McGraw-Hill/Irwin

International Business

9e By Charles W.L. Hill

Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 12

The Global Capital Market

Why Do We Have Capital Markets?

 Capital markets bring together investors and borrowers 

investors

- corporations with surplus cash, individuals, and non-bank financial institutions 

borrowers

- individuals, companies, and governments 

markets makers

- the financial service companies that connect investors and borrowers, either directly (investment banks) or indirectly (commercial banks)  capital market loans can be equity or debt 12-3

Who Are The Main Players in Capital Markets?

The Main Players in a Generic Capital Market 12-4

What Makes The Global Capital Market Attractive?

 Today’s capital markets are highly interconnected and facilitate the free flow of money around the world  Borrowers benefit from the additional supply of funds global capital markets provide  lowers the cost of capital  Investors benefit from the wider range of investment opportunities  diversify portfolios and lower risk 12-5

How Have Global Capital Markets Changed Since 1990?

 Global capital markets have grown rapidly  the stock of cross-border bank loans was just $3,600 billion in 1990, but $32,430 in 2010  the international bond market has grown from $3,515 billion in 1997 to $26,613 in 2010  international equity offerings were just $18 billion in 1990, but grew to $750 billion in 2009  The growth in the markets is a result of 1.

Advances in information technology 2.

Deregulation by governments 12-6

What Are The Risks Of The Global Capital Markets?

 Question:  Could deregulation of capital markets and fewer controls on cross-border capital flows make nations more vulnerable to the effects of speculative capital flows?

can have a destabilizing effect on economies  2008-2009 global financial crisis  Speculative capital flows may be the result of inaccurate information about investment opportunities  if global capital markets continue to grow, better quality information is likely to be available from financial intermediaries 12-7

What Is A Eurocurrency?

 A eurocurrency is any currency banked outside its country of origin  about two-thirds of all eurocurrencies are Eurodollars  It is an important source of low-cost funds for international companies  The market began in the 1950s  Eastern bloc countries feared that the U.S. might seize their dollars so, they deposited them in Europe  additional dollar deposits came from Western European central banks and companies that exported to the U.S. 12-8

Why Has The Eurocurrency Market Grown?

 In 1957, the market surged again after changes in British laws  London became the leading center of the market and still hold this position  In the 1960s, the market grew once again  Changes in regulations discouraged U.S. banks from lending to non-U.S. residents  would-be borrowers of dollars outside the U.S. turned to the euromarket as a source of dollars 12-9

Why Has The Eurocurrency Market Grown?

 The next big increase came after the 1973-74 and 1979-80 oil price increases  Arab members of OPEC accumulated huge amounts of dollars  avoided potential confiscation of their dollars by the U.S. by depositing them in banks in London 12-10

What Makes The Eurocurrency Market Attractive?

 The eurocurrency market is attractive because it is not regulated by the government  banks can offer higher interest rates on eurocurrency deposits and charge lower interest rates to eurocurrency borrowers  The spread between the eurocurrency deposit and lending rates is less than the spread between the domestic deposit and lending rates  gives eurocurrency banks a competitive edge over domestic banks 12-11

What Makes The Eurocurrency Market Attractive?

Interest Rate Spreads in Domestic and Eurocurrency Markets 12-12

What Makes The Eurocurrency Market Unattractive?

 1.

2.

The eurocurrency market has two significant drawbacks:  Because the eurocurrency market is unregulated, there is a higher risk that bank failure could cause depositors to lose funds can avoid this risk by accepting a lower return on a home-country deposit  Companies borrowing eurocurrencies can be exposed to foreign exchange risk can minimize this risk through forward market hedges 12-13



What Is The Global Bond Market?

Bonds are an important means of financing for many companies  the most common bond is a fixed rate which gives investors fixed cash payoffs   The global bond market grew rapidly during the 1980s and 1990s and continues to grow today There are two types of international bonds 1.

2.

Foreign bonds Eurobonds 12-14

 1.

2.

3.

What Makes The Eurobond Market Attractive?

The eurobond market is attractive because It lacks regulatory interference  since companies do not have to adhere to strict regulations, the cost of issuing bonds is lower It has less stringent disclosure requirements than domestic bond markets  it can be cheaper and less time consuming to offer eurobonds than dollar-denominated bonds It is more favorable from a tax perspective  eurobonds can be sold directly to foreign investors 12-15



What Is The Global Equity Market?

The global equity market allows firms to 1.

Attract capital from international investors  many investors buy foreign equities to diversify their portfolios 2.

List their stock on multiple exchanges  this type of trend may result in an internationalization of corporate ownership 3.

Raise funds by issuing debt or equity around the world 12-16

What Do Global Capital Markets Mean For Managers?

 The growth in global capital markets has created opportunities for firms to borrow or invest internationally  can often borrow at a lower cost, but must balance the foreign exchange risk against the costs savings  Growth in capital markets offers opportunities for firms, institutions, and individuals to diversify their investments and reduce risk  Capital markets are likely to continue to integrate providing more opportunities for business 12-17