Commodity Markets Role In International Trade Finance Essay

The fiscal market is a system that allows people to purchase and sell fiscal securities such as bonds, stocks, currencies, and different signifiers of derived functions. Besides traded in this market are trade goods such as diamonds, cherished metals and agricultural merchandises. Due to the rapid growing in cross boundary line trade, capital flows and technological promotions over the old ages, these markets have had to germinate with altering times because most companies have become international establishments, hence they need international understandings. ( Clark. E et al 1993 ) . These markets act as an intermediary for purchasers and Sellerss. Its a topographic point where possible loaners and borrowers come together. Since its origin, assorted events have forced the fiscal markets to germinate dramatically into the market we know it as today. There are different types of fiscal markets. They are ;

The Foreign exchange market which involves the trading of foreign currency for illustration the Eurocurrency market.

The Capital market- This market can be divided into two which are the debt market and the equity market. The three chief capital markets are the US, the UK and the Nipponese market. These markets facilitate the trade of stocks and bonds amongst issuer and holders.

The Derivative market- fiscal instruments such as options, hereafters, forwards are sold in this sort of market. This is another class of the capital market.

The Commodity market- this market does non cover with trading fiscal instruments but instead it deals with the trade of trade goods. This market is more of a touchable market.

THE FOREIGN EXCHANGE MARKET ( FOREX )

Due to the globalisation of trade, most international minutess these yearss involve an exchange of one currency to another. This has hence gave birth to a foreign exchange market. A foreign exchange market harmonizing to Ephraim Clark is “ a market where an exchange of a demand sedimentation denominated in one currency for another demand sedimentation denominated in another currency takes topographic point ” . ( Clark. E et Al, 1993, pg142 ) . The foreign exchange market evolved dramatically in vitamin D 1970 ‘s due to the autumn of the Bretton forests system and shortly became the largest individual most liquid fiscal market in 500 universe with a day-to-day bend over of $ 3.98 trillion, in April 2010, which represented a 20 % from 2007. ( BIS, Sept 2007 ) . However engagement in the foreign exchange market has increased enormously and this is due to fund directors and investors. Investors has moved into the foreign exchange market and utilize it as hedge financess and pension financess with the most traded currencies being the US dollar, the lb sterling, the Nipponese hankering and the Euro. Harmonizing to Maurice.D Levi, The foreign exchange market is the most active market in the universe, with the U.K accounting for 36.7 % of the market followed by U.S and so Japan ( Maurice.D Levi, 1996, pg 31 )

Although the foreign exchange market involves the exchange of currencies, nevertheless, purchasers and Sellerss do n’t physically convey currencies to be exchanged. Currencies are traded through the interbank market. This is an informal agreement of big Bankss and foreign exchange agents and these two parties stay in changeless communicating by telephone, teletypewriter and orbiter communicating web called SWIFT ( society for world-wide international fiscal telecommunication. SWIFT links merely about every bank and agent in every fiscal Centre, thereby maintaining Bankss and agents informed with respects to critical events happening all over the universe. Actual trading is a consecutive forward procedure where one bargainer calls the other to inquire for the monetary value of a specific currency without uncovering the sum he or she wants to buy. The bargainer so quotes two monetary values which are the BID are and ASK monetary value. These two monetary values represent the monetary value in which the bargainer is willing to purchase ( command ) and sell ( ask ) the currency in inquiry and the difference between these two monetary values is known as the spread. Anonymity in this market is of topmost importance. Prior to the trade, Traders keep the names of their clients secret so clients do non cognize whom they are covering with until the whole dealing is over.

Participating in a foreign market is unfastened to anyone, nevertheless there are merely a few participants who are actively involved in the forex market. These include Commercial Bankss, Cardinal Bankss, Multinational Corporation ( MNC ) , Fund directors and hedge fund speculators. First the cardinal Bankss are non in this market for net income devising. They are simply at that place to command the money supply and to some extent command the exchange rate. However this is non a position shared by the commercial Bankss. Commercial Bankss are the most active participants in the interbank money market. The act as purchasers and Sellerss of currencies in majorities and bring forth a significant part of their turnover from the money market. Besides MNC ‘s drama a important portion in this market because due to investings in other states, there would be a changeless transportation of financess amongst states. Fund directors besides participate in this market. Fund directors with international portfolios, would necessitate to purchase and sell currencies in order to carry through fiscal duties abroad. Finally, like any other market, speculators play an active and important function. Some establishments with big capitals do non purchase a certain currency because they need it, they do because they believe the currency is inexpensive at 500 point in clip and anticipate that it would increase.

