Title: The Global Capital Market
1Chapter 12
- The Global Capital Market
2Why 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
3Who Are The Main Players in Capital Markets?
- The Main Players in a Generic Capital Market
4What 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
5What Makes The Global Capital Market Attractive?
- Market Liquidity and the Cost of Capital
6What 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
7What Makes The Global Capital Market Attractive?
- Risk Reduction through Portfolio Diversification
8How 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
9Why 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
10Why 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
11Why 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?
12What 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
13What 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
14Why 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
15Why 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
16Why 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
17Why 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
18What 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
19What 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
20What Makes The Eurocurrency Market Attractive?
- Interest Rate Spreads in Domestic and
Eurocurrency Markets
21What 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
22What 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
23What 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
24What 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
25What 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
26What 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
27How 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
28What 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
29What 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