The Global Capital Market Chapter 11
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Transcript of The Global Capital Market Chapter 11
© McGraw Hill Companies, Inc., 2000
The Global Capital Market Chapter 11
© McGraw Hill Companies, Inc., 2000
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.
11-1
© McGraw Hill Companies, Inc., 2000
The Main Players in a Generic Capital Market
Investors: Companies Individuals Institutions
Market makers: Commercial bankers Investment bankers
Borrowers: Individuals Companies Governments
11-2
Figure 11.1
© McGraw Hill Companies, Inc., 2000
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.
11-3
© McGraw Hill Companies, Inc., 2000
Market Liquidity and the Cost of Capital
SSB
D
SSl
D
D D21
Dollars
0
9
10%
Cost
of
Cap
ital
11-4
Figure 11.2
© McGraw Hill Companies, Inc., 2000
Risk Reduction Through Portfolio Diversification
(a) Risk reduction through domestic diversification
0.27
1.0
1 10 20 30 40 50
U.S. Stocks
TotalRisk
SystematicRisk
Number of stocks
Variance of portfolio return
Variance of return on
typical stock
11-5
Figure 11.3a
© McGraw Hill Companies, Inc., 2000
Risk Reduction Through Portfolio Diversification
(b) Risk reduction through domestic and international diversification
0.27
1.0
1 10 20 30 40 50
U.S. Stocks
International Stocks
Number of stocks
Variance of portfolio return
Variance of return on
typical stock0.12
11-6
Figure 11.3b
© McGraw Hill Companies, Inc., 2000
Net International Bank Lending
0
1000
2000
3000
4000
5000
6000
83 84 85 86 87 88 89 90 91 92 93 94 95 96 97
$Billions
11-7
Figure 11.4
© McGraw Hill Companies, Inc., 2000
International Bond Issues and the US Dollar Exchange Rate
60
80
100
120
140
160
180
0 94-1Q 94-2Q 94-3Q 94-4Q 95-1Q 95-2Q 95-3Q 95-4Q 96-1Q 96-2Q 96-3Q 96-4Q 97-1Q 97-2Q 97-3Q
DMYEN
Left-hand Scale (31 Dec 1993=100): Exchange Rate against US$
Right-hand Scale ($ Billion): announced IssuesUS DollarYen
European Currencies
Other
100
200
300
11-8Figure 11.5
© McGraw Hill Companies, Inc., 2000
International Equity Offerings and Equity Price Developments
0
100
200
300
400
500
600
700
800
900
1000
85 86 87 88 89 90 91 92 93 94 95 96 97
20
60
40
80Left-Hand Scale (US$)
M.S.C.I. World Index
Right-hand Scale ($ Billions)US$
Yen
11-9Figure 11.6
© McGraw Hill Companies, Inc., 2000
Why The Growth?
TECHNOLOGY. Deregulation by governments of capital
flows and financial services. Risk: Nations may be more vulnerable
to speculative capital flows. Short term investing.
11-10
© McGraw Hill Companies, Inc., 2000
Index of Capital Controls in Emerging Markets
0.52
0.54
0.56
0.58
0.6
0.62
0.64
0.66
0.68
86 87 88 89 90 91 92 93 94 95 96
0 = No Capital controls
1 = Tight Capital Controls
11-11Figure 11.7
© McGraw Hill Companies, Inc., 2000
Eurocurrency
It’s not the Euro! It is any currency banked outside its country
of origin. 1950s. Eastern Europeans afraid US would
seize deposits to reimburse claims for business losses as a result of Communist takeover of Eastern Europe.
11-12
© McGraw Hill Companies, Inc., 2000
Growth in Eurocurrency Funds
0
200
400
600
800
1000
1200
1400
1600
1961 1998
19611998
One Billion
1.5 Trillion
11-13
© McGraw Hill Companies, Inc., 2000
The Eurocurrency Market Characterized by a lack of regulation compared
to domestic financial markets. This means that you don’t have to pay for the
cost of regulation. Hence, cheap (or cheaper) money. Downside:
Banks could be more likely to fail (not probable) Because you are getting foreign money, you have
currency exchange risks.
11-14
© McGraw Hill Companies, Inc., 2000
Interest Rate Spreads in Domestic and Eurocurrency Markets
Rate of interest
Domestic lendingrate
Domesticdeposit rate
Eurocurrencylending rate
Eurocurrencydeposit rate
0%
11-15
Figure 11.8
© McGraw Hill Companies, Inc., 2000
The International Bond Market Bonds tend to be fixed rate. Foreign bonds
Sold outside the borrower’s country and in currency of country where issued.
Eurobonds underwritten by an international syndicate. issued by large corporations, international institutions
and governments. placed in country other than country of currency and
its residents.11-16
© McGraw Hill Companies, Inc., 2000
Euro vs Foreign Bonds(Billions of Dollars)
0 50 100 150 200
Euro
Foreign
11-17
© McGraw Hill Companies, Inc., 2000
Attraction of the Eurobond Market?
No government interference. Few disclosure requirements. Favorable tax status.
11-18
© McGraw Hill Companies, Inc., 2000
Global Equity Markets
Where investors can buy/sell stocks. Made up of many stock exchanges
around the world.
11-19
© McGraw Hill Companies, Inc., 2000
Trading in Non-US Stocks
0
100
200
300
400
500
NASDAQ NYSE
1994199519961997
US Billions
11- 20
© McGraw Hill Companies, Inc., 2000
Who Uses These Markets?
Investors seeking to diversify their portfolios. Companies seeking to
issue stock in the country use stock and options as a form of employee incentives satisfy local ownership requirements create funding for future acquisitions increase the visibility of the company.
11-21