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Globalization of Financial Markets.docx

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Western University
Political Science
Political Science 2211E
Adam Harmes

Globalization of Financial Markets  Investors move money abroad to escape stagflation  Collapse of Bretton Woods capital controls/fixed exchange rates  Massive growth in capital mobility Mundell-Fleming thesis  Today we do have capital mobility which is one of the reasons why we have economic globalization  Main reason for giving up fixed exchange rates for discretion in monetary policy because they want to be able to lower/raise interest rates to stimulate the economy to get them out of recessions  Canada has a floating exchange rate  During the era prior to the great depression fixed exchange rates and capital mobility were dominant  Bretton Woods Era : fixed exchange rates and discretion in monetary policy  Contemporary Globalization Era: capital mobility and discretion in monetary policy, Eurosom is the only exception New Financial Instruments  Shift from bank loans to securities o i.e. to stocks and bonds  Securities are more liquid  Increased speed of financial systems  Growth of Derivatives o "specialized financial contracts which are derived from an underlying asset" o Options and futures Options  Contract which gives the holder the option of buying a particular asset in the future at a pre- set price o Stock option  CEO given stock option when stock was trading at 10$/share  If stock goes higher, CEO can still buy stock at $10/share  Creates incentive to increase share price Futures  Contract to buy or sell an underlying asset at a future date  Allows someone to sell an asset which they don’t yet own Shot-Selling (aka Shorting)  Profit form falling asset prices  Selling high first then buying low  NOW o Stock at $10/share o Sell 3 months futures
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