international capital markets - ankur

8/3/2019 International Capital Markets - Ankur

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DEFINITIONGlobal Capital Market refers to a cross-border market forsecurities that are used to finance long-term capital needsof companies.

The global capital market is used primarily by large,

sophisticated corporations that sell their stocks and bondsto institutional investors, like mutual funds, pension fundsand other investment companies.

Financial transactions in the global capital markets take

place in the world's biggest financial centres, like NewYork and London.


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GLOBAL CAPITAL MARKET

GLOBALMONEYMARKET

GLOBALBONDMARKET

GLOBALSTOCKMARKET

GLOBALLOANMARKET


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GLOBAL MONEYMARKETS

They are the market in which foreign monies arefinanced or invested.

For Example Hitachi & Matsushita borrowedU.S. dollars from several U.S. banks in Tokyo to

finance their worldwide operations.

MNEs use global or international money marketsto finance global operations at lower cost than ispossible domestically. They borrow currencies' that

have a lower interest rates and are expected todepreciate against their own currency.

They incur risk that currencies borrowed mayappreciate, which will increase their cost offinancing.


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Investors on other hand, may achievesustainably higher returns in foreign marketsthan in their domestic markets when investing incurrencies that appreciate against their homecurrency. However if these currenciesdepreciate , the effective yield on foreigninvestment will likely to be lower than domesticyield and may be even negative. Investors

attempt to capitalize on potentially high effectiveyields on foreign money market securities ,while reducing the exchange rate risk bydiversifying investment across currencies.


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The Eurocurrency markets consists of

commercial banks that accepts largedeposits and provide large loans in foreigncurrencies . Often, transactions in globalmoney markets are conducted via the Euro

currency market. Eurodollars represents U.S dollars deposits

in non-U.S. banks. When interest rates

ceilings are imposed on dollar deposits in USbanks , corporations with large dollarbalances often deposits their funds overseasto receive a higher yield.


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GLOBAL BONDS MARKETS They are the markets where government bonds or corporate

bonds are issued, bought, or sold in foreign countries like ChinaInternational Trust and Investment Corporation, or CITIC,issued its corporate bonds in Japan, Europe, and the U.S.during the 1980s and 1990s.

Although debt financing has always been international innature, there is still no unified international bond market. Theinternational bond market is divided into three bond market

groups: i. Domestic bonds. They are issued locally by a domestic

borrower and are usually denominated in the local currency. ii. Foreign bonds. They are issued on a local market by a

foreign borrower and are usually denominated in the localcurrency. Foreign bond issues and trading are under thesupervision of local market authorities.

iii. Eurobonds. They are underwritten by a multinationalsyndicate of banks and placed mainly in countries other thanthe one in whose currency the bond is denominated. Thesebonds are not traded on a specific national bond market.


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Some issuers ofbond in theEurobondmarket

includeDiamlerChryslerFinancial, Citicorp,

GeneralMotors Acceptance Corp.and the WorldBank.DiamlerChryslerFinancial Corp.now

obtains about onefourth of its funds from the

Eurobondmarket.


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TypeofBondInstrumentso Straight or fixed income bonds: a fixed income bond is a

financial instrument with specific interest payments onspecified dates over a period of years. On the lastspecified date, or maturity, the payment includes arepayment of principal. The interest rate or coupon is

expressed as a percentage of the issue amount and isfixed at launch. For the issuer, the attraction of thesebonds is the knowledge of level payments on interestand a set repayment schedule. For investors, theattraction of straight bonds lies in a known income.

o Partly-paid bonds: these are standard straight bonds inall respects but for the payment of principal by investorson the closing date of the issue -which is limited to 0-33percent of the principal amount, with the balance fallingdue up to six months later. These bonds are popular withissuers who can tailor the second payment to their cashflow requirements.