Although the chief point traded on the forex market is currencies. However currencies are traded utilizing different instruments. These include topographic point rates, frontward rate and barters. The interbank topographic point rate market is a normal market in which the currency is traded at the exchange rate at that point in clip. However the hereafter market is wholly different. In this market, the take parting parties agree to a certain monetary value on a certain hereafter day of the month. This is irrespective of the exchange rate on that day of the month. “ A forward exchange rate is the rate that is contracted today for the exchange of currencies at a specified day of the month in the hereafter ” . ( Maurice D. Levi, 1996, pg 58 ) . Forward exchange rates are the hereafter expected topographic point rate, nevertheless this does non ever turn out to be the instance. Forward exchange rates could be quoted in footings of yearss, months or old ages. Barters on the other manus, is most times a combination of both topographic point rate minutess and forward rate dealing. It involves a spot dealing now and a forward dealing in the rearward way in the hereafter.

THE DEBT MARKET ( BOND MARKET )

The debt market is another type of fiscal market, nevertheless this market is non every bit large as that of the forex on the footing of day-to-day trading. However the market capitalisation of this market is the biggest with merely the US bond market which is largest bond market with a market capitalisation of $ 31.2trillion ( SIFMA website ) . Chemical bonds are widely regarded as riskless securities nevertheless this lone applies to authorities bonds. Chemical bonds are debt instruments which are issued by authoritiess or big company and they pay out a fixed hard currency flow during the life of the bond and at the terminal the rule is paid back bonds could either be short, average or long-run. There are three types of international bonds. These are domestic, foreign and Eurobonds. Domestic bonds harmonizing to its name are bonds issued by a domestic company into the domestic market in the domestic currency. Foreign bonds portion the same features as the domestic bonds, the lone difference is that they are issued by foreign companies. Foreign bonds in the US market are known as Yankee Bonds whilst the 1s in the Nipponese market are called Samurai bonds. Finally, Eurobonds are bonds that are issued in states other than the state in which the bond is denominated. Chemical bonds can be issued by any authorities or big company, nevertheless the chief bond markets are the U.S, U.K and Nipponese markets.

The U.S Bond market

The US bond market is the biggest bond market in the universe with a day-to-day trading of over $ 900billion ( SIFMA website ) . This market has different types of bond instruments to offer through OTC counter markets. Trades are largely carried out by publishing companies and groups of Bankss. Just like any other market, there are two types of bonds, these are authorities somas and corporate bonds. There are different sorts of authorities bonds and these include

There are different types of bonds drifting in the US Market for the investors. The US bond market is the universe largest bond market and the official trading hours are from 9.00 am to 4.00 autopsy. Most of the trading takes topographic point on the OTC counter markets through a group of Bankss and trader houses. The different types of authorities issues are exchequer measures, exchequer notes and exchequer bonds. All the above sorts of authorities bonds are all issued by the exchequer and they are all comparatively safe and pay a fixed hard currency flow nevertheless the chief difference between them is the continuance. Treasury measures are short term largely less than a twelvemonth, exchequer notes are average term whilst exchequer bonds are bonds that have a drawn-out lifetime for illustration 30years.

Corporation bonds on the other manus are issued by companies. Although they excessively are regarded as hazard free investing, it is of import to cognize that corporate bonds portion portion of the alone hazards of the company who issued them. There are different types of corporate bonds. These include zero voucher bonds, unsecured bond bonds, exchangeable bonds, variable involvement bond and mortgage bonds. Due to the alone hazards of corporate bonds, they are rated by specializer houses based on their inclination to default. Examples of these evaluation bureaus are standard & A ; hapless and Moody ‘s.

