Chapter 12 ‒ The Global Capital Market
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Learning objectives
• Describe the benefits of the global
market has grown so rapidly.
• Understand the risks associated
and risks associated with the
Eurocurrency market, the global
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
Advances in information technology, together
with the deregulation of financial services and
the relaxation of regulations on cross-border
The chapter explores the nature of the
Eurocurrency market, the global bond market,
and the international equities market.
in government-owned Saudi Aramco. The
country is exploring listing the shares on a
larger exchange such as the NYSE to help
ensure that the initial public offering (IPO) is
allowing it to maintain ownership control.
Chapter 12 ‒ The Global Capital Market
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OUTLINE OF CHAPTER 12: THE GLOBAL CAPITAL MARKET
Management Focus: The Industrial and Commercial Bank of China 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 Global Bond Market
Attractions of the Eurobond Market
The Global Equity Market
Closing Case: Alibaba’s Record-Setting IPO
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Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
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
20 years ago, or the current system.
OPENING CASE: Saudi Aramco
Summary
The opening case explores Saudi Arabia’s plan to list shares of the government-run Saudi
Aramco on the NYSE or another larger exchange. In an effort to diversify and modernize
its economy, Saudi Arabia announced an ambitious plan called Vision 2030. To finance
the plan, the government plans to raise some $100 billion through the sale of Saudi
Aramco shares. The government is currently exploring the benefits of listing the
company on the NYSE and the Singapore exchange. Both would offer a larger pool of
buyers, but both would also require the company to adhere to strict accounting
requirements. Discussion of the case can begin with the following questions:
QUESTION 1: Why has the government of Saudi Arabia decided to sell shares of Saudi
Aramco? What benefits does the decision offer the country?
ANSWER 1: Saudi Arabia is heavily reliant on oil, in fact, 90 percent of its export
QUESTION 2: What are the benefits of listing Saudi Aramco on a larger exchange like
the NYSE rather than the local exchange?
ANSWER 2: Saudi Arabia’s government has set a goal of raising $100 billion by selling
Chapter 12 ‒ The Global Capital Market
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Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
more than $20 trillion. Saudi Arabia could also explore listing on multiple exchanges to
further widen the pool of potential investors.
QUESTION 3: Discuss accounting regulations and Saudi Aramco. Do you see any issues
related to Saudi Aramco’s state ownership? How might things change for Saudi Aramco
if it sells its shares on the NYSE?
ANSWER 3: As a state owned enterprise, Saudi Aramco has been subject to limited
oversight, something that would swiftly change if the oil company is listed on the NYSE.
Another Perspective: For more information on Saudi Aramco’s listing, go to:
{https://www.bloomberg.com/gadfly/articles/2017-11-16/norway-sovereign-wealth-fund-
sells-oil-and-gas-stocks} and {http://fortune.com/2017/10/24/saudi-arabia-aramco-oil/}.
LECTURE OUTLINE
This lecture outline follows the Power Point Presentation (PPT) provided along with this
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 – 12-10 Benefits of the Global Capital Market
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).
Attractions of the Global Capital Market
Borrowers benefit from the global capital market’s lower cost of capital and greater
investment options.
Growth of the Global Capital Markets
According to the Bank for International Settlements, stocks, bonds, and bank loans are
currently about $300 trillion, about three times the size of the world economy.
Chapter 12 ‒ The Global Capital Market
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The two factors behind the growth are advances in information technology and
the_future_of_equity_mrkts.pdf}.
Global Capital Market Risks
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.
market.
Attractions of the Eurocurrency Market
The Eurocurrency market is attractive to depositors and borrowers because it is not
regulated by governments.
Drawbacks of the Eurocurrency Market
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.
Attractions of the Eurobond Market
Chapter 12 ‒ The Global Capital Market
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Slide 12-20 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 12-21 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.
CRITICAL THINKING AND DISCUSSION QUESTIONS
QUESTION 1: Why has the global capital market grown so rapidly in recent decades?
Do you think this growth will continue throughout the next decade? Why?
ANSWER 1: The global capital market has experienced rapid growth in recent decades.
QUESTION 2: In 2008‒2009, the world economy retrenched in the wake of a global
financial crisis. Did the globalization of capital markets contribute to this crisis? If so,
what can be done to stop global financial contagion in the future?
ANSWER 2: Most students will probably agree that the globalization of capital markets
was a significant contributing factor to the 2008 financial crisis. If markets still operated
Another Perspective: To learn more about G20 efforts to prevent future financial crises
consider {https://www.ecb.europa.eu/pub/pdf/other/art3_mb201101en_pp87-
97en.pdf?1a5ea2a018c10cfa07a6a9fac8849be8}.
QUESTION 3: A firm based in Mexico has found that its growth is restricted by the
limited liquidity of the Mexican capital market. List the firm’s options for raising money
on the global capital market. Discuss the pros and cons of each option, and make a
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recommendation. How might your recommended options be affected if the Mexican peso
depreciates significantly on the foreign exchange markets over the next two years?
ANSWER 3: Companies seeking to raise money in the global capital markets can pursue
equity loans or debt loans. Equity loans involve selling stock to investors, while debt
QUESTION 4: Happy Company wants to raise $2 million with debt financing. The funds
are needed to finance working capital, and the firm will repay them with interest in one
year. Happy Company’s treasurer is considering three options:
a. Borrowing U.S. dollars from Security Pacific Bank at 8 percent.
b. Borrowing British pounds from Midland Bank at 14 percent.
c. Borrowing Japanese yen from Sanwa Bank at 5 percent.
If Happy borrows foreign currency, it will not cover it; that is, it will simply change
foreign currency for dollars at today’s spot rate and buy the same foreign currency a year
later at the spot rate that is in effect. Happy Company estimates the pound will depreciate
by 5 percent relative to the dollar and the yen will appreciate 3 percent relative to the
dollar in the next year. From which bank should Happy Company borrow?
ANSWER 4: Happy Company needs to consider both the cost of capital and foreign
exchange risk. If Happy Company borrows $2 million from Security Pacific Bank in one
year it will owe the bank $2 million plus 8 percent. If Happy Company borrows British
CLOSING CASE: Alibaba’s Record Setting IPO
Summary
The closing case explores the $231 billion initial public offering of Chinese e-commerce
company Alibaba. Initially, Alibaba considered making an IPO in Hong Kong, but
concerns over a rule that would cause founder Jack Ma and his colleagues to lose
ownership control of the company caused them to turn to the New York Stock Exchange.
The decision proved to be beneficial for Alibaba, and the IPO drew enormous interest