Detailed Guide On International Money Market & Features

international money market

The International Monetary Market (IMM) was established in December 1971 and formally implemented in May 1972, although its origins may be traced back to the collapse of Bretton Woods with the 1971 Smithsonian Agreement and Nixon’s suspension of the US dollar’s convertibility to gold.

But what is International Money Market, and how does it regulates? We will see everything in this article.

International Money Market Definition

The International Money Market is a market in which foreign currency transactions are conducted between various central banks of nations. The money borrowed or lent by governments or major financial organizations is one of the core processes of the International Money Market.

The market’s participants are not people; rather, they are large financial entities. International Money Market investments are less hazardous, and as a result, the returns on investment are lower. Money market mutual funds or treasury bills are the finest and most popular ways to invest in the International Money Market.

Daily, the International Money Market handles massive amounts of foreign currency transactions. Regularly, the International Money Market monitors the exchange rates between currency pairings. Currency bands, fixed exchange rates, exchange rate regimes, linked exchange rates, and floating exchange rates are typical indicators that control the International Money Market subtly.

This was what does IMM mean.

History Of International Money Market

The International Monetary Market (IMM) was founded in May 1972 after being developed in December 1971. The Chicago Mercantile Exchange established the IMM as a distinct company (CME).

The initial futures transactions comprised trading of currencies such as the British Pound, Swiss Franc, German Deutschmark, Canadian Dollar, Japanese Yen, and French Franc against the US dollar. Later added were the currencies of different countries.

Drawbacks Of Currency Feature

international money market

The IMM’s task was to link the prices of IMM foreign exchange contracts to the interbank market, which was the dominant method of currency trading in the 1970s. To address these issues, clearing member businesses were permitted to operate as arbitrageurs between central banks and the IMM, allowing for orderly markets between the bid and ask spreads.

These early achievements sparked intense rivalry for additional futures products. It had been granted the official authority to trade US 30-year bond futures, whilst the IMM had been granted the official license to trade Eurodollar contracts. Eurodollars subsequently evolved into the “Eurocurrency Market,” which was primarily utilized by the Organization of Petroleum Exporting Countries (OPEC).

OPEC demanded that oil be paid for in US currency. This cash settlement component subsequently led to the introduction of index futures known as the International Money Market Index.

International Money Market Volatility In Funds

Market volatility is not a concern for market players who own bonds, collect coupons, and keep them until maturity. They have predetermined principal and interest rates. Participants who exchange bonds before maturity, on the other hand, incur several hazards, the most prominent of which are fluctuations in interest rates.

Market volatility is typically influenced by economic indicators and their correlation with real facts. Following the announcement of “in-line” statistics, there is little price change. When an economic release contradicts the conventional opinion, the market experiences a fast price movement. Volatility is exacerbated by uncertainty.

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Serving Bodies Of International Money Market

The International Money Market is primarily served by:

  • Citigroup
  • Deutsche Bank
  • HSBC
  • Barclays Capital
  • UBS AG
  • Royal Bank of Scotland
  • Bank of America
  • Goldman Sachs
  • Merrill Lynch
  • JP Morgan Chase

International Money Market Rates

The worldwide monetary crises of the 1960s and 1970s generated serious concerns about the intrinsic stability of the Bretton Woods Agreement-based monetary system. Many economists today think that the combination of autonomous national monetary systems, fixed exchange rates, and unrestrained international capital flows is inherently unstable.

For the “dilemma” situation of a country with a balance-of-payments deficit and high unemployment, the instability principle might be stated. Low interest rates encourage short-term arbitrage money to flow into nations with high-interest rates, with arbitrageurs shielding themselves from exchange loss by selling foreign exchange forward while buying it spot.

Under flexible exchange rates, the resulting pattern of forwarding rates would be similar to that predicted by the interest-parity theory: currencies with high-interest rates would be discounted forward, while currencies with low-interest rates would be rewarded, and covered interest differentials would tend to disappear.

Interest arbitrage would be self-limiting in its operation. Simultaneously, speculators with differing views on projected future spot exchange rates would likely belong forward in high-interest-rate currencies and short ahead in low-interest-rate currencies, participating in stabilizing speculation.

In contrast, under a fixed exchange rate system, the loss of reserves suggested by the movement of capital out of nations with low-interest rates might cast doubt on the authorities’ capacity to maintain the pegged rate. The well-known “one-way bet” on devaluation substitutes scattered expectations with the politician’s nightmare — a bear assault by speculators and business people attempting to dodge the impacts of devaluation.

