Chapter 12 International Business

Economist Martin Feldstein has coined the term _____ to pertain to long-term, cross-border capital flows.

"patient money". Harvard economist Martin Feldstein has argued that most of the capital that moves internationally is pursuing temporary gains, and it shifts in and out of countries as quickly as conditions change. He distinguishes between this short-term capital, or "hot money," and "patient money" that would support long-term cross-border capital flows.

A(n) _____ is any currency banked outside its country of origin.

Eurocurrency

The global capital market limits the opportunity for businesses and individuals to build a diverse financial portfolio.

False. On the investment side, the growth of the global capital market is providing opportunities for firms, institutions, and individuals to diversify their investments to limit risk. By holding a diverse portfolio of stocks and bonds in different nations, an investor can reduce total risk to a lower level than can be achieved in a purely domestic setting.

Problems of limited liquidity are limited to less developed nations, which tend to have smaller domestic capital markets.

False. Problems of limited liquidity are not restricted to less developed nations, which naturally tend to have smaller domestic capital markets. In recent decades, even very large enterprises based in some of the world's most advanced industrialized nations have tapped the international capital markets in their search for greater liquidity and a lower cost of capital, such as Germany's Daimler and Deutsche Telekom.

_____ are sold outside of the borrower's country and denominated in the currency in which they are issued, and _____ are normally underwritten by an international syndicate of banks and placed in countries other than the one in which the bond is denominated.

Foreign bonds; Eurobonds

Which of the following is one of the attractions of the Eurobond market?

The tax status is favorable. Three features of the Eurobond market make it an appealing alternative to most major domestic bond markets, specifically: an absence of regulatory interference, less stringent disclosure requirements than in most domestic bond markets, a favorable tax status.

Harvard economist Martin Feldstein has argued that owners and managers tend to keep long-term investments at home and speculate with "hot money" in foreign markets.

True. Harvard economist Martin Feldstein, for example, has argued that most of the capital that moves internationally is pursuing temporary gains, and it shifts in and out of countries as quickly as conditions change. He distinguishes between this short-term capital, or "hot money," and "patient money" that would support long-term cross-border capital flows.

The rapid growth of information technology allows for 24-hours-a-day trading in the financial world.

True. It is now technologically possible for financial services companies to engage in 24-hour-a-day trading, whether it is in stocks, bonds, foreign exchange, or any other financial asset.

The financial services companies that connect investors and borrowers are called market makers.

True. Market makers are the financial service companies that connect investors and borrowers, either directly or indirectly. They include commercial banks (e.g., Citi, U.S. Bank) and investment banks (e.g., Goldman Sachs).

An integrated international capital market is more volatile compared to a nonintegrated market.

True. The integration facilitated in the global capital markets cause shocks that occur in one financial center now spread around the globe very quickly. This makes the global markets highly volatile.

No matter what form of borrowing a firm uses—equity, bonds, or cash loans—they can often borrow funds at a lower rate by using the global capital market.

True. The lack of regulation also allows banks to charge borrowers a lower interest rate for Eurocurrency borrowings than for borrowings in the home currency, making Eurocurrency loans attractive for those who want to borrow money.

The Eurocurrency market has two significant drawbacks: _____ and _____.

a higher probability of a bank failure due to a lack of regulation; foreign exchange risk

The function of a capital market is to

bring together those who want to invest money with those who want to borrow money.

Investors using the global capital market have a wider range of investment opportunities than a purely domestic capital market. One of the most significant consequences of their choice is that they

can reduce their risk to below what could be achieved in a strictly domestic market.

A borrower can hedge against unpredictable movements in foreign exchange rates that can make the global capital market riskier by

entering into a forward contract.

One of the consequences of the global financial crisis of 2008 and 2009 for hedge funds, which are private investment funds, was a(n)

growing concern that deregulation had gone too far.

A global capital market benefits borrowers by lowering the cost of capital and

increasing the supply of funds available for borrowing.

Two factors that helped global capital markets take off in the last decades of the 20th century were _____ and _____.

information technology; deregulation by governments. Two factors that helped global capital markets take off in the last decades of the 20th century were information technology and deregulation by governments.

When a firm borrows funds from the global capital market, it must weigh the benefits of a

lower interest rate against the risks of an increase in the real cost of capital due to adverse exchange rate movements. When a firm borrows funds from the global capital market, it must weigh the benefits of a lower interest rate against the risks of an increase in the real cost of capital due to adverse exchange rate movements. Although using forward exchange markets may lower foreign exchange risk with short-term borrowings, it cannot remove the risk. Most important, the forward exchange market does not provide adequate coverage for long-term borrowings.

Different accounting conventions can make the problem of lack of information about the quality of foreign investments by

making direct comparisons difficult.