For most securities and loans that circulate in the world’s money markets, interest rates as well as maturities are set in advance, which is especially important for buyers of financial requirements of the money market who want to invest their funds only for a short time and with minimal risk.
In the short-term capital markets, individuals and legal entities, other organizations can borrow the funds they need for a short time or invest temporarily free financial resources in order to generate income. Business units with a temporary surplus of funds can direct them to the money markets and thus receive interest income. At the same time, economic units wishing to borrow for a short period of time can take out a loan or issue their own securities.
Since funds entering the money market in the form of borrowings, loans or investments are easily available for operations, only reliable financial requirements with a high degree of liquidity are used in short-term capital markets. All claims in these markets have a maturity of no more than 1 year and are issued by borrowers with a high rating, which reduces interest rate risk and the risk of default. In addition, most issuers of financial obligations of money markets have a good reputation, which allows them to resell their securities with a high degree of liquidity. Finally, the bulk of transactions in short-term capital markets are carried out for fairly large amounts (from 1 to 10 million US dollars), so the transaction costs for them are relatively low in comparison with the interest income of lenders or the fees for using the loan by borrowers. Most money market participants represent economic units that seek to quickly lend or, conversely, borrow large sums of money for short periods of time.
Thus, among the main participants of the global financial market are commercial, central banks, joint-stock companies, other participants (brokers, dealers, guarantors of securities placement (underwriters) and exchange specialists). The main feature of the subjects of the world financial market is the possibility of simultaneous combination of various functions: issuers, sellers, buyers, speculators, traders, etc. At the same time, often the same participants function in different sectors of the world financial market, which determines their corresponding varieties.
All participants of the global financial market can be conditionally distinguished according to the following main criteria, depending on:
the nature of the participation of entities in operations; the purpose and motives of the participation of actors in operations; organization of the activities of entities in the operations of the global financial market.
According to the nature of participation in operations, the subjects (participants) of the global financial market are divided into direct and indirect. Direct participants are entities of various sectors of the global financial market that carry out operations for the purchase and sale of relevant financial instruments on behalf of their clients or at their own expense. Indirect participants are those subjects of the global financial market that resort to the services of direct participants.
In terms of the goals of the participants, there are hedgers and speculators. Hedgers are persons who carry out operations to minimize financial risks. Speculators, on the other hand, make transactions solely for the purpose of maximizing profits by exploiting imbalances in their respective sectors of the global financial market. The main sphere of activity of speculators is the currency and stock markets, where speculators seek to predict price fluctuations in order to make a profit through the purchase and sale of various financial instruments (assets). In turn, speculators are divided into traders and arbitrageurs. Traders use the fluctuation of the rate of one or more contracts by buying them in anticipation of an increase in price and selling when it decreases. At the same time, the costs of performing such operations are relatively small compared to the total amount of the transaction. Costs in this case are, on the one hand, a pledge, on the other – a price, on the third – a percentage for the use of a certain financial asset. Such operations of financial traders are called financial (credit) leverage operations.
Arbitrageurs are, as a rule, exchange speculators who make a profit based on the exchange rate difference of a financial instrument either in time or in space. At the same time, carrying out such operations, the arbitrageur catches the difference in prices, buying cheaper and selling more expensively the same financial asset or instrument with almost no risk.
According to the organization of the activities of the global financial market, its subjects are divided into financial brokers and investment banks and companies.
Financial brokers perform intermediary (agency) functions at the expense and on behalf of the client on the basis of a commission agreement or order. Brokers are represented by specialized firms that have the status of legal entities. In the West, they are either private firms or joint-stock companies. Their authorized capital is small, but these firms seek to increase the growth of own and borrowed capital, to expand the number of their clients.
According to its structure, the brokerage firm consists of a directorate, an administrative group (secretariat, accounting), an advisory department, a securities trading department, an information and technical department, etc. The number of such a company ranges from 15 to 20 people.
The scope of the brokerage firm’s activities includes the provision of consulting services, placement of securities in the primary and secondary markets, the creation and management of investment funds, etc. In addition, brokers usually provide a number of special services: in the field of bank credit, insurance of transactions, including exchange ones. At the same time, it is possible that the brokerage firm carries out operations at its own expense, providing the client with a loan, and assumes all the risk associated with transactions made with its participation. In this case, the brokerage firm goes beyond purely intermediary functions and approaches the nature of its activities to dealer firms, which increases its income by the amount of risk payments. Dealers of the global financial market are the same brokers, but unlike the latter, they invest and risk their own capital when concluding transactions.
A significant role in the capital market is played by investment banks and companies that act not only as investors and issuers, but also as organizers. These organizations are constantly increasing the staff of traders, which is primarily due to the aggravation of competition in the global financial market.
Participants of the global financial market can also be combined into separate groups: commercial banks, central banks, joint-stock companies.
Commercial banks constitute the most important group of participants, buying and selling almost all financial obligations addressed to them. Banks are continuously adjusting their liquidity due to the short-term nature of their own borrowings, the wide range of requirements for the parameters of loans provided and the need to maintain their reserves at the level established by local legislation. During periods of economic recovery, banks usually face the problem of reserve deficits due to the growing demand for loans. To replenish reserves, they can sell securities (for example, short-term Treasury bills) from their investment portfolio, commercial papers and transferable certificates of deposit, as well as borrow funds from the Eurodollar market or from other banks. During recessions (economic downturns), the main problem of banks is the availability of excess investment resources. Therefore, in such conditions, banks begin to create secondary reserves through the purchase of state securities.
