international business chapter 12

Two factors are responsible for the growth of capital markets

1. Advances in information technology (IT) 2. deregulation by governments

3 Appealing features of the eurobond market:

1. An absence of regulatory interference 2. Less stringent disclosure requirements 3. A favorable tax status

the global equity market allows firms to

1. Attract capital from international investors 2. List their stock on multiple exchanges 3. Raise funds by issuing debt or equity around the world

2 types of international bonds:

1. Eurobonds 2. foreign bonds

2 drawbacks to the eurocurrency market:

1. Possibility of losing deposited money is greater (no required reserves) 2. Borrowing funds internationally can expose to foreign exchange risk

Risk of global capital market

1. countries are more vulnerable to speculative capital flows (can have a destabilizing effect on economies). 2. A lack of info about fundamental quality of foreign investments may encourage speculative flows.

Investment bank functions

Brings investors and borrowers together and charge a commission fee. Ex: Stockbrokers

Why Has the Eurocurrency Market Grown? 1957

British banks had to attract dollar deposits and lend dollars rather than pounds to finance non-British trade. london biggest center in the world

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

since non US firms dont need to comply to SEC regulations, the limited ___

DISCLOSURE requirements make the eurobond market more attractive

Segments Of The Global Capital Market

Eurocurrency market Global bond market Global equity market

The most common type of bond

Fixed-rate bond; investor receives a fixed rate of bond payoffs.

GCM for managers (investment side)

Growth in capital markets offers opportunities for firms, institutions, and individuals to diversify their investments and reduce risk. must consider foreign exchange risk

Those who want to invest money v. those who want to borrow money

I: corps with surplus cash, individuals, nonbank financial institutions. B: Individuals, companies, governments

When was the Eurocurrency market born?

In the 1950's when eastern european holders of dollars were afraid to deposit their holdings of dollars in the US, so they did so elsewhere, especially London b/c of a higher IR.

Equity Loan

Made when a corporation sells stock to investors. Amount of dividends is not fixed in advanced.

Debt Loan

Requires a corp. to repay a predetermined portion of the loan amount at regular intervals regardless of how much profit it is making.

Foreign Bonds

Sold outside the borrowers country and are denominated by the currency in the country that they are issued. Used by companies when they think it will reduce the cost of capital

Commercial bank functions

Take money from corporations/individuals and pay them a rate of interest in return. They lend that money to borrowers at a higher rate of interest. often referred to as the INTEREST RATE SPREAD

Why Has the Eurocurrency Market Grown? 1960 - 1980

The US govt encouraged US banks to not lend to non US residents. Also the rise of oil prices and OPEC, Arabs were afraid to place money in US banks so they deposited them in london .

Market makers

The financial service companies that connect the investors and the buyers. Ex: commercial banks (direct) / investment banks (direct)

Where did Asian borrowers go wrong in the Asian financial crisis?

They didn't hedge their dollar-dominated short term debt, so when it collapsed they saw a sharp increase in their cost of capital.

deregulation began in the

U.S., then moved to Great Britain, Japan, and France

Global Capital Market benefits borrowers

additional supply of funds global capital markets provide and lowers cost of capital

Adverse movements in foreign exchange rates can result in...

an increase in the cost of foreign currency loans. Ex: Asian financial crisis.

The global capital market benefits both ____ and _____.

borrowers/investors

Debt loans include...

cash loans from banks and funds raised from the sale of corporate bonds for investors. management has no discretion

Eurocurrency

currency banked outside its country of origin - Euro-yen, the Euro-pound, and Euro-euro - important source of low cost funds for international companies

Capital market loans are either ____ or ____ loans.

debt/equity

the cost of recording, transmitting, and processing information has ___ since the 60s

decreased

2. It is cheaper to issue _______ than dollar-dominated bonds within the US.

euro bonds.

The spread between the ______ lending rate is less than the spread between the _____ deposit and lending rates.

eurocurrency/domestic

GCM for managers (borrowing side)

firms borrow at a lower cost than in the domestic capital market - must balance foreign exchange risk associated with borrowing in foreign currencies against cost savings

1. Many investors buy ___ ___ to diversify their portfolios and reduce their risk

foreign equities

changes in currency can affect a company's cost of capital and this ___ ___ ___ can affect the cost of borrowing

foreign exchange risk

2 eurocurrency drawbacks

foreign exchange risk higher probability of bank failure

3. Eurobonds can be sold directly to

foreign investors

Eurocurrency market is not regulated by the

government

Advances in information technology

growth of international communications technology and advances in data processing capabilities. 24 hours a day trading

Due to the risk in foreign currency borrowing, oftentimes a seemingly low cost can become a ___ ___.

high cost. firms can hedge using forward contracts

IR in domestic markets is __ than in global markets because the pool of investors in domestic markets is ___ than in global markets

higher , smaller

global capital market

huge, highly interconnected, facilitate free flow of $

Deregulation has facilitated growth in the _____ _____ ____.

international capital market, in which govts limited foreign investment in domestic companies, and the amount of foreign investment citizens could make

2. This type of trend may result in an___ of corporate ownership

internationalization

Who do capital markets bring together?

investors and borrowers

The maturity pd of debt loans range from very ___-___ to extremely ___-___

long-term (20 years)/short-term (1 day)

many companies dismantled capital controls, which lead to...

loosening restrictions on inward investments by foreigners and outward investments by citizens/corps.

due to limited regulation of eurobond market, there is a ___ cost of issuing the bonds

lower

Eurocurrency borrowers are charged a ___ IR than if they borrowed domestically, and they are offered a ___ IR if they invest in the eurocurrency market.

lower / higher

Deutsch telecom

lowered cost of capital then earned more (privatization)

volatile exchange rates can...

make what would otherwise be profitable investments, unprofitable

person initiating draft (bill of exchange) is called the ___

maker

Freight forwarders

orchestrate transportation for companies that are shipping internationally.

cost of capital

price of borrowing money or the rate of return that borrowers pay investors

Hedge Funds

private investment funds that position themselves to make "long bets" on assets they think will increase in value and "short bets" on assets they think will decrease in value.

the global capital market is growing

quickly according to the bank for international settlements

3. By issuing stock in other countries, firms open the door to ___ ___ in the foreign market

raising capital. compensate managers / employees with stock, provides for local ownership, increases visibility w stakeholders

bill of lading acts as

receipt, document of title, contract

Systematic risk

refers to the movements in a stock portfolio's value that are attributable to macroeconomic forces affecting all firms in an economy.

Domestic security deposits are _____ in all industrialized countries.

regulated (ensure that banks have enough liquid funds)

bill of exchange

specifies amount to be paid and when it should be paid

buyback agreement

take % of companies output as partial payment

1. companies do not have to adhere to strict regulations so....

the cost of issuing bonds is lower

Eurodollars

two-thirds of all Eurocurrencies

Eurobonds

underwritten by a syndicate of banks and placed in countries other than the one in whose currency the bond is denominated

Global Capital Market benefits investors

wider range of investment opportunity, Diversify portfolios and lower risk.