Notes

Program Name: MBA – 3RD SEMESTER

Course Name: International Finance

Unit Number – I Unit Name: Introduction to International Finance

Topic Name – International Capital Market

International Capital Market

The market in which residents of different countries trade assets is called the international capital
market. The international capital market is not really a single market; it is a group of closely
interconnected markets in which asset exchanges with some international dimension take place.
International currency trades take place in the foreign exchange market, which is an important
part of the international capital market
International capital market is that financial market or world financial center where
shares, bonds, debentures, currencies, hedge funds, mutual funds and other long term securities
are purchased and sold. International capital market is the group of different country's capital
market. They associate with each other with Internet. They provide the place to international
companies and investors to deal in shares and bonds of different countries. In addition to the
benefits and purposes of a domestic capital market, international capital markets provide the
following benefits:
Higher returns and cheaper borrowing costs. These allow companies and governments to tap
into foreign markets and access new sources of funds. Many domestic markets are too small or
too costly for companies to borrow in. By using the international capital markets, companies,
governments, and even individuals can borrow or invest in other countries for either higher rates
of return or lower borrowing costs.
Diversifying risk. The international capital markets allow individuals, companies, and
governments to access more opportunities in different countries to borrow or invest, which in
turn reduces risk. The theory is that not all markets will experience contractions at the same time.

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 The structure of the capital markets falls into two components—primary and secondary.
The primary market is where new securities (stocks and bonds are the most common) are issued.
If a corporation or government agency needs funds, it issues (sells) securities to purchasers in the
primary market. Big investment banks assist in this issuing process as intermediaries. Since the
primary market is limited to issuing only new securities, it is valuable but less important than the
secondary market.

The vast majority of capital transactions take place in the secondary market. The secondary
market includes stock exchanges (the New York Stock Exchange, the London Stock Exchange, and
the Tokyo Nikkei), bond markets, and futures and options markets, among others. All these
secondary markets deal in the trade of securities.

Major Components of the International Capital Markets

International Equity Markets: Companies sell their stock in the equity markets. International
equity markets consists of all the stock traded outside the issuing company’s home country.
Many large global companies seek to take advantage of the global financial centers and issue
stock in major markets to support local and regional operations.
For example, Arcelor Mittal is a global steel company headquartered in Luxembourg; it is listed
on the stock exchanges of New York, Amsterdam, Paris, Brussels, Luxembourg, Madrid,
Barcelona, Bilbao, and Valencia. While the daily value of the global markets changes, in the past
decade the international equity markets have expanded considerably, offering global firms
increased options for financing their global operations. The key factors for the increased growth
in the international equity markets are the following:
Growth of developing markets. As developing countries experience growth, their domestic firms
seek to expand into global markets and take advantage of cheaper and more flexible financial
markets.
Drive to privatize. In the past two decades, the general trend in developing and emerging
markets has been to privatize formerly state-owned enterprises. These entities tend to be large,
and when they sell some or all of their shares, it infuses billions of dollars of new equity into local
and global markets. Domestic and global investors, eager to participate in the growth of the local
economy, buy these shares.
Investment banks. With the increased opportunities in new emerging markets and the need to
simply expand their own businesses, investment banks often lead the way in the expansion of
global equity markets. These specialized banks seek to be retained by large companies in
developing countries or the governments pursuing privatization to issue and sell the stocks to
investors with deep pockets outside the local country.

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 Technology advancements. The expansion of technology into global finance has opened new
opportunities to investors and companies around the world. Technology and the Internet have
provided more efficient and cheaper means of trading stocks and, in some cases, issuing shares
by smaller companies.
International Bond Markets
Bonds are the most common form of debt instrument, which is basically a loan from the holder
to the issuer of the bond. The international bond market consists of all the bonds sold by an
issuing company, government, or entity outside their home country. Companies that do not want
to issue more equity shares and dilute the ownership interests of existing shareholders prefer
using bonds or debt to raise capital (i.e., money). Companies might access the international bond
markets for a variety of reasons, including funding a new production facility or expanding its
operations in one or more countries.

Foreign Bond
A foreign bond is a bond sold by a company, government, or entity in another country and issued
in the currency of the country in which it is being sold. There are foreign exchange, economic,
and political risks associated with foreign bonds, and many sophisticated buyers and issuers of
these bonds use complex hedging strategies to reduce the risks. For example, the bonds issued
by global companies in Japan denominated in yen are called samurai bonds. As you might expect,
there are other names for similar bond structures. Foreign bonds sold in the United States and
denominated in US dollars are called Yankee bonds. In the United Kingdom, these foreign bonds
are called bulldog bonds. Foreign bonds issued and traded throughout Asia except Japan, are
called dragon bonds, which are typically denominated in US dollars. Foreign bonds are typically
subject to the same rules and guidelines as domestic bonds in the country in which they are
issued. There are also regulatory and reporting requirements, which make them a slightly more
expensive bond than the Eurobond. The requirements add small costs that can add up given the
size of the bond issues by many companies.

