The Global Capital Market

1. The Global Capital Market

2. The Global Capital Market (Outline)  Introduction Benefits of the Global Capital Market Functions of a Generic Capital Market Attractions of the Global Capital Market Growth of the Global Capital Market  Foreign Exchange Risk and the Cost of Capital  The Eurocurrency Market Origin and Growth of the Market Attractions of the Eurocurrency Market  The Global Bond Market  The Global Equity Market

3. Functions of a Generic Capital Market • Brings together: • Those who want to invest: • corporations, individuals, nonbank financial institutions. • Those who want to borrow: • individuals, companies, governments. • Market makers: • Commercial and investment banks that connect investors with borrowers.

4. The Main Players in a Generic Capital Market Investors: Companies Individuals Institutions Borrowers: Individuals Companies Governments Market makers: Commercial bankers Investment bankers

5. Attraction of the Global Capital Market? • Increases the supply of funds available for borrowing. • Borrower’s perspective • Lowers the cost of capital. • Investor’s perspective • Provides a wider range of investment opportunities. * Growth of Global capital market: - TECHNOLOGY. - Deregulation by governments of capital flows and financial services. 0 = No Capital controls 1 = Tight Capital Controls

6. Risk Reduction Through Portfolio Diversification (a) Risk reduction through domestic diversification 1.0 Variance of portfolio return Variance of return on typical stock U.S. Stocks 0.27 Total Risk Systematic Risk 1 10 20 30 40 50 Number of stocks

7. Risk Reduction Through Portfolio Diversification (b)Risk reduction through domestic and international diversification 1.0 Variance of portfolio return Variance of return on typical stock U.S. Stocks 0.27 International Stocks 0.12 1 10 20 30 40 50 Number of stocks

8. Eurocurrency(offshore currency market) • It’s not the Euro! • It is any currency banked outside its country of origin. (ex) Eurodollar, Euroyen • Origin of Eurocurrency market - During 1950’s, Russia got big deposits of US$ from selling gold for dollars. - In 1957, as the Cold war got intense, Russia didn’t want to deposit their dollars in US banks for fear of their account being frozen. - so Russia move their US$ deposits to UK and French banks. - These banking services were the basis for the Eurodollar market.

9. Growth in Eurocurrency Funds 1.5 Trillion One Billion

10. The Eurocurrency Market • Characterized by a lack of regulation compared to domestic financial markets. • No restriction on payments and deposits • This means that you don’t have to pay for the cost of regulation. • Hence, cheap (or cheaper) money. (maintains narrower interest rate spread)

11. Attraction of the Eurobond Market? • No government interference. • Few disclosure requirements. • Favorable tax status.

12. Global Equity Markets • Where investors can buy/sell stocks. • Made up of many stock exchanges around the world.

13. Who Uses These Markets? • Investors seeking to diversify their portfolios. • Companies seeking to • issue stock in the country (extend investor base) • satisfy local ownership requirements • create funding for future acquisitions • increase the visibility of the company.