheses, and make
decisions automatically based on advanced analytics operating on extensive
data sets.
• Cyber security solutions are technological tools and services that help
protect organizations against cyber attacks, which can result in application
downtime, theft of sensitive data, damage to reputation, compliance fines,
and other adverse consequences.
 ESG Investing
refers to a method that investors adopt to build investment portfolios based on
environment, social, and governance (ESG) as criteria and gain financial returns while
positively contributing to the society. In addition, it aims measure businesses’
sustainability by assigning ESG scores to them.