Operating Mechanism of Cross-border Capital Flows, Logic of International Asset Allocation and Practical Path of Financial Derivatives

Abstract

Accelerated globalisation of finance has brought closer the world's cross-border capital flows, international asset allocation and financial derivatives in a large-scale system. Systematically explore the operating mechanism of cross-border capital flows and the underlying logic for international asset allocation in this paper, and finally conduct an analysis of the application of financial derivatives. Theoretically, this paper investigates the push-pull mechanism driving global capital flows and examines how the global financial cycle challenges the traditional Mundell-Fleming 'Impossible Trinity'. In terms of asset allocation, the study analyzes the reasons for international portfolio diversification and contrasts the theoretical mean-variance optimization approach with the empirical phenomenon of 'home bias'. To connect theory with practice, research is also conducted on how multinational corporations and institutional investors use foreign-currency derivatives and interest-rate swaps to hedge against systemic exchange-rate and credit risks in cross-border investments. Based on the above research, although the objective of expanding overseas is to improve risk-adjusted returns, given the volatility of the global financial cycle, derivatives must be used carefully and dynamically to ensure the safety of funds and stability of assets.