The currency of the low-interest nation may move to a discount forward, rather than a premium, creating an incentive for more arbitrage movements toward high-interest countries and hastening reserve depletion.

Major Participants In The International Money Market

international money market

The International Money Market primarily concentrates on:

  • Institutional investors
  • Governments
  • Traders
  • Individuals

But what are the major participants in the International Money Market? The main participants in the International Money Market are:

1. Commercial Banks Or Money Makers

Commercial banks often take on the role of supporting the country’s economy by carrying over foreign money from one period to the next to fulfill the country’s future needs. They also make short sales of foreign currency to fulfill the requirement of companies to make payments (a promise to sell or sell the foreign currency without any genuine capacity to sell through or borrow the needed currency from others).

Later, to bring the position back into balance, they quote the rates for purchasing and selling foreign currency correspondingly because they are purchasing foreign currency from the consumer, the rate they quote for purchasing foreign currency is officially known as the Bid rate. When they sell foreign currency to customers, the rate they quote is known as the Ask rate.

2. Foreign Exchange Brokers

Unlike market makers, FE brokers do not purchase or sell foreign currency on their accounts. They act as a go-between for two parties to meet their respective demands. They only make money in the form of brokerage costs since they act as a bridge between buyers and sellers of foreign currency.

3. Central Banks Or Reserve Bank Of India

To safeguard the financial soundness and stability of the country’s balance of payments, domestic money supply, interest rates, and inflation, the RBI intervenes in foreign currency markets to maintain price disequilibrium in foreign exchange conversion.

4. Corporates Or Entrepreneurs

Corporates participate in the FE market to meet their demand for foreign currency payment for imports of products, commodities, and services. On the other hand, they must convert foreign money into domestic currency to export goods, commodities, and services. Conversion is also required for transactions in global financial markets, such as loan disbursement, loan repayment, receipt and payment of yearly charges, and so forth.

So, now you know the major participants of Money Market International. So, let’s move ahead, and shed light on major instruments of the International Money Market.

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Major Instruments Of International Money Market

Following are the major instruments of the International Money Market:

international money market

1. Currency Features

Currency futures are the most popular financial product traded on the IMM Exchange. These are futures contracts that are used to hedge one currency against another. Currency futures are frequently beneficial in reducing the risk associated with changes in the exchange rate.

These contracts forecast a price in one currency, with the purchase or sale taking place in another currency at a later period. The rate of these futures contracts is determined by the current spot rate of the currency (for example, USD/EUR). This financial instrument was the first to be used in the operation of the International Monetary Market.

2. Interest Rate Derivatives

Rate of Interest Derivatives is the IMM Exchange’s second most popular product. It is a financial instrument that is directly tied to an interest rate or rates or an asset that bears interest. This instrument is beneficial in reducing the risk associated with changes in interest rates.

It is a hedging mechanism used to safeguard the interests of investors, banks, corporations, people, and others. Derivatives can take the form of swaps, futures contracts, or even options.

3. Other Instruments Of International Money Market Funds

In addition to currency futures and interest rate derivatives, additional products are traded in the International Monetary Market. They are:

LIBOR is an abbreviation for London Interbank Offer Rate. In the international banking business, this is the rate at which all international banks lend money to one another. IMM is concerned with LIBOR and LIBOR-based securities.

Similarly, futures and options contracts based on the US Consumer Price Index (CPI) are traded in IMM. The IMM also facilitates the trading of 10-year Japanese bonds. These financial instruments are not exhaustive.

Criticism Of International Money Market

  • Economic and political factors have a direct impact on the instruments traded on the International Monetary Market. These external variables represent a significant danger to this industry.
  • Other changes, such as changes in rules and regulations, may also have a detrimental influence. The IMM is required to follow regulatory authorities.
  • The International Monetary Market is a market for derivatives. As a result, the demand and supply of such goods influence this market.
  • The IMM is hampered by changes in the underlying sector or the financial market.
  • Other factors like commodity price levels, foreign exchange rates, currency supply-demand, interest rate fluctuations, and so on have a direct influence on the instruments in this market.

Concluding The Big Picture Of International Money Market

The International Monetary Market (IMM) is the world’s largest futures exchange. IMM provided a venue for all investors to trade in the derivatives market. Despite a few concerns about the sector and the exchange, IMM plays a critical role in the finance industry.

We hope we cleared everything related to International Money Market, and this article was helpful to you!

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