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Dual-currency bonds: Dual-currency bonds are bonds that are purchased interms of one currency but pay coupons or repay principal at maturity in terms ofa second currency. Japanese firms have frequently issued CHF-denominatedbonds convertible into common shares of a Japanese company. A foreigninvestor can benefit from purchasing this bond in any one of three situations:

A drop in the market interest rate on CHF bonds (as on any straight CHFbond).

A rise in the price of the company's stock (because the bonds are convertibleinto stocks).

A rise in the JPY relative to the CHF (because the bond is convertible into aJPY asset).

Dual currency bonds represent a combination of an ordinary bond combinedwith one or more forward contracts.

Bonds with warrants: Bonds with warrants resemble convertibles except thatthe warrant can be traded separately. The proceeds from the warrants are

applied to the reduction of the cost of the host bond. Bonds can have equitywarrants, bond warrants, or commodity warrants attached. Bonds with equitywarrants differ from convertible bonds in one other aspect: when the warrantsare exercised new money is normally used to subscribe for the shares, and thetotal capitalization of the borrower increases. This is unlike the conversion of aconvertible bond, which merely shifts debt capital into equity capital. The equity

warrant is effectively a call option on the underlying stock.


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Zero-coupon bonds: a zero-coupon bond is a straight bond withno schedule of periodic interest payments. The cash flow consists

of two payments, the receipt of the proceeds on issue date and therepayment of principal on maturity. For the issuer, zero couponbonds are an ideal financing instrument for a project, whichgenerates no income for some years. On the other hand, theloading of the debt service of the bond into a single payment someyears later creates a higher credit risk. For this reason the marketis confined to highly rated borrowers. Investors are attracted tozero-coupon bonds to meet future liabilities.

Floating rate notes (FRNs): FRNs are a medium-term instrumentsimilar in structure to straight bonds but for the interest base andinterest rate calculations. The coupon rate is reset at specifiedregular intervals, normally 3 months, 6 months, or one year. Thecoupon comprises a money market rate (e.g., the London

Interbank Offered Rate for 6-month deposits, or LIBOR) plus amargin, which reflects the creditworthiness of the issuer. FRNsusually carry a prepayment option for the issuer. Issuers like FRNsbecause they combine the lower pricing of a bank loan and largermaturities than the straight bond market. Investors are attracted toFRNs because the periodic resetting of the coupon offers the

strongest protection of capital.


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GLOBAL STOCK MARKETS

Global orInternational stock markets aremarkets where company stocks are listed andare traded on foreign exchange. For example,Nokia of Finland issued stock on NYSE. Firms

in needs of financing use foreign stockmarkets as additional source of funds The ability of firms to place new shares in

foreign markets depends partially on thestocks perceived liquidity in the market. A

secondary market in the stock must beestablished in foreign markets to enhanceliquidity and make newly issued stocks moreattractive.


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Firms inneedoffinancinguseforeign stockon the

market as additional sourceoffunds.Investors use

foreign stockmarkets toenhance theirportfolioperformance.This financingsourceallows MNEs to

attract morefunds without floodingtheir home stock

market,avoidingadecline in the shareprice.

Alargeno.ofMNEs issue stock inforeignmarkets to

circumvent regulations, sinceregulatoryprovisions differ

amongmarkets.Furtherlistingonforeign stockexchange

not onlyenhances the stocks liquidity but also increases

thefirms perceivedfinancial standingwhenexchange

approves thelistingapplication.Also thecorporations getworldwiderecognitionamongcustomers.

It also theprotect thefirmagainst hostile takeovers

because it disperses ownershipand,makes it more

difficult forotherfirms togaincontrollinginterest.


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The size of the world stock market was estimated atabout $36.6 trillion at the start of October 2008.[1] Thetotal world derivatives market has been estimated atabout $791 trillion face or nominal value,[2] 11 times thesize of the entire world economy.[3] The value of the

derivatives market, because it is stated in terms ofnotional values, cannot be directly compared to a stockor a fixed income security, which traditionally refers to anactual value. Moreover, the vast majority of derivatives

'cancel' each other out (i.e., a derivative 'bet' on an eventoccurring is offset by a comparable derivative 'bet' on theevent not occurring). Many such relatively illiquidsecurities are valued as marked to model, rather than anactual market price.


