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TheGlobalCapitalMarketWhyDoWeHaveCapitalMarkets?lCapitalmarketsbringtogetherinvestorsandborrowerslinvestors-corporationswithsurpluscash,individuals,andnon-bankfinancialinstitutionslborrowers-individuals,companies,andgovernmentslmarketsmakers-thefinancialservicecompaniesthatconnectinvestorsandborrowers,eitherdirectly(investmentbanks)orindirectly(commercialbanks)lcapitalmarketloanscanbeequityordebt2WhoAreTheMainPlayersinCapitalMarkets?TheMainPlayersinaGenericCapitalMarket3WhatMakesTheGlobalCapitalMarketAttractive?lToday’scapitalmarketsarehighlyinterconnectedandfacilitatethefreeflowofmoneyaroundtheworldlBorrowersbenefitfromltheadditionalsupplyoffundsglobalcapitalmarketsprovideltheassociatedlowercostofcapital-thepriceofborrowingmoneyortherateofreturnthatborrowerspayinvestorslInvestorsbenefitfromthewiderrangeofinvestmentopportunitiesldiversifyportfoliosandlowerrisk4WhatMakesTheGlobalCapitalMarketAttractive?MarketLiquidityandtheCostofCapital5WhatMakesTheGlobalCapitalMarketAttractive?RiskReductionthroughPortfolioDiversification6HowHaveGlobalCapitalMarketsChangedSince1990?lGlobalcapitalmarketshavegrownrapidlylthestockofcross-borderbankloanswasjust$3,600billionin1990,but$24,566in2008ltheinternationalbondmarkethasgrownfrom$3,515billionin1997to$22,734in2008linternationalequityofferingswere$18billionin1997and$387billionin20087WhyIsTheGlobalCapitalMarketGrowing?lTwofactorsareresponsibleforthegrowthofcapitalmarkets1.Advancesininformationtechnology–thegrowthofinternationalcommunicationstechnologyandadvancesindataprocessingcapabilitiesl24-hour-daytradinglso,shocksthatoccurinonefinancialmarketspreadaroundtheglobeveryquickly8WhyIsTheGlobalCapitalMarketGrowing?2.Deregulationbygovernments–hasfacilitatedgrowthininternationalcapitalmarketslgovernmentshavetraditionallylimitedforeigninvestmentindomesticcompanies,andtheamountofforeigninvestmentcitizenscouldmakelsincethe1980s,theserestrictionshavebeenfallinglderegulationbeganintheUnitedStates,thenmovedtoothercountries-GreatBritain,Japan,andFrancelmanycountrieshavedismantledcapitalcontrolsmakingiteasierforbothinwardandoutwardinvestmenttooccur9WhatAreTheRisksOfTheGlobalCapitalMarkets?lCouldderegulationofcapitalmarketsandfewercontrolsoncross-bordercapitalflowsmakenationsmorevulnerabletotheeffectsofspeculativecapitalflows?lSpeculativecapitalflowsmaybetheresultofinaccurateinformationaboutinvestmentopportunitieslIfglobalcapitalmarketscontinuetogrow,betterqualityinformationislikelytobeavailablefromfinancialintermediaries10WhatIsAEurocurrency?lAeurocurrencyisanycurrencybankedoutsideitscountryoforiginlAbouttwo-thirdsofalleurocurrenciesareEurodollars-dollarsbankedoutsidetheUnitedStateslOtherimportanteurocurrenciesaretheeuro-yen,theeuro-pound,andtheeuro-euro11WhyHasTheEurocurrencyMarketGrown?lTheeurocurrencymarketbeganinthe1950swhentheEasternbloccountriesfearedthattheUnitedStatesmightseizetheirdollarslso,theydepositedtheminEuropeladditionaldollardepositscamefromWesternEuropeancentralbanksandcompaniesthatexportedtotheUnitedStateslIn1957,themarketsurgedagainafterchangesinBritishlawslLondoncontinuestobetheleadingcenteroftheeurocurrencymarket12WhyHasTheEurocurrencyMarketGrown?lInthe1960s,themarketgrewonceagainwhen,afterchangesinU.S.regulationsdiscouragedU.S.banksfromlendingtonon-U.S.residents,would-beborrowersofdollarsoutsidetheUnitedStatesturnedtotheeuromarketasasourceofdollarslThenextbigincreasecameafterthe1973-74and1979-80oilpriceincreaseslOPECmembersavoidedpotentialconfiscationoftheirdollarsbydepositingtheminbanksinLondon13WhatMakesTheEurocurrencyMarketAttractive?lTheeurocurrencymarketisattractivebecauseitisnotregulatedbythegovernmentlbankscanofferhigherinterestratesoneurocurrencydepositsthanondepositsmadeinthehomecurrencylbankscanchargelowerinterestratestoeurocurrencyborrowersthantothosewhoborrowthehomecurrencylThespreadbetweentheeurocurrencydepositandlendingratesislessthanthespreadbetweenthedomesticdepositandlendingratesgivingeurocurrencybanksacompetitiveedgeoverdomesticbanks14WhatMakesTheEurocurrencyMarketAttractive?InterestRateSpreadsinDomesticandEurocurrencyMarkets15WhatMakesTheEurocurrencyMarketUnattractive?lTheeurocurrencymarkethastwosignificantdrawbacks1.Becausetheeurocurrencymarketisunregulated,thereisahigherriskofbankfailure2.Companiesborrowingeurocurrenciescanbeexposedtoforeignexchangerisk16WhatIsTheGlobalBondMarket?lBondsareanimportantmeansoffinancingformanycompanieslThemostcommonkindisafixedratebondwhichgivesinvestorsfixedcashpayoffslTheglobalbondmarketgrewrapidlyduringthe1980sand1990slTherearetwotypesofinternationalbonds1.Foreignbondsaresoldoutsidetheborrower’scountryandaredenominatedinthecurrencyofthecountryinwhichtheyareissued2.Eurobondsareunderwrittenbyasyndicateofbanksandplacedincountriesotherthantheoneinwhosecurrencythebondisdenominated17WhatMakesTheEurobondMarketAttractive?lTheeurobondmarketisattractivebecause1.Itlacksregulatoryinterference–sincecompaniesdonothavetoadheretostrictregulations,thecostofissuingbondsislower2.Ithaslessstringentdisclosurerequirementsthandomesticbo