International business 7e chapter 11


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International business 7e chapter 11

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  • In 2006, some $6.5 trillion a year was flowing across national borders. This number is expected to grow by 11 percent annually.
  • Market makers include commercial banks like Citicorp and investment banks like Bear Stearns and Merrill Lynch.
  • The answer is a.
  • Capital market loans include Equity loans- when corporations sell stock to investors Debt loans - when a corporation borrows money and agrees to repay a predetermined portion of the loan amount at regular intervals regardless of how much profit it is making In a purely domestic capital market the pool of investors is limited to residents of the country. This Places an upper limit on the supply of funds available Increases the cost of capital
  • Management Focus: Deutsche Telekom Taps the Global Capital Market Summary This feature examines Deutsche Telekom’s privatization strategy. Deutsche Telekom, one of the world’s largest telephone companies was state-owned until 1996 when the decision was made to privatize the company in order to increase efficiency and be in a better position to face the greater competition the deregulation of the European Union’s telecommunications sector was expected to create. Discussion of the feature can revolve around the following questions: Suggested Discussion Questions 1. Why did Deutsche Telekom feel it was necessary to take its Initial Public Offering outside the German market? Discussion Points: Deutsche Telekom was valued at about $60 billion. At this level of valuation, it would be significantly bigger than any other company on the German stock exchange. In fact, analysts believed that it would be nearly impossible to raise that sum in Germany. Most Germans shied away from stock ownership, and in any case, because many other companies were also being privatized, there was significant competition for investment money. 2. Deutsche Telekom listed its shares in Frankfurt, London, New York, and Tokyo. What are the advantages listing on so many different exchanges? Discussion Points: Many students will probably focus on the fact that the company’s Initial Public Offering was the largest in European history, and the second largest in the world ever. By listing on all four exchanges, Deutsche Telekom had a bigger base of potential investors. Another Perspective: For more information on Deutsche Telekom, go to the company’s web site at { }.
  • A fully diversified portfolio that contains stocks from many countries is less than half as risky as a fully diversified portfolio that contains only U.S. stocks.
  • The answer is a.
  • The answer is c.
  • The answer is c.
  • The answer is d.
  • Country Focus: Did the Global Capital Markets Fail Mexico Summary This feature explores Mexico’s economic problems in the mid-1990s. Mexico went from being a strong developing country with a good future to a country facing a financial crisis. Discussion of the feature can revolve around the following questions: Suggested Discussion Questions 1. How did Mexico’s financial fortunes turn negative so quickly in the 1990s. Discussion Points: Mexico went from being one of the most admired developing countries of the world, to one in a crisis. Much of the blame for this situation probably lies with the country’s trade deficit, which had been growing annually. As long as the money earned from trade was being reinvested, things were fine. But when events in the U.S. took investors by surprise, Mexican investments became riskier, and many short-term investors began to pull their money out, leaving the government without the means to maintain its current account deficit. 2. What steps could Mexico have taken to prevent the type of financial crisis it experienced in the 1990s? Discussion Points: Some students will probably argue that Mexico should have done a better job of managing its money so that its accounts were balanced rather than in deficit. Others students might suggest that even with the trade deficit, had Mexico promoted its long-term investment opportunities, it might have avoided the crisis.
  • The answer is b.
  • Foreign bonds sold in the United States are called Yankee bonds. Foreign bonds sold in Japan are Samurai bonds. Foreign bonds sold in Great Britain are bulldogs.
  • Country Focus: The Search for Capital in the Czech Republic Summary This feature explores the difficulties firms face raising capital in the Czech Republic. Although the Czech Republic was initially seen as a vibrant economy following the collapse of communism, macroeconomic problems caused the country to fall out of favor with investors. In addition, the Prague stock exchange was the target of allegations of financial misconduct, a situation which effectively raised the cost of capital for Czech firms. Discussion of the feature can revolve around the following questions: 1. What are the advantages to Czech firms of listing their equity on the London stock exchange? Discussion Points: Because of the improprieties surrounding the Prague stock exchange, Czech firms have little choice but to go outside the country to raise capital. By listing on the London exchange, Czech firms have access to a wider pool of investors and a probably a lower cost of capital. 2. Can you see any disadvantages to this strategy? Discussion Points: Some students will probably point out that by making the decision to list on the London stock exchange, Czech companies are also making a commitment to ensuring that it is complying with British accounting methods, and so raises its cost of capital.