Central banks occupy a special position in the global financial market, as they regulate the formation of the national money supply. With the help of monetary policy, central banks regulate the amount of reserves of banks that are part of the country’s banking system.
In a special category of participants in the global financial market, joint-stock companies are distinguished. For many firms, the main flow of cash receipts is the payment of receivables formed after the sale of manufactured products. At the same time, their expenses consist of tax payments, salary payments, purchase of materials and services necessary for current activities.
Since the timing of the receipt and expenditure of funds is independent of each other, companies often experience difficulties due to cash shortages. The key point in this case is to establish reliable relations with a commercial bank. The company usually keeps part of the cash in the bank for current expenses, the other part – as compensatory balances on the deposit account to pay for banking services. Since the amount of payment for banking services is set on a monthly basis, the firm can use part of it as a reserve for short-term borrowing of small cash amounts. To meet larger and longer-term cash needs, the firm may arrange a loan with the bank. If the company is large enough, then it may be more profitable for it to obtain the necessary funds through the issuance of commercial papers.
Among the instruments of the global short-term capital market are bank treasury and commercial bills, bank acceptances, Eurobonds, certificates of deposit, repo agreements, bonds, shares. Bills of exchange are issued for a period of 3 to 6 months. Certificates of deposit are a negotiable monetary document issued by commercial banks against funds deposited in them with a certain period of validity and certifying the right of the depositor to receive the deposit and interest. Eurobanks issue certificates of deposit from 25 thousand dollars and above for a period of 30 days to 3 to 5 years and place them among banks and individuals who can sell them on the secondary market. Such certificates are sold by brokers or transferred by endorsement. By stimulating the inflow of deposits in Eurobanks, they contribute to the expansion of the European market.
Bank acceptance is, in fact, an urgent draft issued to the bank and accepted by it in accordance with the established procedure. An urgent draft implies an order to pay a certain amount of money to its bearer by a certain date. In case of acceptance of the draft, the bank assumes an unconditional obligation to pay its owner the nominal value of the draft by the maturity date. Such a transfer of payment obligations to the bank with confirmation of their unconditional fulfillment allows bank acceptances to act as a financial instrument of the money market.
Most bank acceptances arise as a result of international export-import transactions, the participants of which are located in different countries.
A Eurobond is a bond issued by a borrower through the International Banking Consortium and denominated in euro currencies. It is hosted simultaneously in several countries. Eurobonds have a number of advantages over foreign bonds. They are not subject to national rules for conducting operations with securities, the interest on Eurobond coupons is not subject to withholding tax, they provide more opportunities for making a profit and minimizing currency risk. From euro currencies for the bond, you can issue a favorable portfolio of Eurobonds. No special registration is required for Eurobond holders. In turn, the advantages of foreign bonds are that they are less exposed to bankruptcy risk, since a significant part of them is issued by the state.
Repo agreements are agreements on the sale of a short-term security with the condition of its repurchase at a predetermined date and price. Various well-known financial instruments can act as collateral. Redemption agreements are usually concluded for a very short period: from one to several days. The minimum volume of such a transaction is $ 1 million.
Instruments of capital market operations are securities, mainly bonds of various types (with a fixed or floating interest rate; convertible into shares; bonds with which you can buy other bonds or shares).
New financial instruments arose in the 80s in order to attract more customers and increase profits. These instruments are traded in the relevant financial markets, for example, such as the financial futures market, the financial options market and the “swap”, the forward market, the financial derivatives market. New financial instruments are intended mainly for insuring currency risk of participants in international economic relations, as well as for speculative operations.
Forward markets allow you to set the future rate of the transaction in advance. In the forward market, each economic unit concludes an agreement with its counterparty on the exchange of one type of goods for another at a predetermined price at a predetermined point in time. Usually, both parties to the contract are bound by the terms of the contract and cannot change its terms unilaterally until its execution. In addition, an individual party to a forward contract assumes the potential risk of insolvency of its counterparty before or at the time of the date of performance of obligations under the contract.
Operations in futures markets are more detailed than in forward markets. Futures contracts differ from forward contracts in the following parameters:
Futures require delivery of specific securities, commodities or currencies either by a fixed date or after a certain period of time in the future. The futures contract market, unlike the forward contract market, is standardized in terms of transaction volumes, terms of their execution and the range of goods. when making a transaction in the futures market, both parties establish direct contact not with each other, but with the futures exchange. each party to a transaction made in the futures market may liquidate its obligations to buy or sell a commodity (asset) by buying or selling an equivalent futures concluded against an early one. futures market rules require continuous adjustment of the value of all contracts to current prices. the rules of the futures markets require all contract holders to make a guarantee contribution or margin in order to insure against possible daily price fluctuations.
Forward contracts are riskier, as one of the parties may refuse to fulfill its obligations if a sharp price change occurs on the eve of the delivery day.
In recent years, a new form of direct exchange of contracts or swaps has emerged. Swap transactions are the sale of a financial asset at the spot rate with its simultaneous purchase for a period or vice versa, the purchase of a financial asset at the spot rate with its simultaneous sale for a period. The swap market is often used to offset interest rate risk by exchanging fixed-rate payments for variable interest rate payments. In addition, swaps reduce the risk associated with the future movement of foreign exchange flows (for example, the income that the firm expects to receive from a foreign branch or from foreign investments) or the risk of different rates of change in interest rates in the domestic and foreign markets.