Chapter 12 Int. Bus.

two factors are responsible for the growth of capital markets:

1. Advances in information technology 2. deregulation by governments

two factors that are responsible for the growth of capital markets:

1. advances in information technology (growth of International communications technology and advances in data processing capabilities - 24 hr a day trade) 2. deregulation by governments: Govs have traditionally limited foreign investment in domestic companies

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 (by issuing stock in other countries, firms open the odor to raising capital in the foreign market)

The eurocurrency market has two significant drawbacks:

1. because it is unregulated, there is a higher risk that bank failure could case depositors to lose funds 2. companies borrowing Eurocurrencies can be exposed to foreign exchange risk

two types of international bonds:

1. foreign bonds 2. eurobonds

what makes the Eurobond market attractive:

1. lacks regulatory interference 2. has less stringent disclosure requirements than domestic bond markets 3. it is more favorable from a tax perspective (eurobonds can be sold directly to foreign investors)

Asian economic crisis and financial crisis mainly driven by:

2008; capital investments - too much debt

Forward exchange contracts are good for:

90 days

Forward premium

A forward premium occurs when dealing with foreign exchange; it is a situation where the spot futures exchange rate, with respect to the domestic currency, is trading at a higher spot exchange rate then it is currently.

example of a dirty pegged exchange rate

China

capital market lans can be _________ or __________.

Equity or Debt

Who are the main players in the capital markets?

Generic Capital Market: Investors, Market Makers, Borrowers

Where is the leading center of the Eurocurrency market?

London

are capital markets long term investments or short term investments?

Long term

speculative capital flow:

The funds reserved by an investor for the sole purpose of speculation (hearsay - no on is sure whether it will really do well or not). This capital is often associated with extreme volatility and a high probability of loss. Most speculators have short-term investment horizons and often use high degrees of leverage in their efforts to obtain profits.

spot rate

The price quoted for immediate settlement on a commodity, a security or a currency. The spot rate, also called "spot price," is based on the value of an asset at the moment of the quote.

eurocurrency:

any currency banked outside its country of origin

deregulation of capital markets by governments:

began in the US, then moved to Great Britain, Japan, and France

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 destabilized effect on economies

investors:

corporations with surplus cash, individuals, and non-bank financial institutions

Risk in global capital market:

currency, regulation, lack of quality information

2/3s of all eurocurrencies are:

eurodollars : dollars banked outside the US

most common bond

fixed rate, gives investors fixed cash payoffs

3 different exchange systems:

floating, pegged, dirty-pegged

what do global capital markets mean for managers?

growth in global capital markets has created opportunities for firms to borrow or invest internationally 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 businesses

borrowers:

individuals, companies, and governments

the eurocurrency market is an important source of low cost funds for:

international companies

efficient market hypothesis

is an investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information.

spread between the eurocurrency deposit and lending rates:

less than the spread between domestic deposit and lending rates this makes the eurocurrency market attractive

Market liquidity and the cost of capital do what to the global capital market?

make it attractive

are there any pure systems?

no

is there a pure float market system?

no

why is the eurocurrency market attractive?

not regulated by the government banks can offer higher interest rates on eurocurrency deposits than on ones made in the home currency banks can charge lower interest rates to eurocurrency borrows

what allowed the eurocurrency market to grow in the 70s and 80s?

oil prices increasing; OPEC accumulated huge amounts of dollars

foreign bond

sold outside the borrower's country and are denominated in the currency of the country in which they are issued

why has the eurocurrency market grown?

the Eurocurreny market began in 1950s when eastern bloc countries feared that the US might seize their dollars so they deposited them in Europe

adverse exchange rates can increase what?

the cost of foreign currency loans

market makers

the financial service companies that connect investors and borrowers, either directly (investment banks) or indirectly (commercial banks)

Example of a premium:

the index on a spot rate on a dollar today is 100, the forward rate for a 90 day contract might be 120

what is a capital market

the part of a financial system concerned with raising capital by dealing in shares, bonds, and other long-term investment

what does it mean to lower the cost of capital:

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

Why do capital markets exist

they bring together investors and borrowers

how have global capital markets changed since 1990?

they have grown rapidly

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 fro meh additional supply of funds global capital markets provide

eurobond

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

volatile exchange rates can make what:

what would otherwise be profitable investments, unprofitable