Chapter 12 – The Global Capital Market
The Global Capital
Learning objectives
Describe the benefits of the global capital market.
Identify why the global capital market has grown so rapidly.
Understand the risks associated with the globalization of capital markets.
Compare and contrast the benefits and risks associated with the Eurocurrency market,
the global bond market, and the global equity markets.
Understand how foreign exchange risks affect the cost of capital.
This chapter discusses the form and function of the global capital market. The market is
attractive because its size lowers the cost of capital for borrowers, and allows investors to
diversify their portfolios, thereby reducing their risk.
Advances in information technology, together with the deregulation of financial services
and the relaxation of regulations on cross-border capital flows have contributed to the
growth of the global capital market.
The chapter explores the nature of the Eurocurrency market, the global bond market, and
the international equities market.
The opening case explores the decision by Chinese company Alibaba to list its share on
the New York Stock Exchange. This choice gave the company access to the world’s
largest and most liquid pool of investors while allowing it to maintain ownership control.
The closing case considers the implications of the decline in cross-border capital flows
following the global financial crisis in 2008.
OUTLINE OF CHAPTER 12: THE GLOBAL CAPITAL MARKET
Opening Case: Alibaba’s Record-Setting IPO
Introduction
Benefits of the Global Capital Market
Functions of a Generic Capital Market
Attractions of the Global Capital Market
Management Focus: Deutsche Telekom Taps the Global Capital Market
Growth of the Global Capital Market
Global Capital Market Risks
Country Focus: Did the Global Capital Markets Fail Mexico?
The Eurocurrency Market
Genesis and Growth of the Market
Attractions of the Eurocurrency Market
Drawbacks of the Eurocurrency Market
The Global Bond Market
Attractions of the Eurobond Market
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Chapter 12 – The Global Capital Market
The Global Equity Market
Foreign Exchange Risk and the Cost of Capital
Implications for Managers
Chapter Summary
Critical Thinking and Discussion Questions
Closing Case: Declining Cross-Border Capital Flows: Retreat or Reset?
CLASSROOM DISCUSSION POINT
Many of today’s students may be unaware of the limitations faced by companies that
wanted to raise capital just a couple of decades ago.
Encourage students to comprehend the significance and implications of the growth of the
global capital market by asking them to imagine a world where firms were limited to
their domestic market as a source of funds or investment opportunities.
Ask students to identify the advantages of this type of world, and then the disadvantages.
Finally, ask students to consider which type of system is better – the one that was in place
twenty years ago, or the current system.
LECTURE OUTLINE
This lecture outline follows the Power Point Presentation (PPT) provided along with this
instructor’s manual. The PPT slides include additional notes that can be viewed by
clicking on “view,” then on “notes.” The following provides a brief overview of each
Power Point slide along with teaching tips, and additional perspectives.
Slides 12-3 and 12-4 Why Do Global Capital Markets Exist?
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.
Global capital markets, while providing many of the same functions of domestic markets,
offer some benefits not found in domestic capital markets.
Capital markets bring together investors (corporations with surplus cash, individuals, and
non-bank financial institutions) and borrowers (individuals, companies, and
governments).
Slides 12-5 through 12-7 Attractions of the Global Capital Market
Borrowers benefit from the global capital market’s lower cost of capital and greater
investment options.
Slides 12-8 through 12-11 Growth of the Global Capital Markets
Since 1990, the stock of cross-border bank loans has grown from just $3,600 billion to
$33,913 billion in late 2012. The international bond market shows a similar pattern of
growth.
The two factors behind the growth are advances in information technology and
deregulation of the financial services industry.
Another Perspective: McKinsey & Company have been following the growth of the
global capital markets. Detailed analysis can be found at
{http://www.mckinsey.com/insights/global_capital_markets/mapping_global_capital_mar
kets_2011}.
Slide 12-12 Global Capital Market Risks
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McGraw-Hill Education.
Chapter 12 – The Global Capital Market
A key risk of an unregulated capital market and looser control on cross-border capital
flows is that individual nations may be more vulnerable to the destabilizing effects of
speculative capital flows.
Slide 12-13 The Eurocurrency Market
A Eurocurrency is any currency banked outside of its country of origin.
Slides 12-14 through 12-17 Genesis and Growth of the Eurocurrency Market
The Eurocurrency market began in the 1950s when the Eastern bloc countries were afraid
the United States might seize their holdings of dollars. Today, London is the center of the
market.
Slides 12-18 through 12-20 Attractions of the Eurocurrency Market
The Eurocurrency market is attractive to depositors and borrowers because it is not
regulated by governments.
Slide 12-21 Drawbacks of the Eurocurrency Market
The Eurocurrency market has two drawbacks. First, because the Eurocurrency market is
unregulated, there is a higher risk of bank failure. Second, companies borrowing
Eurocurrencies can be exposed to foreign exchange risk.
Slides 12-22 and 12-23 The Global Bond Market
There are two types of international bonds:
1. Foreign bonds are sold outside the borrower’s country and are denominated in the
currency of the country in which they are issued.
2. Eurobonds are underwritten by a syndicate of banks and placed in countries other than
the one in whose currency the bond is denominated.
Slide 12-24 Attractions of the Eurobond Market
The Eurobond market is attractive because:
It lacks regulatory interference
It has less stringent disclosure requirements than domestic bond markets
It is more favorable from a tax perspective
Slides 12-25 and 12-26 The Global Equity Market
The largest equity markets are in the United States, Britain, and Japan.
Slide 12-27 Foreign Exchange Risk and the Cost of Capital
While it may initially seem attractive to borrow foreign currencies, when the exchange
rate risk is factored in, that situation can change.
Slide 28 Think Like a Manager: Seeking Global Capital
Slides 12-29 and 12-30 Implications for Managers
Firms can often borrow in global capital markets at a lower cost than in the domestic
capital market. Firms must balance the foreign exchange risk associated with borrowing
in foreign currencies against the costs savings that may exist.
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McGraw-Hill Education.