1. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 11-1 Chapter Focus The benefits of the global capital market. Growth of the international capital market. Macroeconomic risks associated with the growth. Important segments of the market: Eurocurrency market. International bond market. International equity market.

2. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 11-2 Functions of a Generic Capital Market Brings together those who want to invest with who want to borrow. Invest: Firms with surplus cash. Individuals. Nonbank financial institutions. Borrow: Individuals. Companies. Governments. Market makers: Financial service companies that connect investors and borrowers, either directly or indirectly.

3. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 11-3 The Main Players in a Generic Capital Market Investors: Companies Individuals Institutions Market makers: Commercial bankers Investment bankers Borrowers: Individuals Companies Governments Figure 11.1

4. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 11-4 Attractions of the Global Capital Market Benefits both borrowers and investors. Borrowers: Increases the money supply. Lowers the cost of capital. Investors: Provides a wide range of investment opportunity. Diversifies investor risk.

5. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 11-5 International Portfolio Risk Reduction Movements of stock prices across across countries are not perfectly correlated. Reflects two factors: Countries pursue different macroeconomic policies and face different economic conditions. Different stock markets are segmented by capital controls. Perception that markets are integrating, but not as rapidly as thought.

6. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 11-6 Growth of Global Capital Markets Information Technology: Diminishing costs of sharing information. Internet. Computer power. Shocks in one market affect other markets Deregulation: Response to: Eurocurrency market. Financial services firms. Increasing acceptance a ‘free market’ concept. Dismantling of national capital controls. Less restrictions on inward/outward capital flows.

7. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 11-7 Global Bond Market Fixed rate. Two types: Foreign: Sold outside borrower’s country and denominated by the currency of the country where issued. Desire to lower cost of capital. Eurobonds: Underwritten by a bank syndicate and placed in countries other than the one in whose currency the bond is denominated. Issued by multinational corporations,large domestic corporations, and international institutions. Not offered in capital market, or to residents, of the country whose currency they are denominated.

8. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 11-8 Attractions of the Eurobond Market Attraction: An absence of regulatory interference. Less stringent disclosure requirements than domestic bond markets. Favorable tax status.

9. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 11-9 Global Equity Market No equity market in the sense of the international currency and bond markets. Countries have their own markets to trade corporate stocks. Many open to foreign investors. Two trends: Internationalization of corporate ownership. Companies broadening stock ownership by listing stock on foreign exchanges. Tap into larger pool of funds for investment. Lowering capital costs. Facilitate future acquisitions. Stock and stock options for local employees, suppliers and bankers. Increasing, firms from developing countries are taking advantage of the opportunity to access these funds.

10. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 11-10 Foreign Exchange Risk and the Cost of Capital Unpredictable movements in rates. Increases cost of currency Forward exchange market provides some hedge.