Chap 12: Global Capital Market

12.1 Benefit of global capital market

a) Capital markets: bring who want to invest money + who want to borrow money.
> Who want to invest money: corporations with surplus cash, individuals, nonbank financial
institutions
> Who want to borrow money: individuals, companies, governments.
> Between two groups: market makers - financial service companies connect investors and
borrowers (directly or indirectly). 2 Cái connect investor đó là commercial banks (e.g., Citi, U.S.
Bank) and investment banks (e.g., Goldman Sachs).

commercial banks investment banks

Take cash deposits from corporations and bring investors + borrowers together, charge
individuals -> pay them a rate of interest in commissions for doing so.
return ->lend money to borrowers (higher rate
of interest + making a profit from difference in
interest rates)

b) Capital market loans: equity loans or debt loans.

> equity loan: made when a corporation sells stock to investors
> debt loan: requires corporation to repay a predetermined portion of the loan amount (sum of the
principal + specified interest) at regular intervals regardless of how much profit it is making
12.2 Attraction of global capital market
Benefits borrowers: increasing the supply of funds available for borrowing + lowering the cost of
capital.
Benefits investors: providing a wider range of investment opportunities, allowing them to build
portfolios of international investments that diversify their risks.
Dưới góc nhìn của borrowers, tại sao global capital market lại benefit họ?
- much larger investors -> larger supply of funds for borrowers to draw on
- lower the cost of capital
Dưới góc nhìn của investor, tại sao global capital market lại benefit họ?
- much wider range of investment opportunities than in a purely domestic capital market
- diversifying a portfolio internationally -> investor reduce the level of risk
- correlation between stock market movements in developed and emerging markets: lower
- rise of stock markets in developing nations, given international investors: more opportunities
for international portfolio diversification.
12.3 Growth of global capital market
Two factor: advances in information technology VÀ deregulation by governments

advance in information deregulation

technology
 -Large volumes of information
about markets, risk, bla bla.
-Uses this information to make
decisions về chiến lược kinh
doanh, bla bla.
-Engage 24-hour-a-day trading
-“Shocks” that occur in one
financial center now spread around
the globe very quickly
-Hồi trc, government: traditionally kept other countries’ financial
service firms from enter their capital markets. In some cases,
restricted the overseas expansion of their domestic financial
services firms.
-Therefore, deregulation in key countries facilitated growth of
international capital market.
- Hedge funds: private investment funds position themselves to
make “long bets” on assets they think will increase in value, “short
bets” on assets they think will decline in value.

12.4 Risk of global capital market

- Individual nations: more vulnerable to speculative capital flows
- Lack of information about the fundamental quality of foreign investments: encourage
speculative flows in the global capital market
=> Investor: react to dramatic news events in foreign nation + pull their money out too
quickly
12.5 3 CÁI THỊ TRƯỜNG
- EUROCURRENCY MARKET (thị trường đồng tiền Châu Âu)
- GLOBAL BOND MARKET (Thị trường trái phiếu quốc tế)
- GLOBAL EQUITY MARKET ( thị trường chứng khoáng toàn cầu)

EUROCURRENCY born in mid-1950s

MARKET recevie: major push in 1957, British government
(eurocurrency: currency prohibited British banks from lending British pounds to finance non-British trade
banked outside its
country of origin) received another push: the 1960s when the U.S. government enacted regulations that discouraged U.S.
banks from lending to non-U.S. residents.
offered real financial advantages, to those who wanted to deposit dollars or borrow dollars + later to
those who wanted to deposit and borrow other currencies

Attraction? lack of government regulation

allows banks: offer higher interest rates on Eurocurrency deposits than deposits made in home
currency
allows banks: charge borrowers a lower interest rate
spread between the Eurocurrency deposit and lending rates < the spread between the domestic deposit.

Drawback?
unregulated system (Eurocurrency market), probability of a bank failure cause depositors to lose their
money is greater

expose a company to foreign exchange risk

  Consequently, many companies borrow funds in their domestic currency to avoid foreign
exchange risk, even though the Eurocurrency markets may offer more attractive interest rates

GLOBAL BOND Foreign bonds: sold outside the borrower’s country, denominated in the currency of the country in
MARKET which they are issued.
Eurobonds: underwritten by an international syndicate of banks, placed in countries other than one in
whose currency the bond is denominated

Attraction? Regulatory Interference: issued at a lower cost to the issuer.

Disclosure Requirements: less stringent than those of several national governments

Favorable Tax Status: sold directly to foreign investor

.
Drawback?
upsurge in demand for Eurobonds from investors who wanted to take advantage of their tax benefits.

GLOBAL EQUITY enabled firms: attract capital from international investors

MARKET
list their stock on multiple exchanges

raise funds by issuing equity or debt

local managers and employees with stock

gives the firm the option of compensating

12.6 Exchange Rates Affect the Cost of Capital?

Unpredictable movements in exchange rates can inject risk into foreign currency borrowing, making
something that initially seems less expensive ultimately much more expensive