Lecture International business (9e): Chapter 12 - Charles W.L. Hill

International Business

9e

By Charles W.L. Hill
McGraw­Hill/Irwin

        Copyright © 2013 by The McGraw­Hill 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? 
 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

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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

1. 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

1. 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

1. 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

1. List their stock on multiple exchanges
 this type of trend may result in an
internationalization of corporate ownership

1. 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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