Chapter 12 ‒ The Global Capital Market
The Global Capital Market
Learning Objectives
• LO12-1: Describe the benefits of
the global capital market.
• LO12-2: Identify why the global
capital market has grown so
rapidly.
• LO12-3: Understand the risks
associated with the globalization
of capital markets.
• LO12-4: Compare and contrast
the benefits and risks associated
with the Eurocurrency market, the
global bond market, and the
global equity market.
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 growing trend
for Chinese companies to conduct their initial
12
Chapter 12 ‒ The Global Capital Market
12-2
OUTLINE OF CHAPTER 12: THE GLOBAL CAPITAL MARKET
Opening Case: Chinese IPOs in the United States
Introduction
Benefits of the Global Capital Market
The Functions of a Generic Capital Market
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
The Global Equity Market
Foreign Exchange Risk and the Cost of Capital
Focus on Managerial Implications
Growth of the Global Capital Market
Chapter 12 ‒ The Global Capital Market
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.
Finally, ask students to consider which type of system is better—the one that was in place
a few decades ago, or the current system.
OPENING CASE: Chinese IPOs in the United States
Summary
The opening case explores the growing trend of Chinese companies conducting their
IPOs in the United States. Despite the ongoing trade tensions between the United States
and China, in 2018, more than 30 companies raised more than $9 billion in the United
States. Many of the companies involved were technology companies. Discussion of the
case can begin with the following questions:
QUESTION 1: Why are so many Chinese companies choosing to conduct their IPOs in
the United States rather than in China?
ANSWER 1: Many Chinese companies, especially those in the technology sector are
turning to the United States where the cost of capital is lower, for their IPOs. In 2017, 17
Chinese companies raised nearly $4 billion via IPOs in the United States. That number
QUESTION 2: Why are U.S. investors interested in Chinese technology stocks when
Chinese citizens are shying away from them?
ANSWER 2: Many U.S. investors appear to view the potential for China’s technology
companies in a much different light than their Chinese counterparts. While Chinese
Chapter 12 ‒ The Global Capital Market
investors, buying shares in a Chinese technology IPO offers a good option to diversify
their portfolios into stock which may carry higher risk, but also potentially higher gains.
QUESTION 3: How do regulations in the United States contribute to the attractiveness
of the United States as a location for Chinese IPOs?
ANSWER 3: Chinese companies interested in maintaining control over their companies
are likely to prefer to conduct their IPOs in the United States rather than in China because
of the difference in regulations on share ownership rights between the two countries.
Stock exchanges in the United States allow for dual class shares, an option that is not
LECTURE OUTLINE
This lecture outline follows the Power Point Presentation (PPT) provided along with this
instructor’s manual. The following provides a brief overview of each Power Point slide
along with teaching tips and additional perspectives.
Slides 12-3 – 12-13 Benefits of the Global Capital Market
The Functions of a Generic Capital Market
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.
Chapter 12 ‒ The Global Capital Market
The two factors behind the growth are advances in information technology and
deregulation of the financial services industry.
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.
CONNECT
Click and Drag
Risks and Opportunities in the Global Capital Market
Summary
This activity focuses on the risks and opportunities in global capital markets. Advances in
technology and government deregulation have triggered rapid growth in global capital markets.
While that growth provides benefits for borrowers and for investors, it can also have a
destabilizing effect on national economies.
Class Discussion
Understanding the risks and opportunities associated with global capital markets is important for
international managers. Discuss how global capital markets benefit both investors and borrowers.
What are the drawbacks of growth in global capital markets?
CONNECT
Case Analysis
Riding the Rollercoaster: China and Global Capital Markets
Chapter 12 ‒ The Global Capital Market
Activity
Students are asked to read a short case on China’s role in global capital markets and then respond
to a series of questions related to the case.
Class Discussion
Discuss China’s role in global capital markets. How might economic and financial problems in
China spread to other markets? Should investors considering investing in China be concerned
about the lack of transparency?
Slides 12-14 – 12-18 The Eurocurrency Market
A Eurocurrency is any currency banked outside of its country of origin.
Genesis and Growth of the 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.
CONNECT
Click and Drag
Development of the Eurocurrency Market
Summary
This activity focuses on the Eurocurrency markets. Eurocurrencies, defined to be any currency
that is banked outside of its country of origin, can be created anywhere in the world.
Activity
Students are asked to match developments in the evolution of the Eurocurrency market to the
correct spot in the timeline.
Class Discussion
Discuss why the Eurocurrency market was created. How does the Eurocurrency market benefit
investors and borrowers?
Chapter 12 ‒ The Global Capital Market
Slides 12-19 – 12-20 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.
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 12-21 – 12-22 The Global Equity Market
The largest equity markets are in the United States, Britain, Japan, and Hong Kong.
CONNECT
Decision Generator
Where to Invest?
