Any sophisticated economy has a capital market which allows individuals and firms to exchange money for promises to pay in future. The growing importance of International trade is accompanied by growth in International capital markets. It expands the choices available to an investors to invest his money as now he would not be restricted to choose amongst opportunities available only in domestic economy. Countries also invest their surplus fund in government debt of other economies. For example China holds $2 trillion reserves in U.S Debt, Oil rich Middle East countries generally hold their earnings with banks in UK.
One of the risks associated with International capital market is the Exchange rate risk. The Effective rate of interest may be different from what it seems because of variation in exchange rate involved.
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