International Business

8e


By Charles W.L. Hill

Chapter 11
The Global Capital
Market
Copyright 2011 by the McGraw-Hill Companies, I nc. All rights reserved.
McGraw-Hill/I rwin



11-3
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



11-4
Who Are The Main Players
in Capital Markets?
The Main Players in a Generic Capital Market






11-5
What Makes The Global
Capital Market Attractive?
Todays 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
the associated lower cost of capital - the price of
borrowing money or the rate of return that borrowers
pay investors
Investors benefit from the wider range of
investment opportunities
diversify portfolios and lower risk



11-6
What Makes The Global
Capital Market Attractive?
Market Liquidity and the Cost of Capital






11-7
What Makes The Global
Capital Market Attractive?
Risk Reduction through Portfolio Diversification






11-8
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 $24,566 in 2008
the international bond market has grown from
$3,515 billion in 1997 to $22,734 in 2008
international equity offerings were $18 billion
in 1997 and $387 billion in 2008




11-9
Why Is The Global Capital
Market Growing?
Two factors are responsible for the growth
of capital markets
1. Advances in information technology
the growth of international
communications technology and advances
in data processing capabilities
24-hour-day trading
so, shocks that occur in one financial market
spread around the globe very quickly




11-10
Why Is The Global Capital
Market Growing?
2. Deregulation by governments has facilitated
growth in international capital markets
governments have traditionally limited foreign
investment in domestic companies, and the amount of
foreign investment citizens could make
since the 1980s, these restrictions have been falling
deregulation began in the United States, then moved
to other countries - Great Britain, Japan, and France
many countries have dismantled capital controls
making it easier for both inward and outward
investment to occur





11-11
What Are The Risks Of The
Global Capital Markets?
Could deregulation of capital markets and fewer
controls on cross-border capital flows make
nations more vulnerable to the effects of
speculative capital flows?
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




11-12
What Is A Eurocurrency?
A eurocurrency is any currency banked
outside its country of origin
About two-thirds of all eurocurrencies are
Eurodollars - dollars banked outside the
United States
Other important eurocurrencies are the euro-
yen, the euro-pound, and the euro-euro




11-13
Why Has The Eurocurrency
Market Grown?
The eurocurrency market began in the 1950s
when the Eastern bloc countries feared that the
United States 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
United States
In 1957, the market surged again after changes in
British laws
London continues to be the leading center of the
eurocurrency market




11-14
Why Has The Eurocurrency
Market Grown?
In the 1960s, the market grew once again when,
after changes in U.S. regulations discouraged U.S.
banks from lending to non-U.S. residents, would-
be borrowers of dollars outside the United States
turned to the euromarket as a source of dollars
The next big increase came after the 1973-74 and
1979-80 oil price increases
OPEC members avoided potential confiscation of their
dollars by depositing them in banks in London




11-15
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 than on deposits made in the home currency
banks can charge lower interest rates to eurocurrency
borrowers than to those who borrow the home
currency
The spread between the eurocurrency deposit and
lending rates is less than the spread between the
domestic deposit and lending rates giving
eurocurrency banks a competitive edge over
domestic banks




11-16
What Makes The Eurocurrency
Market Attractive?
Interest Rate Spreads in Domestic and Eurocurrency Markets





11-17
What Makes The Eurocurrency
Market Unattractive?
The eurocurrency market has two
significant drawbacks
1. Because the eurocurrency market is
unregulated, there is a higher risk of bank
failure
2. Companies borrowing eurocurrencies can
be exposed to foreign exchange risk




11-18
What Is The
Global Bond Market?
Bonds are an important means of financing for many
companies
The most common kind is a fixed rate bond which gives
investors fixed cash payoffs
The global bond market grew rapidly during the 1980s
and 1990s
There are two types of international bonds
1. Foreign bonds are sold outside the borrowers country
and are denominated in the currency of the country in
which they are issued
2. Eurobonds are underwritten by a syndicate of banks and
placed in countries other than the one in whose currency
the bond is denominated




11-19
What Makes The Eurobond
Market Attractive?
The eurobond market is attractive because
1. It lacks regulatory interference since
companies do not have to adhere to strict
regulations, the cost of issuing bonds is lower
2. 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
3. It is more favorable from a tax perspective
eurobonds can be sold directly to foreign
investors




11-20
What Is The
Global Equity Market?
The global equity market allows firms to
1. Attract capital from international investors
many investors invest in 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
by issuing stock in other countries, firms open the door to raising
capital in the foreign market, and give the firm the option of
compensating local managers and employees with stock





11-21
How Do Exchange Rates
Affect The Cost Of Capital?
Adverse exchange rates can increase the cost of foreign
currency loans
While it may initially seem attractive to borrow foreign
currencies, when exchange rate risk is factored in, that can
change
Firms can hedge their risk by entering into forward
contracts to purchase the necessary currency and lock in
the exchange rate, but this will also raise costs
Firms must weigh the benefits of a lower interest rate
against the risk of an increase in the real cost of capital due
to adverse exchange rate movements



11-22
What Do Global Capital
Markets Mean For Managers?
Growth in global capital markets has created
opportunities for firms to borrow or invest
internationally
firms can often borrow at a lower cost than in the
domestic capital market
firms must balance the foreign exchange risk associated
with borrowing in foreign currencies against the costs
savings
Growth in capital markets offers opportunities for
firms, institutions, and individuals to diversify
their investments and reduce risk
again though, investors must consider foreign exchange
rate risk



11-23
Review Question
Which of the following are market makers?

a) commercial banks
b) pension funds
c) insurance companies
d) governments



11-24
Review Question
Which of the following is not true of global
capital markets

a) they benefit borrowers
b) they benefit sellers
c) they raise the cost of capital
d) they provide a wider range of investment
opportunities



11-25
Review Question
Compared to developed nations, less
developed nations have

a) smaller capital markets
b) more investment opportunities
c) similar costs of capital
d) greater liquidity





11-26
Review Question
In 2008, the stock of cross-border bank loans
was about

a) $3,620
b) $7,840
c) $24, 560
d) $33,630




11-27
Review Question
Historically, the most tightly regulated
industry has been

a) agriculture
b) consumer electronics
c) automotives
d) financial services




11-28
Review Question
The term eurocurrency refers to

a) the currency used by the European Union
countries
b) any currency banked outside its country of origin
c) currencies purchased in the international equities
market
d) bonds sold outside the borrowers country that
are denominated in the currency of the country in
which they are issued