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The stocks are listed and traded on stock exchangeswhich are entities of a corporation or mutualorganization specialized in the business of bringingbuyers and sellers of the organizations to a listing ofstocks and securities together. The largest stock marketin the United States, by market capitalization, is theNew York Stock Exchange (NYSE). In Canada, the

largest stock market is the Toronto Stock Exchange.Major European examples of stock exchanges includethe Amsterdam Stock Exchange, London StockExchange, Paris Bourse, and the Deutsche Brse(Frankfurt Stock Exchange). In Africa, examples include

Nigerian Stock Exchange, JSE Limited, etc. Asianexamples include the Singapore Exchange, the TokyoStock Exchange, the Hong Kong Stock Exchange, theShanghai Stock Exchange, and the Bombay Stock

Exchange.In Latin America, there are such exchangesas the BM&F Boves a and the BMV.


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GLOBAL LOAN MARKET

Loan markets involve large commercial banksand other lending institutions providing loansfor foreign companies .

Banks from all countries perceive internationallending as means of diversification. A portfolioof loans to borrowers across various countriesis less susceptible to recession in the bankhome country. International lending also allows

banks to develop relationships with foreignfirms which create demand for banks otherservices.


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In additions , a large portion of international

lending is to support international acquisitions .Commercial banks and investment banks servenot only as advisers but also as financialintermediaries by placing stocks and bonds orby providing loans.

Lending to developing countries often requirescredit checking. International commercial banksand other lending institutions do so based onanalysis by credit rating agencies such as

standards & poors and Moodys. Notably Political risk and overall pressure on

balance of payments and macroeconomicconditions are the focus of analysis.


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Factors used inSovereignratingby

S&P

Political Risk

Form of government and adaptability of politicalinstruments

Extent of political participationOrderliness of leadership succession

Degree of consensus on economic policyobjectives

Integration into global trade and financial systemInternal and external security risks


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Economic Factors

Income and economic structure

Economic growth prospects

Fiscal flexibility

Public debt burden

Price stabilityBOPs flexibility

External debt and liquidity


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OBSTACLESIN GLOBAL CAPITAL MARKETS

1.Information barriers.

2.Political and capital control risks.

3.Foreign exchange risks.

4.Restrictions on foreign investment and control.

5.Taxation.

6.Higher costs.


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HowToRaise MoneyIn Global Capital Market

Determine the capital needs of your company. How much

money can your company absorb without overextending itself?Do you need equity capital or debt capital? New equity capitalcan be raised by issuing new shares, while debt capital can beacquired though a bond issue or with a bank loan.

Think about whether you can satisfy your capital needs in thedomestic market. Raising money in the country where yourcompany is based is easier and normally costs less than goingoverseas in search of investments in your business. Can youcover your needs by a domestic issuance of shares or bonds? If

it's not enough, you may need to tap into the global capitalmarket. Look at what your competitors are doing in this respectand try not to fall behind (if they are getting funds from theglobal capital markets, you should probably do likewise).


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Determine how you can access the global capital market.

Contact investment banks and seek their help. One of the mostpopular ways to get access to the global capital market is thoughan initial public offering (IPO). An IPO is a sale of your firm'ssecurities, usually common stocks, to the investing public on anorganized stock exchange such as the New York Stock Exchange

(NYSE) or the London Stock Exchange (LSE). Doing an IPOrequires a lot of time, energy and money from the firms' executivesand directors. At the same time, it transforms the way a firm is run,turning it into a public company that needs to make sure it meetsits investors' expectations in terms of dividend payouts and

corporate strategy.


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international capital markets - ankur

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