International Trade Finance and Investment: A Study of Financial Markets, Capital Allocation, and the Economy of UK

International Trade
Finance and
Investment

Table of Contents
INTRODUCTION ..........................................................................................................................1
MAIN BODY...................................................................................................................................1
Background study of financial markets.......................................................................................1
Capital allocation inside domestic economy...............................................................................3
Capital allocation in international market...................................................................................4
Economy of UK..........................................................................................................................7
Challenges faced by UK due to industrialisation and trade policies...........................................9
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................11

INTRODUCTION
Trade finance refers to funding of global trade flows. It exists to bring down the risks
involved in global trade activities. There are three type of risks associated with it, which are
payment risk, country risk and corporate risk. Payment risk for exporter is that will they receive
payment on time and for importer is that will they get the goods they want. In country risk,
various risks are associated like political risk, exchange risk and sovereign risk. In corporate risk,
the risk is associated with the company. There are two players involved in these dealings, that are
exporters and importers. Exporters are those who need payment for their goods or services
whereas importers are those who need to pay for goods or services. Users of trade finance are
producers, manufacturers, importers, traders and exporters. International investment refers to
investing in other countries by the investors in order to diversify the risks. These investments are
done in financial instruments like shares, debentures, mutual funds and many other instruments.
They can be classified as government funds, cross border loans, foreign portfolio investment and
foreign direct investment (Narayan and Sharma, 2018).
MAIN BODY
Background study of financial markets
Financial markets refers to the place where purchasing and selling of financial securities
and assets takes place. It acts as a broker between the capitalist and the market by deploying
capital between them. It helps in setting the price of securities depending upon the demand and
supply of securities. The activities of financial market are fund management, private wealth
management and banking related activities. History of financial market can be traced back to
four hundred years ago which can be broken down into five eras.
The first era was from 1600 to 1815 where government bonds and monopolies of
government were funded by financial market. In this era, limited number of securities were
traded (Nelson and et.al., 2018). Also, after the war from 1719-1720, bonds were more preferred
than equities.
The second era was known for globalization and it lasted from 1815-1914. In this era,
investors were getting opportunity to invest in several companies so that capital gains and
dividends could be generated. Also, transportation was the main reason of globalization as the
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goods were being traded globally. This era came to an end, as the stock market were closed
down on July 13, 1914 due to world war one.
The third era was of great reversal and it lasted from 1915-1980. In this era, the effort to
restore globalization failed, due to which financial markets operated only on national platform
instead of international platform. World war two also happened in this era, due to which Europe
nationalized lots of its industries and US also did the same.
The fourth era started in 1981 and this era is known for return of globalization. This era
greatly benefited Asian market because exports were high from Asian market and it was
reflected in global market capitalization. Privatization was also high in this era. When this era
will come to end will only depend upon technology. As the fifth era, will be known for
technology. This era will begin when there will a single market and that will be opened for 24
hours.
The most favourable country for any investor to invest is UK as it is the most dynamic,
progressive and knowledgeable centre of finance in the world. The investment products that UK
offers are securities, derivatives, hedge funds, insurance, private equity and venture capital.
VARIOUS TYPES OF FINANCIAL MARKETS ARE DISCUSSED BELOW:
 Money Market- In this market, lending and borrowing of loans having maturity of less
than one year takes place. Participants of this market are corporates, financial institutions
and banks. The examples of money market are commercial papers, bills of exchange,
treasury bills and many more. Also lots of money is involved in this market (Sampson,
2017).
 Capital Market- Here, lending and borrowing of money is done for long term, for
trading of stocks and bonds. This market is of two types i.e. primary and secondary. In
the primary market, there are issue of shares and bonds by the company whereas in
secondary market these shares are sold by the investors at a higher price so that they can
earn lots of profit.
 Derivatives Market- In this market, trading is done of futures, options, swaps and of
forward contracts. The trading in this market is done either over the counter or via in
exchange traded derivatives. The value of the derivatives are derived from the assets that
are underlying and they are used to manage the risk that is financial in nature due to
changes in the prices of these stocks. Over the counter market refers to trading of
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