The Global Capital Market

1
The Global Capital Market
2
The Global Capital Market
(Outline) ? Introduction
Benefits of the Global Capital Market
Functions of a Generic Capital Market
Attractions of the Global Capital Market Growth
of the Global Capital Market ? Foreign Exchange
Risk and the Cost of Capital ? The Eurocurrency
Market Origin and Growth of the Market
Attractions of the Eurocurrency Market ? The
Global Bond Market ? The Global Equity Market
3
Functions of a Generic Capital Market

• Brings together
• Those who want to invest
• corporations, individuals, nonbank financial
  institutions.
• Those who want to borrow
• individuals, companies, governments.
• Market makers
• Commercial and investment banks that connect
  investors with borrowers.

4
The Main Players in a Generic Capital Market
Investors Companies Individuals
Institutions
Borrowers Individuals Companies
Governments
Market makers Commercial bankers
Investment bankers
5
Attraction of the Global Capital Market?

• Increases the supply of funds available for
  borrowing.
• Borrowers perspective
• Lowers the cost of capital.
• Investors perspective
• Provides a wider range of investment
  opportunities.

Growth of Global capital market -
TECHNOLOGY. - Deregulation by governments
of capital flows and financial services.
0 No Capital controls 1 Tight Capital Controls
6
Risk Reduction Through Portfolio Diversification
(a) Risk reduction through domestic
diversification
1.0
Variance of portfolio return Variance of
return on typical stock
U.S. Stocks
0.27
Total Risk
Systematic Risk
1 10 20 30 40
50
Number of stocks
7
Risk Reduction Through Portfolio Diversification
(b) Risk reduction through domestic and
international diversification
1.0
Variance of portfolio return Variance of
return on typical stock
U.S. Stocks
0.27
International Stocks
0.12
1 10 20 30 40
50
Number of stocks
8
Eurocurrency (offshore currency market)

• Its not the Euro!
• It is any currency banked outside its country of
  origin. (ex) Eurodollar, Euroyen
• Origin of Eurocurrency market
• - During 1950s, Russia got big deposits of
  US from selling gold for dollars.
• - In 1957, as the Cold war got intense, Russia
  didnt want to deposit their dollars in US banks
  for fear of their account being frozen.
• - so Russia move their US deposits to UK and
  French banks.
• - These banking services were the basis for the
  Eurodollar market.

9
Growth in Eurocurrency Funds
1.5 Trillion
One Billion
10
The Eurocurrency Market

• Characterized by a lack of regulation compared to
  domestic financial markets.
• No restriction on payments and deposits
• This means that you dont have to pay for the
  cost of regulation.
• Hence, cheap (or cheaper) money.
• (maintains narrower interest rate spread)

11
Attraction of the Eurobond Market?

• No government interference.
• Few disclosure requirements.
• Favorable tax status.

12
Global Equity Markets

• Where investors can buy/sell stocks.
• Made up of many stock exchanges around the world.

13
Who Uses These Markets?

• Investors seeking to diversify their portfolios.
• Companies seeking to
• issue stock in the country (extend investor base)
• satisfy local ownership requirements
• create funding for future acquisitions
• increase the visibility of the company.