International Business 9e By Charles W.L. Hill McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

The Global Capital Market Chapter 12 The Global Capital Market

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 LO1: Describe the benefits of the global capital market.

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

What Makes The Global Capital Market Attractive? Today’s 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 Investors benefit from the wider range of investment opportunities diversify portfolios and lower risk

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 The growth in the markets is a result of Advances in information technology Deregulation by governments LO2: Identify why the global capital market had grown so rapidly.

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 2008-2009 global financial crisis 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 LO3: Understand the risks associated with the globalization of capital markets.

What Is A Eurocurrency? A eurocurrency is any currency banked outside its country of origin about two-thirds of all eurocurrencies are Eurodollars It is an important source of low-cost funds for international companies The market began in the 1950s Eastern bloc countries feared that the U.S. 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. LO4: Compare and contrast the benefits and risks associated with the Eurocurrency market, the global bond market, and the global equity market.

Why Has The Eurocurrency Market Grown? In 1957, the market surged again after changes in British laws London became the leading center of the market and still hold this position In the 1960s, the market grew once again Changes in 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 dollars 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 and charge lower interest rates to eurocurrency borrowers 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 LO4: Compare and contrast the benefits and risks associated with the Eurocurrency market, the global bond market, and the global equity market.

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 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 LO4: Compare and contrast the benefits and risks associated with the Eurocurrency market, the global bond market, and the global equity 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 There are two types of international bonds Foreign bonds Eurobonds LO4: Compare and contrast the benefits and risks associated with the Eurocurrency market, the global bond market, and the global equity market.

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 LO4: Compare and contrast the benefits and risks associated with the Eurocurrency market, the global bond market, and the global equity market.

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 Raise funds by issuing debt or equity around the world LO4: Compare and contrast the benefits and risks associated with the Eurocurrency market, the global bond market, and the global equity market.

What Do Global Capital Markets Mean For Managers? The growth in global capital markets has created opportunities for firms to borrow or invest internationally can often borrow at a lower cost, but must balance the foreign exchange risk against the costs savings Growth in capital markets offers opportunities for firms, institutions, and individuals to diversify their investments and reduce risk Capital markets are likely to continue to integrate providing more opportunities for business LO5: Understand how foreign exchange risk impacts upon the cost of capital.