MGT 302 - CH12
Downside to IT
"shocks" that hit one market spread quickly to others.
What factors allowed the international capital market to boom?
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
Why is there a low correlation between the movement of stock markets in different countries?
1. Countries pursue different macroeconomic policies and have different economic conditions. 2. Different stock markets are still segmented from one another because of capital controls (restrictions on cross-border capital flows)
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.
Why does an international portfolio lower risk?
Because movements of stock market prices across countries aren't perfectly correlated.
How is the information gap created?
Different accounting systems in different countries. Makes direct comparisons to cross border investment activities difficult for all but the most specialized investor.
Investment bank functions
Direct function. Brings investors and borrowers together and charge a commission fee. Ex: Stockbrokers
Deuche Telekom Example
Example of privatization
The most common type of bond
Fixed-rate bond; investor receives a fixed rate of bond payoffs.
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.
What city is the leading center for Eurocurrency trading?
London
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.
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
What major factors influenced the Eurocurrency market?
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 invested elsewhere.
Market makers
The financial service companies that connect the investors and the buyers. Ex: commercial/investment banks
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.
Who do capital markets bring together?
Those who want to invest money and those who want to borrow money.
What decisions does IT make?
What to invest & where, what to charge borrowers, h/m interest to pay depositors, value of riskiness on financial assets (stocks/bonds/govt/securities)
What qualifies a fully diversified portfolio?
a fully diversified portfolio that contains stocks from multiple countries is less than half as risky (12%) as a fully diversified portfolio that contains only US stocks (27%).
Adverse movements in foreign exchange rates can result in...
an increase in the cost of foreign currency loans. Ex: Asian financial crisis.
Eurocurrency
any currency banked outside its country of origin. Can be created anywhere in the world (not just in Europe)
Eurodollars
any currency banked outside of the US. Account for about 2/3 of all eurocurrency.
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.
IT has facilitated...
communication between any 2 points on the globe. the emergence of a integrated international capital market
What does IT draw from?
creditworthiness, IR/ER, info on markets, & risks
Capital market loans are either ____ or ____ loans.
debt/equity
individualistic political policy directly correlates with global trend of _____ of financial markets.
deregulation
It is cheaper to issue _______ than dollar-dominated bonds within the US.
eurobonds
The spread between the ______ lending rate is less than the spread between the _____ deposit and lending rates.
eurocurrency/domestic
The main factor that makes the eurocurrency market so attractive is the lack of ____ ______.
govt regulation
Due to the risk in foreign currency borrowing, oftentimes a seemingly low cost can become a ___ ___.
high cost.
Commercial banks perform ______ _______ ______.
indirect commercial function.
Deregulation has facilitated growth in the _____ _____ ____.
international capital market
By using a global capital market you have much more ____ _____ than a purely domestic market.
investment opportunities (also less risk in global market)
In a purely domestic capital market...
investors are limited to the residents of their country. This places an upper limit on the supply funds available to customers (aka liquidity of market is limited)
The maturity pd of debt loans range from very ___-___ to extremely ___-___
long-term (20 years)/short-term (1 day)
In the 1970's many companies dismantled capital controls, which lead to...
loosening restrictions on inward investments by foreigners and outward investments by citizens/corps.
There is a relatively ___ correlation between the movement of stock markets in different countries.
low
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
Eurobonds
normally underwritten by a international syndicate of banks and placed in countries other than one who's currency the bond is denominated.
A large pool of investors in an international market implies that buyers will be able to ___ ____.
pay less (also have greater liquidity)
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 helps investors by...
providing a wider range of investment opportunities. Allows them to build portfolios of international investments to diversify their risks.
The euromarket grew because it offered ____ financial advantages.
real
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)
Many financial market regulations have been ending because of...
the development of the eurocurrency market, and pressure from financial services companies.
National government's controls over domestic/international bonds are the reason for...
the increasing price of issuing bonds
International equity investment is facilitating...
the internationalization of corporate ownership
When banks are dealing with foreign currencies...
they have much less of a reserve requirement if any.
