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1) Explain the function of global capital market
Before we discuss the function of global capital market, we`d better consider about generic capital market first. Basically, the generic capital market is the fundamental and essential factor to support such a modern economy. To do business or manufacture products or manage a company, we have to depend on generic capital market to maintain business and make a profit of company. It`s impossible to manage company or business without support from generic capital market. Actually, commertial banks and investment banks play a role to connect both by different way. A capital market brings together those who want to invest money and those who want to borrow money. Those who want to invest money include corporations with surplus cash individuals, and non bank financial institutions. Those who borrow money include individuals, companies and government.
why do we need a global capital market? Because domestic capital markets are not sufficient. A global capital market benefits both borrowers and investors. It benefits borrowers by increasing the supply of funds avaliable for borrowing and by lowering the cost of capital. It benefits investors by providing a wider range of investment opportunities, thereby allowing them to build portfolio of international investments that diversify their risks. To be wide extend, global capital market gives borrowers and investors to more opportunities and less risk in business.
)Describe the nature of the foreign exchange market
First of all, we go through the concept of the foreign capital market. The foreign exchange market is a market for converting the currency of one country into that of another country. And also, an exchange rate is simply the rate at which one currency is converted into another. Without the foreign exchange market, international trade and international investment on the scale that we see today would be impossible; companies would have to resort to barter. The foreign exchange market is the lubricant that enables companies based in countries that use different currencies to trade with each other.
Obviously, the international trade and investment have their risks because future exchange rates cannot be perfectly predicted. Some of these risks can be insured against by using instruments offerd by the foreign exchange market, such as the forward exchange contracts. Commonly refering to foreign exchange risk, it is provide some insurance against the risks that arise from changes in exchange rates even though it cannot provide complete insurance.
To be summary, the foreign exchange market is critical and works a positive role to facilitate for international trade and investment.
)Discuss the implications for international business
There are a number of clear implications for international business. First, International businesses understand the influence of exchange rates on the profitability of trade and investment deals. Adverse changes in exchange rates can make apparently profitable deals unprofitable. The risk introduced into international business transactions by changes in exchange rates is referred to as foreign exchange risk. Means of hedging against foreign exchange risk are avaliable. Forward exchange rates and currency swaps allow companies to insure against this risk.
Second, International business must also understand the forces that determine exchange rates. It a company wants to know how the value of a particular currency is likely to change over the long term on the foreign exchange market. It should look closely at those economic fundamentals that appear to predict long-term exchange rate movements(i.e.,the growth in a company`s money supply,it`s inflation rate,and it`s nominal interest rates). That kinds of fundamentals are sort of the forces that determine exchange rates.
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