The U.K bond market

Merely like the U.S authorities, the U.K authorities besides incurs debt in the signifier of publishing bond. However U.K authorities bonds are called GILTS. These gildings are issued by the HM exchequer in sterling and are besides listed on the London stock exchange at a command and inquire monetary value nevertheless for registered traders, colonies are made through the Bank of England ‘s cardinal gildings office book entry system. Gilts can either be issued in carrier signifier ( unregistered ) or issued in the registered signifier. There are basically two types of gildings, these are the conventional gildings and the index linked gildings. ( UK debt direction office ) . Conventional gildings are bonds with fixed vouchers and a fixed adulthood day of the month. This type of gildings constitutes a big portion of the authorities ‘s debt portfolio. The indexed gildings on the other manus, are gildings with variable voucher rates because they are linked to the retail monetary value index. Coupons for indexed gildings are paid semi-annually. Participant in the U.K bond market are the same as that of the U.S bond market.

The Nipponese bond market

The Nipponese bond market is the 2nd largest bond market in the universe after the US bond market. Just like any other market, bonds are issued in bearer signifier or registered signifier. The authorities are listed on the Tokyo stock exchange and trades have to be settled four working yearss after the trade. The Nipponese authorities besides issues different sorts of bonds. These include exchequer measures ( 3-6mths ) , average term notes ( 2years ) , long term bonds ( 2-20years ) , financing measures, super long term bonds ( 20years and supra ) , municipal bonds ( 10years ) and zero voucher bonds. All these bonds are traded on the OTC market by auction. However average term notes and municipal bonds pay vouchers semi-annually. Just like any other market, corporate bonds are besides issued in the Nipponese market by transnational companies.

. THE Equity Market

An equity market is a market in which portions are traded and issued. It could either be public or private. In an equity market which is besides called the stock exchange market, stocks are listed and traded between persons and organisations. Companies who are listed on the stock market take advantage of its benefits because the stock market is a critical manner in which companies can raise capital by selling portions. By purchasing a company portion, the investor owns a per centum of the company depending in the volume of portions purchased and in return the company pays dividend. Just like the bond market, publishing of portions requires an issuer, mob bank and an investment banker in order to guarantee a successful listing. Harmonizing to Clark, there are three major equity markets in the universe, they are the US, Japan and the UK. ( Clark. E et Al, 1993 pg 507 ) . These markets carry out the same map nevertheless they differ in their set up.

U.S stock Exchange

The U.S has different stock exchange markets. These are the New York stock exchange, the American stock exchange, the Philadelphia stock exchange, the Boston stock exchange, the NASDAQ stock exchange, the Midwest stock exchange, the Pacific stock exchange and the Cincinnati stock exchange. However amongst all these, the largest and most popular is the New York stock exchange ( NYSE ) . The NYSE is besides the largest the stock exchange in the universe. ( Clark. E, et al 1993, pg 507 ) . The NYSE trades in common stock ( ordinary portions ) , preferable stocks, American depositary grosss ( ADRs ) and trust grosss of good involvements. “ ADRs are negotiable certifications in registered signifiers, issued in the US or by a US bank, attesting that a specific figure of foreign portions have been deposited with an abroad subdivision of the bank or another fiscal establishment, which acts as a keeper in the state of beginning ” . ( Clark. E et Al, 1993, pg 508 ) . Trading is done utilizing different methods, nevertheless in the NYSE, trade is done on a trader to dealer footing and colony of this trades are done through a computerized system within the following five working yearss after the dealing. Due to the volume of trade and money involved, some kind of ordinance is needed and in the US, the Securities and Exchange Commission ( SEC ) is responsible for enforcing rigorous codifications of behavior.

Merely like the US market, the Nipponese market besides has several stock exchanges nevertheless it largest stock exchange is the Tokyo stock exchange. Operationss are similar to that of the US stock exchange, nevertheless the chief difference is alternatively of colonies after 5 working yearss as in the instance of the US market, Tokyo stock exchange allows for 14 on the job yearss. In the Nipponese market, the Nipponese ministry of finance is responsible for the actions of the stock exchange with a security and exchange jurisprudence which spells out the basic demand for a stock listing and more.

The UK is biggest equity market in Europe and therefore it carries a great trade of importance. Unlike the US and Japan, the UK merely has one stock exchange which is the London stock exchange nevertheless it has trading floors all over the state. However, the LSE lists over 3000 houses with about 350 of them being international houses. The LSE is classified as the most international stock exchange market. The LSE is divided into two which is the Main market and the Alternative investing market ( AIM ) . The difference between them is the market capitalisation of the houses. The chief market comprises of houses high public presentation houses while the AIM market contains smaller companies. In the UK, the fiscal service authorization ( FSA ) is responsible for the actions of the stock exchange.

