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The Global Capital Market


... 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

Chapter 12
  • The Global Capital Market

Why Do We Have Capital Markets?
  • Capital markets bring together investors and
  • investors - corporations with surplus cash,
    individuals, and non-bank financial institutions
  • borrowers - individuals, companies, and
  • 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

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

What Makes The Global Capital Market Attractive?
  • Todays capital markets are highly interconnected
    and facilitate the free flow of money around the
  • 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

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

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

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

How Have Global Capital Markets Changed Since
  • 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

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
  • 24-hour-day trading
  • so, shocks that occur in one financial market
    spread around the globe very quickly

Why Is The Global Capital Market Growing?
  • Deregulation by governments
  • has facilitated growth in international capital
  • 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

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
  • Question Are new regulations for the financial
    services industry needed?

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
  • if global capital markets continue to grow,
    better quality information is likely to be
    available from financial intermediaries

What Is A Eurocurrency?
  • A eurocurrency is any currency banked outside its
    country of origin
  • About two-thirds of all eurocurrencies are
  • 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

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

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

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

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
  • avoided potential confiscation of their dollars
    by the U.S. by depositing them in banks in London

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

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

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

What Makes The Eurocurrency Market Unattractive?
  • The eurocurrency market has two significant
  • 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

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

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

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

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

What Is The Global Equity Market?
  • Raise funds by issuing debt or equity around the
  • 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

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

What Do Global Capital Markets Mean For Managers?
  • Growth in global capital markets has created
    opportunities for firms to borrow or invest
  • 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

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