INTERNATIONAL CAPITAL MARKET

SUBMITTED BY :
BELINDA FRANCIS
GAURAV CHOUDHARY
 Capital market
 Capital markets are markets where people, companies,
and governments with more funds than they need
(because they save some of their income) transfer those
funds to people, companies, or governments who have a
shortage of funds (because they spend more than their
income).

 International Capital market

 The group of closed interconnected markets in which
residents of different countries trade-assets such as
currencies, stocks and bonds.
 Capital markets promote economic efficiency by channeling
money from those who do not have an immediate productive
use for it to those who do.
The International Capital Market
and the Gains From Trade

 Three Types of Gain From Trade

 All transactions between the residents of different
countries fall into one of three categories:
 Trades of goods or services for goods or services
 Trades of goods or services for assets
 Trades of assets for assets
The International Capital Market
and the Gains From Trade
The Three Types of International Transaction
Home Foreign

Goods Goods

and and

Services Services

Assets Assets
Features of International Capital
Markets

 Capital markets efficiently direct capital to

productive uses.
 Finance can be direct or indirect.
 Capital markets are important because they
promote efficiency and productive investments.
 The International Capital Market
and the Gains From Trade

 Risk Aversion
 The risk associated with a trade of assets is shared when
assets are traded internationally.
 When people are risk averse, countries can gain
through the exchange of risky assets.
 International capital markets make these trades
possible.
 Reduce risk through Portfolio Diversification as a
Motive for International Asset Trade
 International portfolio diversification can allow
residents of all countries to reduce the variability of
their wealth.
• Changes in the International Marketplace Resulted in
a New Era of Global Capital Markets During the Late
1990s, which were Critical to Development.
 The Menu of International Assets: Debt Versus Equity
 International portfolio diversification can be carried out through the
exchange of:
 Debt instruments
 Bonds and bank deposits
 They specify that the issuer of the instrument must
repay a fixed value regardless of economic
circumstances.
 Equity instruments
 A share of stock
 It is a claim to a firm’s profits, rather than to a fixed
payment, and its payoff will vary according to
circumstance.
STRUCTURE OF CAPITAL
MARKET
 EQUITY  DEBT
1. Primary Market 1. Govt. Securities
2.Secondary Market - Primary
- Spot - Secondary
- Derivatives
2. Corporate Securities
i) Primary
- Public issues
- Private Placement
ii) secondary
 The Structure of the International Capital Market
 The main actors in the international capital market are:
 Commercial banks (3/4th share)
- Public sector banks
- Private sector banks
- Foreign banks
- Regional rural banks
 Corporations Banks (5 % share)
- Rural Corporations Banks
- Urban Corporations Banks (UCB’s)
 Nonbank financial institutions (2-3% share)
 Central banks and other government agencies (8-9%
share)
 Offshore Banking and Offshore Currency Trading
 Offshore banking
 The business that banks’ foreign offices conduct outside of
their home countries
 Banks operate offshore though any of three types of
institution:
 Agency office
 Subsidiary bank
 Foreign branch
 Offshore currency trading
 Trade in bank deposits denominated in currencies of
countries other than the one in which the bank is located
 It is referred to as Eurocurrency trading.
 Eurodollars
 Dollar deposits located outside the U.S.
 Eurobanks
 Banks that accept deposits denominated in
Eurocurrencies
 Eurocurrency trading has grown for three reasons:
 Growth in world trade

 Evasion of financial regulations like reserve requirements

 Political concerns
 The Growth of Eurocurrency Trading
 London is the leading center of Eurocurrency trading.
 The early growth in the Eurodollar market was due to:
 Growing volume of international trade
 Cold War
 New U.S. restrictions on capital outflows and U.S.
banking regulations
 Federal Reserve regulations on U.S. banks .
 Move to floating exchange rates in 1973
 Reluctance of Arab OPEC members to place surplus
funds in American banks after the first oil shock
SIZE ON INDIAN CAPITAL
MARKET
Yrs( As at No. of Stock No. of listed Market
end Dec) Exchange companies capitalization
of BSE (Rs.
Bn.)
1991 22 6229 -

2000 23 9871 9128

2002 23 9644 6122

2003 23 9413 12734

2004 23 - 16860
SOURCES OF CAPITAL
 Private sources of capital
- FDI
- Portfolio Investment
 Public source of capital
- Official non- concessional loans : multilateral
and bilateral aid
- ODA : Officials grants and concessional loans.
 Private Capital became very important to
development in the Late 1990s.
Summary
 When people are risk averse, countries can gain
through the exchange of risky assets.
 International portfolio diversification can be carried
out through the exchange of debt instruments or
equity instruments.
 One important component in the international capital
market is the foreign exchange market.
 Banks are at the center of the international capital
market, and many operate offshore.
 Regulatory and political factors have encouraged
offshore banking and currency trading.
 Creation of a Eurocurrency deposit does not
occur because that currency leaves its country
of origin.
 It poses no threat for central banks’ control over
their domestic monetary bases.
 The international capital market has contributed to
an increase in international portfolio diversification
since 1970.
 The foreign exchange market’s record in
communicating appropriate price signals to
international traders and investors is mixed.
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