Derivative Market

The term derivative refers to a wide categorization of fiscal instrument which usually include options and hereafters. This instrument derive their value from the monetary value and other related variables of the implicit in plus ( Vashishtha, 2010:16 )

Derivative can acquire its significance from “ deducing “ something from something else like the you derive gasoline from rough oil therefore the monetary value of gasoline depends on the monetary value of rough oil.

A Derivative is a contract between a purchaser and a marketer entered today sing a dealing to be completed at a future point in clip ( Deutsche borse Group: White paper:6 )

Section 2 ( Ac ) of Securities Contract Regulation ( SCRA ) 1956 defines a derivative as

( a ) ” a security derived from a debt instrument, portion, loan, whether secured and unbarred, risk instrument or contract for differences or any other signifier of securities.

( B ) ” a contract which derives its value from the monetary values, or index of monetary values or underlying securities.

Derived functions are different from securities because they are fiscal instrument that are chiefly used to protect against and manage hazard and frequently besides serve arbitrage. ( Deutsche )

Derived functions is done on trade good, cherished metal like gold and Ag, foreign exchange rate like currencies, bonds of different types, different scope of adulthoods besides on portions.

Participant in the derivative market are Hedgers who use derive market to cut down and extinguish hazard associated with monetary value of an plus.Speculators who transacts hereafters and options, Arbitrageurs who take advantages of disagreement between monetary values of more or less the same plus or viing plus in different market.

Instrument Traded on Derivative Market are Option, Futures and Swaps.

An Option is a contract that gives its proprietor the right for a given period of clip to purchase or sell a given sum of an implicit in plus at a fixed monetary value, called the exercising or the work stoppage monetary value. ( Clark,2002:181 ) .

An option is a contract that conveys the right, but non the duty, to purchase or sell a fiscal instrument. ( Walmsley, ( 1996 ) :194.We have options on foreign exchange and involvement rate, Options on currencies and debt instrument.

Options are the standardised fiscal contracts that allow the purchaser ( holder ) of the option, non an duty to purchase ( name options ) or sell ( set options ) a specified plus at a set monetary value on or before a specified day of the month through exchanges.

Options are of two types: Call options and Put options. A call option gives the proprietor the right, non the duty, to purchase the implicit in fiscal plus or trade good. A put option gives the proprietor the right, but non the duty, to sell the implicit in fiscal plus or trade good.

A Futures is a contract to present, or take bringing of, a fiscal instrument at a hereafter day of the month ( Walmsey,1996:163 ) .Futures contract are traded on exchanges that work as a purchaser or marketer for the counterparty..

Future is a standardised derivative contract for the bringing or reception of a specific sum of an implicit in, at a set monetary value, on a certain day of the month in the hereafter. Futures are traded on derivative markets. ( Deutshe )

Futures can be traded in currency, share/stock, stock index, Individuals, companies, and even market doing commercial Bankss can merchandise on the floor of the hereafters exchange.

Barter

A Swap may be defined as swap or exchange a barter is an understanding between two or more parties to interchange watercourse of hard currency flows over a period of clip in the hereafter. ( Vashishtha,2010:20 ) Swap can besides be “ to jump “ or give something in exchange. ]

The different party that agrees to trade are known as counter parties. The two most normally used barters are involvement rate barters and currency barter. Barters are most coveted to those who are puting or borrowing in foreign currency. More significantly Swaps are most popular with Bankss because of the hazard involved in future contracts.

COMMODITY MARKET

Commodities are physical goods like natural stuffs and they are mensurable in size, Commodity markets is a topographic point where this natural stuffs and good can be exchanged. These natural trade goods are bought and sold at exchanges or over the counter markets.

Commodity markets can be divided into: Markets for energy, Metallic elements and Minerals, Agricultural trade goods, and other assorted trade goods ( Clark,2002:514 ) Data as respect trade goods can be gotten from informations sellers like Bloomberg, Reuters, to advert a few and besides from trade good exchanges websites for illustration www.cbot.com, www.lme.co.uk..

