The global financial system is an intricate network of various financial markets that play crucial roles in facilitating economic activities worldwide. Among these markets are the capital market, which encompasses both the share market and the bond market. In addition to the capital market, there’s the money market, the foreign exchange (Forex) market, and the market for derivatives. Each of these markets serves distinct purposes, catering to different financial needs and instruments.
The capital market serves as a platform for long-term investment. It’s where companies issue stocks and bonds to raise capital for their operations or expansion. Investors participate in the capital market by purchasing these securities, thereby providing funds to companies in exchange for potential returns through dividends or interest payments. The money market, on the other hand, deals with short-term borrowing and lending, typically involving highly liquid and low-risk instruments such as treasury bills and commercial paper.
Meanwhile, the foreign exchange (Forex) market facilitates the exchange of currencies between different countries. It’s where individuals, corporations, and governments engage in buying and selling currencies to conduct international trade and investment activities. Lastly, the market for derivatives involves financial contracts whose value is derived from an underlying asset, index, or rate. This market provides opportunities for investors to hedge risks, speculate on price movements, and manage exposure to various financial variables.
(Response: The global financial system comprises the capital market, money market, foreign exchange (Forex) market, and the market for derivatives.)