The international capital market

 

A capital market brings together those who want to invest money and those who want to borrow money. Those who want to invest money are corporations with surplus cash, individuals, and non bank financial institutions (e.g., pension funds, insurance companies). Those who want to borrow money are individuals, companies, and governments. In between these two groups are the market makers. Market makers are the financial service companies that connect investors and borrowers, either directly or indirectly. They include commercial banks and investment banks.

Commercial banks perform an indirect connection function. They take deposit from corporations and individuals and pay them a rate of interest in return. They then loan that money to borrowers at a higher rate of interest, making a profit from the difference in interest rates. Investment banks perform a direct connection function. They bring investors and borrowers together and charge commissions for doing so.

EUROCURRENCY MARKET

 

A Eurocurrency is any currency banked outside its country of origin. Eurodollars which, account for about two-thirds of all Eurocurrencies, are dollars banked outside or the United States. Other important Eurocurrencies include the Euro, the Euro-yen, and the Euro-pound. The term Eurocurrency actually a misnomer, since a Eurocurrency can be created anywhere in the persistent Euro-prefix reflects the European origin of the market. The Eurocurrency market is significant because it is an important, relative source of funds for international businesses. From small beginnings, this is mushroomed.

THE INTERNATIONAL EQUITY MARKET

 

There is no international equity market in the sense that there are international currency and bond markets. Rather many countries have their own domestic equity markets in which corporate stock is traded. The largest of these domestic equity markets are to be found in the United States, Britain, Japan, and Germany. Although each domestic equity market is still dominated by investors who are citizens of that country and companies incorporated in that country, developments are internationalising the world equity market. Investors are investing heavily in foreign equity markets as a means of diversifying their portfolios.

THE INTERNATIONAL BOND MARKET

 

Bonds are an important means of financing for many companies. The most common kind of bond is a fixed-rate bond. The investor who purchases a fixed-rate bond receives a fixed set of cash payoffs. Each year until the bond matures, the investor gets an interest payment and then at maturity he gets back the face value of the bond.

International bonds are of two types: foreign bonds and Eurobonds.Foreign bonds are sold outside the borrower's country and are denominated in the currency of the country in which they are issued.

Eurobonds are normally underwritten by an international syndicate of banks and placed in countries other than the one in whose currency the bond is denominated For example, a bond may be issued by a German corporation, denominated in U.S dollars, and sold to investors outside the United States by an international syndicate of banks. Eurobonds are routinely issued by multinational corporations, large domestic corporations, sovereign governments, and international institutions, they are usually offered simultaneously in several national capital markets, but not in the capital market of the country, nor to residents of the country, in whose currency they are denominated. Eurobonds account for the lion's share of international bond issues.

QUESTIONS

1. How would you explain the currency fluctuations?

2. What is the necessary precondition for large-scale international trade and investment?

3. The foreign exchange market serves two main functions. What is their essence?

4. What is the difference between spot exchange rate and forward exchange rate?

5. What are the main participants of swap operations?

6. What is the difference between commercial and investment banks?

7. What types are international bonds divided into?

8. How would you characterise foreign bonds and Eurobonds?

9. What is the principle of the international capital market activity?

10. Who is each domestic equity market dominated by?

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