International Finance: Recent Trends in Financial Market

International

Finance: Recent Trends in Financial Market

Financial markets have experienced many changes during the last

two decades. Technological advances in computers and telecommunications, along

with the globalization of banking and commerce, have led to deregulation, and

this has increased competition throughout the world. The result is a much more

efficient, internationally linked market, but one that is far more complex than

existed a few years ago. While these developments have been largely positive, they

have also created problems for policy makers. At a recent conference, Board

Chairman, World Bank stated that modern financial markets “expose national

economies to shocks from new and unexpected sources, and with little if any

lag.” He went on to say that central banks must develop new ways to evaluate

and limit risks to the financial system. Large amounts of capital move quickly

around the world in response to changes in interest and exchange rates, and

these movements can disrupt local institutions and economies.

With

globalization has come the need for greater cooperation among regulators at the

international level. Various committees are currently working to improve

coordination, but the task is not easy.

Factors

that complicate coordination include:

(i) the differing structures among nations’

banking and securities industries,

(ii) the trend in Europe toward financial

service conglomerates,

(iii) a reluctance on the part of individual

countries to give up control over their national monetary policies.

Still,

regulators are unanimous about the need to close the gaps in the supervision of

worldwide markets.

Another

important trend in recent years has been the increased use of derivatives. A derivative is any

security whose value is derived from

the price of some other “underlying” asset. An option to buy IBM stock is a

derivative, as is a contract to buy Indian rupees six months from now. The

value of the IBM option depends on the price of IBM’s stock, and the value of

the Indian rupees “future” depends on the exchange rate between Indian rupees

and سوق الاردن المركزي dollars. The market for derivatives has grown faster than any other market

in recent years, providing corporations with new opportunities but also

exposing them to new risks.

Derivatives

can be used either to reduce risks or to speculate. Suppose an importer’s net

income tends to fall whenever the dollar falls relative to the Indian rupees.

That company could reduce its risk by purchasing derivatives that increase in

value whenever the dollar declines. This would be called a hedging operation, and its purpose is

to reduce risk exposure. Speculation, on the other hand, is done in the hope of

high returns, but it raises risk exposure. For example, Procter & Gamble

recently disclosed that it lost $150 million on derivative investments, and

Orange County (California) went bankrupt as a result of its treasurer’s

speculation in derivatives.

The

size and complexity of derivatives transactions concern regulators, academics, and

members of Congress. Experts of International Finance noted that, in theory,

derivatives should allow companies to manage risk better, but that it is not

clear whether recent innovations have “increased or decreased the inherent stability

of the financial system.”