  • International business 7e chapter 11

    1. 1. InternationalBusiness 7eby Charles W.L. HillMcGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
    2. 2. Chapter 11The Global Capital Market
    3. 3. 11-3IntroductionThe rapid globalization of capital markets facilitates thefree flow of money around the worldTraditionally, national capital markets have beenseparated by regulatory barriersTherefore, it was difficult for firms to attract foreign capitalMany regulatory barriers fell during the 1980s and 1990s,allowing the global capital market to emergeToday, firms can list their stock on multiple exchanges,raise funds by issuing equity or debt to investors fromaround the world, and attract capital from internationalinvestors
    4. 4. 11-4Benefits Of The Global Capital MarketThere are market functions that are shared by bothdomestic and international capital marketsHowever, global capital markets offer some benefits notfound in domestic capital markets
    5. 5. 11-5Functions Of A Generic Capital MarketCapital markets bring together investors and borrowersInvestors include corporations with surplus cash,individuals, and non-bank financial institutionsBorrowers include individuals, companies, andgovernmentsMarkets makers are the financial service companies thatconnect investors and borrowers, either directly or indirectlyCommercial banks are indirect market makers, andinvestment banks are direct market makersCapital market loans can be equity (stock) or debt ( cashloans or bonds)
    6. 6. 11-6Classroom Performance SystemWhich of the following are market makers?a) commercial banksb) pension fundsc) insurance companiesd) governments
    7. 7. 11-7Functions Of A Generic Capital MarketFigure 11.1: The Main Players in a Generic Capital Market
    8. 8. 11-8Attractions Of The Global Capital MarketBorrowers benefit from:the additional supply of funds global capital marketsprovidethe associated lower cost of capital (the price ofborrowing money or the rate of return that borrowers payinvestors)The cost of capital is lower in international marketsbecause the pool of investors is much larger than in thedomestic capital market
    9. 9. 11-9Attractions Of The Global Capital MarketFigure 11.2: Market Liquidity and the Cost of Capital
    10. 10. 11-10Attractions Of The Global Capital MarketInvestors also benefit from the wider range of investmentopportunities in global capital markets that allow them todiversify their portfolios and lower their risksStudies show that fully diversified portfolios are onlyabout 27 percent as risky as individual stocksInternational portfolio diversification is even less riskybecause the movements of stock prices across countriesare not perfectly correlatedThis low correlation reflects the differences in nations’macroeconomic policies and economic policies and howtheir stock markets respond to different forces, and nations’restrictions on cross-border capital flows
    11. 11. 11-11Attractions Of The Global Capital MarketFigure 11.3: RiskReduction through PortfolioDiversification
    12. 12. 11-12Classroom Performance SystemCompared to developed nations, less developed nationshavea) smaller capital marketsb) more investment opportunitiesc) similar costs of capitald) greater liquidity
    13. 13. 11-13Classroom Performance SystemWhich of the following is not true of global capital marketsa) they benefit borrowersb) they benefit sellersc) they raise the cost of capitald) they provide a wider range of investment opportunities
    14. 14. 11-14Growth Of The Global Capital MarketGlobal capital markets are growing at a rapid paceIn 1990, the stock of cross-border bank loans was just$3,600 billionBy 2006, the stock of cross border bank loans was$17,875 billionThe international bond market shows a similar patternwith $3,515 billion in outstanding international bonds in1997, and $17, 561 billion in 2006International equity offerings were $18 billion in 1997 and$377 billion in 2006
    15. 15. 11-15Classroom Performance SystemIn 2006, the stock of cross-border bank loans was abouta) $3,600b) $7,800c) $17,800d) $33,600
    16. 16. 11-16Growth Of The Global Capital MarketTwo factors are responsible for the growth of capitalmarkets:1. advances in information technology – the growth ofinternational communications technology and advances indata processing capabilitiesFinancial services companies now engage in 24-hour-day trading – the international capital market never sleepsHowever, this also means that shocks that occur in onefinancial market spread around the globe very quickly
    17. 17. 11-17Growth Of The Global Capital Market2. deregulation by governments – has facilitated growth inthe international capital marketsTraditionally, governments have limited the ability offoreign investors to purchase significant equity positions indomestic companies, and the amount of foreign investmentcitizens could makeSince the 1980s, these restrictions have been falling inresponse to the development of the Eurocurrency market,and also pressure from financial services companiesDeregulation began in the United States, then moved onto other countries including Great Britain, Japan, andFrance
    18. 18. 11-18Classroom Performance SystemHistorically, the most tightly regulated industry has beena) agricultureb) consumer electronicsc) automotivesd) financial services
    19. 19. 11-19Growth Of The Global Capital MarketMany countries have also dismantled capital controlsmaking it easier for both inward and outward investment tooccurThis trend has spread from the developed world to theemerging nationsThe global capital market is expected to continue to grow