Some of the most of import exchanges are Chicago Board of Trade, Chicago Mercantile Exchange, NYMEX/COMEX, London International Financial Futures Exchange, London Metal Exchange and the international Petroleum Exchange.

The major market participants for trade good market are manufacturers, the industrial terminal consumers and the trading companies that bring purchasers and Sellerss together. Besides, they exists fiscal companies such as Bankss, agents and insurance companies and distribution/transportation service suppliers that balance the attempt of the participants.

INTERNATIONAL ORGANISATIONS REGULATING THE FINANCIAL SYSTEM

The international economic and fiscal environment we have today can be described as been comprised of a figure of autonomous state provinces with distinguishable internal administration constructions viing against one another harmonizing to a set of guidelines determined by many-sided dialogue and monitored by the moral authorization of the international organisation created for that intent ( Clark, 2002 ) . The whole fiscal system plays a really of import and a important function in the well operation of the economic stableness of the universe.

Several organic structures have been created to ease international trade which includes International Monetary Fund ( IMF ) , World Bank, World Trade Organisation ( WHO ) , European Community now European Union ( EU ) , General Agreement on Tariffs and Trade ( GATT ) .

The International Monetary Fund is the Multilateral Organisation charged with promoting planetary fiscal stableness.As such behaviors surveillance, lends to states with balance of payment troubles, to supply impermanent fiscal support policies aimed at rectifying the implicit in jobs and provides proficient aid and preparation. ( IMF PROFILE )

The IMF was created to supervise exchange rate alterations and to function as modesty base for states with balance of payment shortage. The IMF was given the authorization to roll up and administer militias in order to advance international pecuniary cooperation, smooth the procedure of growing of trade, promote exchange rate stableness, set up a system of many-sided payment and make a modesty base. ( Clark,2002 )

International Monetary Fund ( IMF ) purpose is to see that its members run their exchange rate and balance of payments in an orderly manner. IMF was created to administrate a codification of just exchange patterns and supply compensatory fiscal aid to member states.

The World Bank officially known as International bank for Reconstruction and Development ) is an establishment whose aim is the publicity, Worldwide, of sustainable economic investing and poorness decrease It pursues this nonsubjective through loaning, through the production of research and economic analysis and through proviso of policies advise and giving proficient aid.

RISKS OF THE INTERNATIONAL CAPITAL MARKET

Merely like every other thing in the universe, the globalisation of the market besides has its ain disadvantages. An international market means the coming together of all factors of production which includes trade goods capital and labor. Harmonizing to Adam Smith, the jurisprudence of one monetary value says for an international market to be efficient, all investors should be able to acquire similar plus for the same monetary value anyplace in the universe. This jurisprudence is fulfilled to an extent already with respects to the monetary values of natural resources and foreign exchange. However, there are still some abnormalities.

Exchange rate risk- this is arguably the most obvious hazard of the international market. Most times companies finally pay far more than they bargained for due to the exchange rate. In the universe today, international minutess and colonies are carried out at separate times, therefore companies know how much they are expected to pay in the hereafter by gauging future topographic point rate nevertheless the expected hereafter rate does non turn out to be the existent exchange rate. ( D.O Cushman, Effects of exchange rate hazard on international trade ) Besides most MNCs are at the hazard of losing a portion of their net incomes went repaying monies cross boundary lines due to the instability of exchange rates.

Labour- “ the structural issue confronting developed states such as US and UK is that the sum of high quality, high productiveness labour that will be mobilized over the following decennary in the emerging markets ( Brazil, Russia, India and China ) is likely to be in the 100s of 1000000s and this would displace occupations that would otherwise be created in the developed markets hence taking to unemployment ” ( Bryan, L, Globalization critical instabilities ) . Bryan fears that an international market would finally take to high unemployment in developed states because companies would be able to outsource high quality labour at a cheaper rate. Due to discrepancy in the monetary value of labor, companies might even travel their whole operation cross boundary lines thereby increasing the unemployment rate in the developed states. Bryan ‘s fright is nevertheless fast going a world, because in the universe today most fabrication companies are traveling the operations to topographic points like China and services are besides being imported from topographic points like India.

Other hazards include transit hazards, where the companies incur freight hazard in reassigning trade goods cross boundary line and besides the hazard of corporate duty. If the markets become excessively incorporate, the autumn of one state ‘s market may trip the autumn of the remainder.