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The Global Capital Market

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... money around the world Borrowers benefit from the additional supply of funds global capital markets provide lowers the cost of capital the price ... PPT template ... – PowerPoint PPT presentation

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Title: The Global Capital Market


1
Chapter 12
  • The Global Capital Market

2
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

3
Who Are The Main Players in Capital Markets?
  • The Main Players in a Generic Capital Market

4
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
  • lowers the cost of capital
  • the price of borrowing money or the rate of
    return that
    borrowers pay investors

5
What Makes The Global Capital Market Attractive?
  • Market Liquidity and the Cost of Capital

6
What Makes The Global Capital Market Attractive?
  • Investors benefit from the wider range of
    investment opportunities
  • diversify portfolios and lower risk
  • But, volatile exchange rates can make what would
    otherwise be profitable investments, unprofitable

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

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 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

9
Why Is The Global Capital Market Growing?
  • Two factors are responsible for the growth of
    capital markets
  • 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

10
Why Is The Global Capital Market Growing?
  • 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

11
Why Is The Global Capital Market Growing?
  • deregulation began in the U.S., then moved to
  • Great Britain, Japan, and France
  • many countries have dismantled capital controls
    making it easier for both inward and outward
    investment to occur
  • The 2008-2009 global financial crisis raised
    questions as to whether deregulation had gone too
    far
  • Question Are new regulations for the financial
    services industry needed?

12
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
  • 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

13
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 U.S.
  • Other important eurocurrencies are the euro-yen,
    the euro-pound, and the euro-euro
  • The eurocurrency market is an important source of
    low-cost funds for international companies

14
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 U.S.
  • could earn a higher rate of interest in London

15
Why Has The Eurocurrency Market Grown?
  • In 1957, the market surged again after changes in
    British laws
  • under the new laws, British banks had to attract
    dollar deposits and loan dollars rather pounds to
    finance non-British trade
  • London became the leading center of the
    eurocurrency market
  • continues to hold this position today

16
Why Has The Eurocurrency Market Grown?
  • In the 1960s, the market grew once again
  • Changes in U.S. 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

17
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

18
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

19
What Makes The Eurocurrency Market Attractive?
  • 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

20
What Makes The Eurocurrency Market Attractive?
  • Interest Rate Spreads in Domestic and
    Eurocurrency Markets

21
What Makes The Eurocurrency Market Unattractive?
  • 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

22
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

23
What Is The Global Bond Market?
  • There are two types of international bonds
  • Foreign bonds are sold outside the borrowers
    country and are denominated in the currency of
    the country in which they are issued
  • used by companies when they think it will reduce
    the cost of capital
  • Eurobonds are underwritten by a syndicate of
    banks and placed in countries other than the one
    in whose currency the bond is denominated

24
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

25
What Is The Global Equity Market?
  • The global equity market allows firms to
  • Attract capital from international investors
  • many investors buy foreign equities to diversify
    their portfolios
  • List their stock on multiple exchanges
  • this type of trend may result in an
    internationalization of corporate ownership

26
What Is The Global Equity Market?
  • 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
  • gives the firm the option of compensating local
    managers and employees with stock
  • provides for local ownership
  • increases visibility with local stakeholders

27
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
  • 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

28
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

29
What Do Global Capital Markets Mean For Managers?
  • 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
  • Capital markets are likely to continue to
    integrate providing more opportunities for
    business
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