Global Capital Market
Global Capital Market
Global Capital Market
Introduction
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.
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 from around the world, and attract capital from international investors.
There are market functions that are shared by both domestic and international capital markets.
However, global capital markets offer some benefits not found in domestic capital markets.
Investors also benefit from the wider range of investment opportunities in global capital
markets that allow them to diversify their portfolios and lower their risks.
Studies show that fully diversified portfolios are only about 27 percent as risky as individual
stocks.
International portfolio diversification is even less risky because the movements of stock prices
across countries are not perfectly correlated.
This low correlation reflects the differences in nations’ macroeconomic policies and economic
policies and how their stock markets respond to different forces, and nations’ restrictions on
cross-border capital flows.
Growth of the Global Capital Market
1. Regulatory Freedom
It is attractive to both depositors and borrowers because the government does not regulate
it.
2. Higher Interest Rates for Deposits
Offering higher deposit rates attracts funds from investors looking for better returns on their
savings.
3. Lower Interest Rates for Borrowings
Borrowers in the Eurocurrency market can access loans at lower interest rates compared to
domestic markets, making it cost individuals to borrow funds. effective for companies and
4. Competitive Edge for Eurocurrency Banks
The spread between the Eurocurrency deposit and lending rate is less than the spread
between the domestic deposit and lending rates giving Eurocurrency banks a competitive
edge over domestic banks.
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 the syndicate of banks and placed in countries other than the
one in whose currency the bond is denominated.
THE GLOBAL BOND MARKET BENEFITS
1. Currency Risk
Fluctuations in exchange rates can impact returns for investors holding bonds denominated
in foreign currencies.
2. Interest Rate Risk
Changes in interest rates can affect bond prices and yields, potentially leading to capital
losses for investors.
3. Political and Economic Risks
Investing in bonds from different countries exposes investors to political instability,
regulatory changes, economic downturns, and sovereign risk.
4. Liquidity Risk
Some global bond markets may have lower liquidity than major domestic markets, affecting
the ease of buying or selling bonds at desired prices.
Both markets offer lower cost funding opportunities, albeit through different mechanisms
(Eurocurrency via deposit and lending rates, global bonds via international issuance).
They provide access to diverse funding sources, with the Eurocurrency market focusing on
currency diversity and the global bond market on investor diversity.
Both contribute to market development, with the Eurocurrency market enhancing
competition among banks and the global bond market expanding international capital
markets.
The Eurocurrency market is more focused on interest rate advantages and regulatory freedom,
while the global bond market emphasizes currency diversity and investor base expansion.
Eurocurrency benefits are primarily bank centric, while global bond market benefits extend to
corporations and governments issuing bonds.
Eurocurrency benefits are immediate and applicable to short term funding needs, while global
bond market benefits are strategic and can support long structure optimization.
Comparison and Contrast of Risks Between Eurocurrency market and Global Bond Market
Comparison: Both the Eurocurrency market and the global bond market share a common risk of
Foreign Exchange Risk. Participants in both markets are exposed to fluctuations in exchange
rates, which can affect their financial positions and returns.
Contrast: Eurocurrency risks are more focused on banking and currency related vulnerabilities,
while global bond market risks are broader, encompassing a wider range of financial and
macroeconomic factors.
The largest equity markets are in the United States, Britain and Japan.
Today, many investors invest in foreign equities to diversify their portfolios.
In the future, this type of trend may result in an internationalization of corporate ownership.
Companies are also helping to promote this type of shift by listing their stock in the equity
markets of other nations.
By issuing stock in other countries, firms open the door to raising capital in the foreign market,
and give the firm the option of compensating local managers and employees with stock.
Adverse exchange rates can increase the cost of foreign currency loans.
While it may initially seem attractive to borrow foreign currencies, when exchange rate risk is
factored in, that can change.
Firms can hedge their risk by entering into forward contracts to purchase the necessary currency
and lock in the exchange rate, but this will also raise costs.
Firms must weigh the benefits of a lower interest rate against the risk of an increase in the real
cost of capital due to adverse exchange rate movements.
Growth in global capital markets has created opportunities for firms to borrow or invest
internationally .
Firms can often borrow at a lower cost than in the domestic capital market.
Firms must balance the foreign exchange risk associated with borrowing in foreign currencies
against the cost savings that may exist.
The growth of capital markets also offers opportunities for firms, institutions, and individuals to
diversify their investments and reduce risk.
Again, though investors must consider foreign exchange rate risk.