IntroductionBenefits Of The Global Capital Market Functions Of A Generic Capital MarketClassroom Performance SystemFunctions Of A Generic Capital MarketAttractions Of The Global Capital Market Attractions Of The Global Capital MarketAttractions Of The Global Capital MarketAttractions Of The Global Capital MarketClassroom Performance SystemClassroom Performance SystemGrowth Of The Global Capital MarketClassroom Performance SystemGrowth Of The Global Capital MarketGrowth Of The Global Capital MarketClassroom Performance SystemGrowth Of The Global Capital MarketGlobal Capital Market RisksThe Eurocurrency MarketClassroom Performance SystemGenesis And Growth Of The MarketGrowth Of The Global Capital MarketAttractions Of The Eurocurrency MarketAttractions Of The Eurocurrency MarketDrawbacks Of The Eurocurrency MarketThe Global Bond MarketAttractions Of The Eurobond Market The Global Equity MarketForeign Exchange Risk And The Cost Of CapitalImplications For ManagersInternational Business 7eby Charles W.L. HillMcGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.Chapter 11The Global Capital Market11-3IntroductionThe rapid globalization of capital markets facilitates the free flow of money around the worldTraditionally, national capital markets have been separated by regulatory barriersTherefore, it was difficult for firms to attract foreign capitalMany regulatory barriers fell during the 1980s and 1990s, allowing the global capital market to emergeToday, firms can list their stock on multiple exchanges, raise funds by issuing equity or debt to investors from around the world, and attract capital from international investors11-4Benefits Of The Global Capital Market There are market functions that are shared by both domestic and international capital marketsHowever, global capital markets offer some benefits not found in domestic capital markets11-5Functions Of A Generic Capital MarketCapital markets bring together investors and borrowersInvestors include corporations with surplus cash, individuals, and non-bank financial institutionsBorrowers include individuals, companies, and governmentsMarkets makers are the financial service companies that connect investors and borrowers, either directly or indirectlyCommercial banks are indirect market makers, and investment banks are direct market makersCapital market loans can be equity (stock) or debt ( cash loans or bonds)11-6Classroom Performance SystemWhich of the following are market makers?a) commercial banksb) pension funds c) insurance companiesd) governments11-7Functions Of A Generic Capital MarketFigure 11.1: The Main Players in a Generic Capital Market11-8Attractions Of The Global Capital Market Borrowers benefit from:the additional supply of funds global capital markets providethe associated lower cost of capital (the price of borrowing money or the rate of return that borrowers pay investors)The cost of capital is lower in international markets because the pool of investors is much larger than in the domestic capital market11-9Attractions Of The Global Capital MarketFigure 11.2: Market Liquidity and the Cost of Capital11-10Attractions Of The Global Capital MarketInvestors also benefit from the wider range of investment opportunities in global capital markets that allow them to diversify their portfolios and lower their risks Studies show that fully diversified portfolios are only about 27 percent as risky as individual stocksInternational portfolio diversification is even less risky because the movements of stock prices across countries are not perfectly correlated This low correlation reflects the differences in nations’macroeconomic policies and economic policies and how their stock markets respond to different forces, and nations’restrictions on cross-border capital flows11-11Attractions Of The Global Capital MarketFigure 11.3: Risk Reduction through Portfolio Diversification11-12Classroom Performance SystemCompared to developed nations, less developed nations have a) smaller capital marketsb) more investment opportunitiesc) similar costs of capitald) greater liquidity11-13Classroom Performance SystemWhich of the following is not true of global capital marketsa) they benefit borrowersb) they benefit sellersc) they raise the cost of capitald) they provide a wider range of investment opportunities11-14Growth Of The Global Capital MarketGlobal capital markets are growing at a rapid paceIn 1990, the stock of cross-border bank loans was just $3,600 billionBy 2006, the stock of cross border bank loans was $17,875 billionThe international bond market shows a similar pattern with $3,515 billion in outstanding international bonds in 1997, and $17, 561 billion in 2006 International equity offerings were $18 billion in 1997 and $377 billion in 200611-15Classroom Performance SystemIn 2006, the stock of cross-border bank loans was about a) $3,600b) $7,800c) $17,800d) $33,60011-16Growth Of The Global Capital MarketTwo factors are responsible for the growth of capital markets:1. advances in information technology – the growth of international communications technology and advances in data processing capabilities Financial services companies now engage in 24-hour-day trading – the international capital market never sleepsHowever, this also means that shocks that occur in one financial market spread around the globe very quickly11-17Growth Of The Global Capital Market2. deregulation by governments – has facilitated growth in the international capital marketsTraditionally, governments have limited the ability of foreign investors to purchase significant equity positions in domestic companies, and the amount of foreign investment citizens could makeSince the 1980s, these restrictions have been falling in response to the development of the Eurocurrency market, and also pressure from financial services companiesDeregulation began in the United States, then moved on to other countries including Great Britain, Japan, and France11-18Classroom Performance SystemHistorically, the most tightly regulated industry has beena) agricultureb) consumer electronics c) automotivesd) financial services11-19Growth Of The Global Capital MarketMany countries have also dismantled capital controls making it easier for both inward and outward investment to occurThis trend has spread from the developed world to the emerging