Participants of the capital markets

Institutions are and corporations are participants. Stock exchanges are one of the more visible examples of established operations that give form and function to the capital market. Support organizations such as brokerage firms also form part of the capital market. Over the counter markets are also included in the working definition for a capital market.

Because of the broad structure of the capital market, investors of all types have the opportunity to participate in financial strategies that can strengthen the general economy as well create financial security. Persons who for stable opportunities that ensure a modest return can find plenty of different offerings to choose from. And investors who are more adventurous can also find a wide array of investment types that will allow them to take some additional risk and possibly realize larger returns on their investments.

Capital-market instruments:

Þ Government notes and bonds

Þ Corporate bonds

Þ Corporate stocks (ownership)

Þ Mortgages

 

4. International foreign exchange market: functions, participants, operations.

The foreign exchange market is the market on which foreign currencies are bought and sold. The Foreign Exchange market, also referred to as the "Forex" or "FX" thatmarket is the largest financial market in the world. FOREX is global decentralized market which virtually operates around the clock. It facilitates the transfer of purchasing power denominated in different currencies. The foreign exchange market is not a physical place/location; rather it is an informal arrangement between large commercial banks and foreign exchange brokers for buying and selling foreign currencies.

Functions:

1. Provides a mechanism for transferring purchasing power from individuals who normally deal in one currency to other people who generally transact business using a different monetary unit, thus facilitating the importing and exporting of goods and services.

2. Provides a means of passing the risk associated with changes in exchange rates to professional risk takers. This “hedging” function is particularly important to corporations in the present era of floating exchange rates. The

3. Provide credit. The time span between shipment of goods and their receipt can be considerable. While the goods are in transit, they must be financed. Foreign exchange markets provide a device by which these financing and related currency conversions can be accomplished efficiently and at low cost.

Structure and infrastructure: There is no single formal foreign exchange market such as the one that exists for the sale of stocks and bonds on the New York Stock Exchange. FOREX market:

· over-the-counter market.

· composed of a group of informal markets

· the participants here are linked by telephone, telegraph and cable.

· no fixed trading hours, no written rules.

Participants:

· Retail customers (firms) - importers/exporters of goods, services and financial assets (stocks/bonds). They are most numerous.

· Dealers - large commercial banks. Specifically, they are the international departments of large commercial banks in the financial centers of the world.

· Brokers – the intermediaries between banks, investments firms, dealing centers and so on

· Central Banks: participate to facilitate Treasury's transactions and to prevent or effect a change in the value of their currency

· Private investors (persons) - whose major aim is conducting speculative operations

· Arbitrager and speculators

 

5. Foreign exchange risks: definition, types, insurance methods.

FOREX risk: the risk that profitability, net cash flow, assets/liabilities and market value is affected by a change in exchange rates

3 types of currency risk:

· Transaction Exposure. The risk, faced by companies involved in international trade, that currency exchange rate will change after the companies have already entered into financial obligations. Such exposure to fluctuating exchange rates can lead to major losses for firms.

Management: Often, when a company identifies such exposure to changing exchange rates, it will choose to implement a hedging strategy, using forward rates to lock in an exchange rate and thus eliminate the exposure to the risk.

· Economic exposure measures the impact of changes in exchange rate on the firm's cash flows and earnings.

Management: Adaptation in production and marketing strategy (plant location, input mixing, input sourcing, market selection, product planning, pricing, etc)

· Translation exposure refers to accounting exposure. The risk that a company's equities, assets, liabilities or income will change in value as a result of exchange rate changes. This occurs when a firm denominates a portion of its equities, assets, liabilities or income in a foreign currency

Management: Accountants use various methods to insulate firms from these types of risks, such as consolidation techniques for the firm's financial statements and the use of the most effective cost accounting evaluation procedures. In many cases, this exposure will be recorded in the financial statements as an exchange rate gain (or loss).

 

6. Definition and types of exchange rates. Exchange rate forecasting, currency parity. Factors of exchange rates.

The price of one country's currency expressed in another country's currency. In other words, the rate at which one currency can be exchanged for another

Types of exchange rate

· Nominal exchange rates are established on currency financial markets called "forex markets", which are similar to stock exchange markets. Real exchange rates are nominal rate corrected by inflation measures.

· Bilateral exchange rates clearly relate to two countries' currencies. Multilateral exchange rates are computed in order to judge the general dynamics of a country's currency toward the rest of the world.

· Some countries impose the existence of more than one exchange rate, depending on the type and the subjects of the transaction. In many countries, beside the official exchange rate, the black market offers foreign currency at another, usually much higher, rate.