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Chapter
11 Outline
Chapter Summary
This chapter explained the functions and form of the global
capital market and defined the implications of this for international
business practice. This chapter made the following points:
- The function of a capital market is to bring those who
want to invest money together with those who want to borrow money.
- Relative to a domestic capital market, the global capital
market has a greater supply of funds available for borrowing, and this
makes for a lower cost of capital for borrowers.
- Relative to a domestic capital market, the global capital
market allows investors to diversify portfolios of holdings internationally,
thereby reducing risk.
- The growth of the global capital market during recent
decades can be attributed to advances in
information technology, the widespread deregulation
of financial services, and the relaxation of regulations governing
cross-border capital flows.
- A eurocurrency is any currency banked outside its country
of origin. The lack of government regulations makes the eurocurrency
market attractive to both depositors and borrowers. Due to the absence
of regulation, the spread between the eurocurrency deposit and lending
rates is less than the spread between the domestic deposit and lending
rates. This gives eurobanks a competitive advantage.
- The global bond market has two classifications: the
foreign bond market and the eurobond market. Foreign bonds are sold
outside of the borrower's country and are denominated in the currency
of the country in which they are issued. A eurobond issue is normally
underwritten by an international syndicate of banks
and placed in countries other than the one in whose currency the bond
is denominated. Eurobonds account for the lion's share of international
bond issues.
- The eurobond market is an attractive way for companies
to raise funds due to the absence of regulatory interference, less stringent
disclosure requirements, and eurobonds' favorable tax status.
- Foreign investors are investing in other countries' equity
markets to reduce risk by diversifying their stock holdings among nations.
- Many companies are now listing their stock in the equity
markets of other nations, primarily as a prelude to issuing stock in
those markets to raise additional capital. Other reasons for listing
stock in another country's exchange are to facilitate future stock swaps;
to enable the company to use its stock and stock options for compensating
local management and employees; to satisfy local ownership desires;
and to increase the company's visibility among its local employees,
customers, suppliers, and bankers.
- When borrowing funds from the global capital market,
companies must weigh the benefits of a lower interest rate against the
risks of greater real costs of capital due to adverse exchange rate
movements.
- One major implication of the global capital market for
international business is that companies can often borrow funds at a
lower cost of capital in the international capital market than they
can in the domestic capital market.
- The global capital market provides greater opportunities
for businesses and individuals to build a truly diversified portfolio
of international investments in financial assets, which lowers risk.
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