    20. 20. 11-20Global Capital Market RisksSome analysts worry that the deregulation of capitalmarkets and loosening of controls on cross-border capitalflows make individual nations more vulnerable to thedestabilizing effects of speculative capital flowsSpeculative capital flows may be the result of inaccurateinformation about investment opportunitiesIf global capital markets continue to grow, better qualityinformation is likely to be available from financialintermediaries
    21. 21. 11-21The Eurocurrency MarketA eurocurrency is any currency banked outside of itscountry of originAbout two-thirds of all eurocurrencies are Eurodollars(dollars banked outside the United States)Other important eurocurrencies are the euro-yen, theeuro-pound, and the euro-euro
    22. 22. 11-22Classroom Performance SystemThe term eurocurrency refers toa) the currency used by the European Union countriesb) any currency banked outside its country of originc) currencies purchased in the international equities marketd) bonds sold outside the borrower’s country that aredenominated in the currency of the country in which theyare issued
    23. 23. 11-23Genesis And Growth Of The MarketThe eurocurrency market began in the 1950s when theEastern bloc countries were afraid the United States mightseize their holdings of dollarsSo, instead of depositing their dollars in the UnitedStates, they deposited them in EuropeAdditional dollar deposits came from Western Europeancentral banks and companies that exported to the UnitedStatesIn 1957, the market surged again after changes in BritishlawsToday, London continues to be the leading center of theeurocurrency market
    24. 24. 11-24Growth Of The Global Capital MarketIn the 1960s, the market grew once again when, afterchanges in U.S. regulations discouraged U.S. banks fromlending to non-U.S. residents, would-be borrowers ofdollars outside the United States turned to the euromarketas a source of dollarsThe next big increase in the eurocurrency market cameafter the 1973-74 and 1979-80 oil price increasesOPEC members avoided potential confiscation of theirdollars by depositing them in banks in London
    25. 25. 11-25Attractions Of The Eurocurrency MarketThe eurocurrency market is attractive to depositors andborrowers because it is not regulated by the governmentThis means that banks can offer higher interest rates oneurocurrency deposits than on deposits made in the homecurrencySimilarly, banks can also charge lower interest rates toeurocurrency borrowers than to those who borrow thehome currencyThe spread between the eurocurrency deposit andlending rates is less than the spread between the domesticdeposit and lending rates giving eurocurrency banks acompetitive edge over domestic banks
    26. 26. 11-26Attractions Of The Eurocurrency MarketFigure 11.4: Interest Rate Spreads in Domestic andEurocurrency Markets
    27. 27. 11-27Drawbacks Of The Eurocurrency MarketThe eurocurrency market has two drawbacks:1. because the eurocurrency market is unregulated, thereis a higher risk of bank failure2. companies borrowing eurocurrencies can be exposed toforeign exchange risk
    28. 28. 11-28The Global Bond MarketThe global bond market grew rapidly during the 1980sand 1990sThe most common kind of bond is a fixed rate bondwhich gives investors fixed cash payoffsThere are two types of international bonds:1. foreign bonds are sold outside the borrower’s countryand are denominated in the currency of the country inwhich they are issued2. eurobonds are underwritten by a syndicate of banks andplaced in countries other than the one in whose currencythe bond is denominated
    29. 29. 11-29Attractions Of The Eurobond MarketThe eurobond market is attractive for three main reasons:1. it lacks regulatory interference – since companies do nothave to adhere to strict regulations, the cost of issuingbonds is lower2. it has less stringent disclosure requirements thandomestic bond markets – it can be cheaper and less timeconsuming to offer eurobonds than to issue dollar-denominated bonds3. it is more favorable from a tax perspective – eurobondscan be sold directly to foreign investors
    30. 30. 11-30The Global Equity MarketThe largest equity markets are in the United States,Britain, and JapanToday, many investors invest in foreign equities todiversify their portfoliosIn the future, this type of trend may result in aninternationalization of corporate ownershipCompanies are also helping to promote this type of shiftby listing their stock in the equity markets of other nationsBy issuing stock in other countries, firms open the door toraising capital in the foreign market, and give the firm theoption of compensating local managers and employeeswith stock
    31. 31. 11-31Foreign Exchange RiskAnd The Cost Of CapitalAdverse exchange rates can increase the cost of foreigncurrency loansWhile it may initially seem attractive to borrow foreigncurrencies, when exchange rate risk is factored in, that canchangeFirms can hedge their risk by entering into forwardcontracts to purchase the necessary currency and lock inthe exchange rate, but this will also raise costsFirms must weigh the benefits of a lower interest rateagainst the risk of an increase in the real cost of capital dueto adverse exchange rate movements
    32. 32. 11-32Implications For ManagersGrowth in global capital markets has createdopportunities for firms to borrow or invest internationallyFirms can often borrow at a lower cost than in thedomestic capital marketFirms must balance the foreign exchange risk associatedwith borrowing in foreign currencies against the costssavings that may existThe growth of capital markets also offers opportunities forfirms, institutions, and individuals to diversify theirinvestments and reduce riskAgain, though investors must consider foreign exchangerate risk
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