INTERNATIONAL CAPITAL MARKETINTERNATIONAL CAPITAL MARKET

SUBMITTED BY :

BELINDA FRANCIS

GAURAV CHOUDHARY

Capital market Capital markets are markets where people, companies,

and governments with more funds than they need (because they save some of their income) transfer those funds to people, companies, or governments who have a shortage of funds (because they spend more than their income).

International Capital market The group of closed interconnected markets in which

residents of different countries trade-assets such as currencies, stocks and bonds.

Capital markets promote economic efficiency by channeling money from those who do not have an immediate productive use for it to those who do.

Three Types of Gain From Trade All transactions between the residents of different

countries fall into one of three categories: Trades of goods or services for goods or services Trades of goods or services for assets Trades of assets for assets

The International Capital Market and the Gains From Trade

The International Capital Market and the Gains From Trade

The Three Types of International Transaction

Goods

and

Services

Assets

Goods

and

Services

Assets

Home Foreign

Features of International Capital Markets

Capital markets efficiently direct capital to productive uses.

Finance can be direct or indirect. Capital markets are important because they

promote efficiency and productive investments.

Risk Aversion The risk associated with a trade of assets is shared when

assets are traded internationally. When people are risk averse, countries can gain

through the exchange of risky assets. International capital markets make these trades

possible.

The International Capital Market and the Gains From Trade

Reduce risk through Portfolio Diversification as a Motive for International Asset Trade International portfolio diversification can allow

residents of all countries to reduce the variability of their wealth.

• Changes in the International Marketplace Resulted in a New Era of Global Capital Markets During the Late 1990s, which were Critical to Development.

The Menu of International Assets: Debt Versus Equity International portfolio diversification can be carried out through the

exchange of: Debt instruments

Bonds and bank deposits They specify that the issuer of the instrument must

repay a fixed value regardless of economic circumstances.

Equity instruments A share of stock

It is a claim to a firm’s profits, rather than to a fixed payment, and its payoff will vary according to circumstance.

STRUCTURE OF CAPITAL MARKET

EQUITY

1. Primary Market

2.Secondary Market- Spot- Derivatives

DEBT

1. Govt. Securities- Primary- Secondary

2. Corporate Securities

i) Primary - Public issues- Private Placement

ii) secondary

The Structure of the International Capital Market The main actors in the international capital market are:

Commercial banks (3/4th share)- Public sector banks- Private sector banks- Foreign banks- Regional rural banks Corporations Banks (5 % share)- Rural Corporations Banks - Urban Corporations Banks (UCB’s) Nonbank financial institutions (2-3% share) Central banks and other government agencies (8-9%

share)

Offshore Banking and Offshore Currency Trading Offshore banking

The business that banks’ foreign offices conduct outside of their home countries

Banks operate offshore though any of three types of institution: Agency office Subsidiary bank Foreign branch

Offshore currency trading Trade in bank deposits denominated in currencies of

countries other than the one in which the bank is located It is referred to as Eurocurrency trading.

Eurodollars Dollar deposits located outside the U.S.

Eurobanks Banks that accept deposits denominated in

Eurocurrencies Eurocurrency trading has grown for three reasons:

Growth in world trade Evasion of financial regulations like reserve requirements Political concerns

The Growth of Eurocurrency Trading London is the leading center of Eurocurrency trading. The early growth in the Eurodollar market was due to:

Growing volume of international trade Cold War New U.S. restrictions on capital outflows and U.S.

banking regulations Federal Reserve regulations on U.S. banks . Move to floating exchange rates in 1973 Reluctance of Arab OPEC members to place surplus

funds in American banks after the first oil shock

SIZE ON INDIAN CAPITAL MARKET

Yrs( As at end Dec)

No. of Stock Exchange

No. of listed companies

Market capitalization of BSE (Rs. Bn.)

1991 22 6229 -

2000 23 9871 9128

2002 23 9644 6122

2003 23 9413 12734

2004 23 - 16860

SOURCES OF CAPITAL Private sources of capital

- FDI- Portfolio Investment

Public source of capital- Official non- concessional loans : multilateral

and bilateral aid- ODA : Officials grants and concessional loans.

Private Capital became very important to development in the Late 1990s.

Summary When people are risk averse, countries can gain

through the exchange of risky assets. International portfolio diversification can be carried

out through the exchange of debt instruments or equity instruments.

One important component in the international capital market is the foreign exchange market. Banks are at the center of the international capital

market, and many operate offshore. Regulatory and political factors have encouraged

offshore banking and currency trading.

Creation of a Eurocurrency deposit does not occur because that currency leaves its country of origin. It poses no threat for central banks’ control over

their domestic monetary bases. The international capital market has contributed to

an increase in international portfolio diversification since 1970.

The foreign exchange market’s record in communicating appropriate price signals to international traders and investors is mixed.

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