Class Discussion
The choice of where to invest can have significant implications for future earnings. It is important
to understand the various investment opportunities, domestic and foreign.
Slide 12-23 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.
Chapter 12 ‒ The Global Capital Market
CONNECT
Video Case
Did You Know That China and Japan Are the Largest Foreign Holders of U.S. Treasury Bills?
Summary
This activity focuses on the growth of global capital markets, their benefits and risks, and how
foreign exchange movements affect the cost of capital.
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 or why not?
ANSWER 1: The global capital market has experienced rapid growth in recent decades.
Stocks, bonds, and bank loans currently total around $300 trillion, a number that is triple
the size of the global economy. A similar pattern exists with international equities
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
on a national basis, the crisis would have largely been contained, if indeed it started at all.
Chapter 12 ‒ The Global Capital Market
QUESTION 3: A firm based in Norway has found that its growth is restricted by the
limited liquidity of the Norwegian 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
recommendation. How might your recommended options be affected if the Norwegian
krona 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
loans involve issuing bonds. In either case, the cost of capital is generally lower than it
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
Chapter 12 ‒ The Global Capital Market
CLOSING CASE: Saudi Aramco
Summary
The closing 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 wants to raise some $100 billion through the sale of Saudi
Aramco shares. The government is currently exploring the benefits of listing the
company on various exchanges including the NYSE and the Singapore exchange. Issuing
stock on one of these exchanges would offer a larger pool of buyers, but would also
require the company to adhere to strict accounting requirements. Discussion of the case
can begin with the following questions:
QUESTION 1: Why does the government of Saudi Arabia want Saudi Aramco to
undertake an IPO? Should the fact that the funds raised will not be used to invest in Saudi
Aramco matter to investors?
ANSWER 1: Saudi Arabia is heavily reliant on oil, in fact, 90 percent of its export
earnings come from oil and this is something that the government wants to change. To
that end, it announced a plan called Vision 2030 with the objective of diversifying the
QUESTION 2: Saudi Aramco is a tightly held state-owned enterprise with a history of
secrecy. How might this impact the IPO? What concerns might potential investors have?
How might these concerns impact Saudi Aramco’s cost of capital? What does Saudi
Aramco need to do to reassure investors and deal with these concerns?
ANSWER 2: 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 one of the
QUESTION 3: Could Saudi Aramco raise $100 billion by offering shares for sale on just
the local Tadawul stock exchange? Why is it considering other stock exchanges? If it
does restrict where it offers shares, what might the potential impact be?
Chapter 12 ‒ The Global Capital Market
McGraw-Hill Education.
ANSWER 3: Saudi Arabia’s government has set a goal of raising $100 billion by selling
shares in the government-run Saudi Aramco. To achieve this, the IPO will almost
certainly need to take place on a larger, more liquid exchange than the Saudi exchange,
QUESTION 4: If you were advising Saudi Aramco on their IPO strategy, what would
your advice be?
ANSWER 4: Responses to this question will differ by student. Many will likely agree
that the close relationship between the Saudi government and Aramco will probably raise
red flags for some investors, making it essential that every effort is made to be as
transparent as possible.
MHE INTERNATIONAL BUSINESS VIDEO LIBRARY
Please click here to visit our International Business Video Library, which provides an
ongoing stream of updated video suggestions correlated by key concept and major topic.
Every new clip posted is supported by teaching notes and discussion questions. Please
feel free to leave comments in the library that you feel might be helpful to your
colleagues.
CONNECT
Geography
Chapter 12 ‒ The Global Capital Market
Activity
Students are asked to respond to a series of question related to the geographic location of several
countries.
Class Discussion
Understanding the geographic location of countries is essential to the understanding of
international business. Ask students to discuss the implications of the geographic locations of the
countries in this exercise on the subject matter.
INCORPORATING globalEDGE™ EXERCISES
Exercise 1
The top management team of your not-for-profit organization would like to find out more
about investing in environmentally responsible companies in Europe. FTSE develops
various indexes for the global financial markets. A series of indexes, called ESG, cover
Exercise 2
The Bureau of Economic Analysis is an agency of the U.S. Department of Commerce. It
lists data about U.S. economic accounts, including current investment positions and the
amount of direct investment by multinational corporations in the United States and
abroad. Prepare a brief report regarding the direct investments of other countries in the
U.S. Include in your report the leading countries in foreign direct investment.
Answers to Exercises
Exercise 1 Answer
Search phrase: FTSE
Additional Info:
FTSE publishes and tracks numerous indices. One of these is the FTSE4Good
Environmental Leaders Europe 40 index, tracking European companies with leading
environmental practices.
Chapter 12 ‒ The Global Capital Market
Exercise 2 Answer
Additional Info:
The FDI related data on the Bureau of Economic Analysis website can be found under
the “International” category. The Direct Investment and Multinational Companies data
collection includes information on U.S. direct investment abroad and foreign direct
investment in the United States.