11

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Largest provider of wireless telephone service in the world
In 2000 China was wrapping up negotiations to join the
World Trade organization
 Direct consequence: China will have to open up its telecommunication market to foreign service providers
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As a preemptive strategy China mobile
Increased geographic coverage
Raised capital through
 Issuance of new shares
 Selling 2% stake in company to Vodafone
 Selling ADRs
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11-2

Functions of a generic capital market
11-3
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Brings together:
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Those who want to invest:
 Corporations, individuals, non bank financial institutions
Those who want to borrow:
 Individuals, companies, governments
Market makers:
 Commercial and investment banks that connect investors with borrowers
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Fig 11.1
The main players in a generic capital market
11-4
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Attractions of the global capital market
11-5
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Increases the supply of funds available
Benefits both borrowers and investors
Borrower’s perspective
 Lowers the cost of capital
Investor’s perspective
 Provides a wider range of investment opportunities
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Market liquidity and the cost of capital
11-6
Fig 11.2
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Fig 11.3
Risk reduction through portfolio diversification
11-7
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11-8
International portfolio risk reduction



Some common perceptions
Global capital market has increased the correlation between different stock markets reducing the benefit of international diversification
In fact, movements of stock prices across countries are not perfectly correlated


Reflects two factors:
Countries pursue different macroeconomic policies and face different economic conditions
 Different stock markets are segmented by capital controls.
 Perception that markets are integrating, but not as rapidly as thought
 Home bias puzzle
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11-9
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Information technology
 Diminishing costs of sharing information
 Internet
 Computer power
Deregulation

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Response to:
 Eurocurrency market

Increasing acceptance a ‘free market’ concept
Dismantling of national capital controls
Less restrictions on inward/outward capital flows
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11-10
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
Global capital market risks
Nations more vulnerable to speculative capital flows because of lack of knowledge
 Potential destabilization of economies (Mexico)
 Capital pursuing short term gains
 Hot money

Long term patient money
 Lack of quality information

Investors react to quickly to news events
 Differing accounting conventions
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
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Euro-currency is any currency banked outside its country of origin
 Eurodollars are dollars banked outside the United States
Growth
 1950s. Eastern Europeans, afraid US would seize deposits to reimburse claims for business losses as a result of Communist takeover of Eastern Europe
Other events:

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Britain – 1957
U.S. – 1960s
Failure of Bretton Woods
Oil crisis – 1970s
11-11
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11-12
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Attractions
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Gave opportunity to those who wanted to deposit or borrow dollars (later, other currencies, as well).
Lack of government regulations makes the
Eurocurrency attractive
Banks offer higher interest rates
Drawbacks


Unregulated system could result in loss of deposits
Borrowing funds internationally can expose a company to foreign exchange risk
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Interest rate spreads in domestic and
Eurocurrency markets
Fig 11.4
11-13
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11-14
The global bond market

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Attractions of the Eurobonds market
Bonds tend to be fixed rate
Foreign bonds

Sold outside the borrower’s country and in currency of country where issued
Eurobonds
 Underwritten by an international syndicate


Issued by large corporations, international institutions and governments
Placed in country other than country of currency and its residents
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11-15
Global equity markets
 Where investors can buy/sell stocks
 Made up of many
Stock exchanges around the world
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11-16
Who uses these markets?
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Investors seeking to diversify their portfolios.
Companies seeking to
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Issue stock in the country
Use stock and options as a form of employee incentives
Satisfy local ownership requirements
Create funding for future acquisitions
Increase the visibility of the company
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Foreign exchange risk and the cost of
11-17 capital


When a firm borrows from the global capital market it must
 Weigh benefits of lower interest rates against risks of an increase in the real cost of capital due to adverse exchange rate movements
Unpredictable movements in exchange rates, inject risk into foreign currency borrowing, making something less expensive more expensive
 Borrower can hedge by entering into a forward contract
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11-18
Managerial implications


Growth of Global capital markets provide opportunities for firms wishing to borrow or invest money.
Firms can borrow funds at lower costs



Perhaps the emergence of a unified capital market in the EU?
Opportunities to diversify investments
FX risk is a complicating factor
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