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International

Business
9e
By Charles W.L. Hill
McGraw-Hill/Irwin

Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

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

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Who Are The Main Players


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

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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

Investors benefit from the wider range of


investment opportunities
diversify portfolios and lower risk

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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


1. Advances in information technology
2. Deregulation by governments
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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
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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.
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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

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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

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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

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What Makes The


Eurocurrency Market
Attractive?
Interest Rate Spreads in Domestic and Eurocurrency Markets

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What Makes The


Eurocurrency Market
Unattractive?
The eurocurrency market has two significant

drawbacks:
1. 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

2. Companies borrowing eurocurrencies can be


exposed to foreign exchange risk
can minimize this risk through forward market
hedges
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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
1. Foreign bonds
2. Eurobonds

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What Makes The


Eurobond Market
Attractive?
The eurobond market is attractive because

1. It lacks regulatory interference

since companies do not have to adhere to strict


regulations, the cost of issuing bonds is lower

2. 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

3. It is more favorable from a tax perspective


eurobonds can be sold directly to foreign investors

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What Is The
Global Equity Market?
The global equity market allows firms to
1. Attract capital from international investors
many investors buy foreign equities to
diversify their portfolios

2. List their stock on multiple exchanges


this type of trend may result in an
internationalization of corporate ownership

3. Raise funds by issuing debt or equity


around the world
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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
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