12--Global Capital Markets
Eurodollars
$$ banked outside the US
Market Makers
---financial service companies that connect investors and borrowers
Equity Loan
A corporation sells stock to investors
Capital Market
A---brings together those who want to invest money and those who want to borrow money.
Eurocurrency
Banked outside of its country of origin (ie. $$ kept in a London bank...Yen kept in US bank) Can be created anywhere in the world DRAWBACK: Exposure to foreign exchange risk
Euromarkets:
Borrowers pay less for loans
Market Makers
Connect investors and borrowers in a capital market.
Drawbacks of Domestic Capital market
Cost of capital tends to be higher than it is in a global market; Limited Liquidity
Financial Industry Regulation:
Deregulation helped the development of an international capital market
Corporate Bond
Gives the investor the right to a fixed stream of income from the corporation
Potential Risk of Global Capital Market:
Individual nations are becoming more vulnerable to speculative capital (short term capital that leaves when economy turns bad); Foreign investments may be driven by speculative flows in the market
FIxed-rate bonds
Investors get back the face value of the bond at maturity of fixed-rate bonds
Reason for increased Global Capital Speculation:
Invsestments in the global capital market are faced witha lack of quality information
Financial Services
Is a very information-intensive industry; rise of information technology
Eurocurrency Attractive BECAUSE:
Lacks government regulation
Systematic Risk
Natural Risk; attributable to macro economic forces affecting an economy
Cost of Capital
Price of borrowing money
Increase of stocks in a portfolio
Rapid decline in risk at the beginning; but plateaus with a systematic risk
Disadvantage of Information Technology
Shocks that occur in one financial center will spread globally
Relatively low Correlation between stock market movements in different countries:
Signifies that countries pursue different macroeconomic policies
Foreign bonds
Sold outside th borrower's country and denominated in currency of country in which they are issued
Eurobond more attractive than domestic bonds because:
favorable tax status
National equity Markets
historically, substantial regulatory barriers
EuroBonds
international bonds, normally underwritten by an international syndicate of banks and placed in countries other than the one in whose corrency the bond is denominated (Italian corporation issues a bond denominated in dollars)
Hedge Funds
make short bets on assets that they think will decline in value
Banks with foreign currency:
receive more freedom from government in dealing with foreign currency
Debt Loans
to be repaid at regular intervals (interest payments)