Eurobond
A Eurobond is a bond issued outside the country in whose currency it is denominated. Eurobonds
are not regulated by the governments of the countries in which they are sold, and as a result,
Eurobonds are the most popular form of international bond. A bond issued by a Japanese
company, denominated in US dollars, and sold only in the United Kingdom and France is an
example of a Eurobond.

Global Bond
A global bond is a bond that is sold simultaneously in several global financial centers. It is
denominated in one currency, usually US dollars or Euros. By offering the bond in several markets

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 at the same time, the company can reduce its issuing costs. This option is usually reserved for
higher rated, creditworthy, and typically very large firms.

Eurocurrency Markets
The Eurocurrency markets originated in the 1950s when communist governments in Eastern
Europe became concerned that any deposits of their dollars in US banks might be confiscated or
blocked for political reasons by the US government. These communist governments addressed
their concerns by depositing their dollars into European banks, which were willing to maintain
dollar accounts for them. This created what is known as the Eurodollar—US dollars deposited in
European banks. Over the years, banks in other countries, including Japan and Canada, also
began to hold US dollar deposits and now Eurodollars are any dollar deposits in a bank outside
the United States. (The prefix Euro- is now only a historical reference to its early days.) An
extension of the Eurodollar is the Eurocurrency, which is a currency on deposit outside its country
of issue. While Eurocurrencies can be in any denominations, almost half of world deposits are in
the form of Eurodollars.

The Euro loan market is also a growing part of the Eurocurrency market. The Euroloan market is
one of the least costly for large, creditworthy borrowers, including governments and large global
firms. Euro loans are quoted on the basis of LIBOR, the London Interbank Offer Rate, which is the
interest rate at which banks in London charge each other for short-term Eurocurrency loans.

The primary appeal of the Eurocurrency market is that there are no regulations, which results in
lower costs. The participants in the Eurocurrency markets are very large global firms, banks,
governments, and extremely wealthy individuals. As a result, the transaction sizes tend to be
large, which provides an economy of scale and nets overall lower transaction costs. The
Eurocurrency markets are relatively cheap, short-term financing options for Eurocurrency loans;
they are also a short-term investing option for entities with excess funds in the form of
Eurocurrency deposits.

Offshore Centers
The first tier of centers in the world are the world financial centers, which are in essence central
points for business and finance. They are usually home to major corporations and banks or at
least regional headquarters for global firms. They all have at least one globally active stock
exchange. While their actual order of importance may differ both on the ranking format and the
year, the following cities rank as global financial centers: New York, London, Tokyo, Hong Kong,
Singapore, Chicago, Zurich, Geneva, and Sydney.

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 SUMMARY

The market in which residents of different countries trade assets is called the international capital
market. The international capital market is not really a single market; it is a group of closely
interconnected markets in which asset exchanges with some international dimension take place.
Major Components of the International Capital Markets

International Equity Markets: International equity markets consists of all the stock traded
outside the issuing company’s home country. Many large global companies seek to take
advantage of the global financial centers and issue stock in major markets to support local and
regional operations.
International Bond Markets: The international bond market consists of all the bonds sold by an
issuing company, government, or entity outside their home country.
Foreign Bond
A foreign bond is a bond sold by a company, government, or entity in another country and issued
in the currency of the country in which it is being sold. There are foreign exchange, economic,
and political risks associated with foreign bonds, and many sophisticated buyers and issuers of
these bonds use complex hedging strategies to reduce the risks.
Eurobond
A Eurobond is a bond issued outside the country in whose currency it is denominated. Eurobonds
are not regulated by the governments of the countries in which they are sold, and as a result,
Eurobonds are the most popular form of international bond.
Global Bond
A global bond is a bond that is sold simultaneously in several global financial centers. It is
denominated in one currency, usually US dollars or Euros.
Eurocurrency Markets
Eurocurrency is currency held on deposit by governments or corporations operating outside of
their home market. For example, a deposit of U.S. dollars (USD) held in a British bank would be
considered euro currency, as would a deposit of British Pounds (GBP) made in the United States.
The Euro loan market is also a growing part of the Eurocurrency market.

Offshore Centers
Offshore banking centres is an expression used to describe countries with banking sectors dealing
primarily with non-residents and/or in foreign currency on a scale out of proportion to the size
of the host economy.

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 Self-Assessment Questions:

Q1. International capital market is:

a. Allow investors to reduce risk by diversifying the portfolio

b. Limit the available set of lending opportunities

c. Increases overall portfolio risk of investors

d. Is easily accessible to everyone

Q2. The four major trading currencies are free to float against each other. They include all the
following except:

a. British Pound

b. Japanese Yen

c. Spanish Peso

d. US Dollar

Q3.The major function of International capital market is:

a. Foreign exchange rates

b. Innovative financial instruments
c. Informed technology
d. Deregulation
Q4. Capital markets denote the places where funds are swapped between

a. suppliers of capital
b. Borrower of capital
c. Those who request capital investments.
d. Both (a) & (c)

Q5. It is currency held on deposit by governments or corporations operating outside of their

home market:

a. Indian Currency
b. Euro Currency
c. Japanese Currency
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 d. Chinese Currency

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