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INTERNATIONAL CAPITAL MARKET
SUBMITTED BY : BELINDA FRANCIS GAURAV CHOUDHARY
Capital market Capital markets are markets where people, peo ple, companies, and governments with more funds than they need (because they save some of their income) transfer those funds to people, companies, or governments gove rnments who have a shortage of funds (because they spend more than their income). International
Capital market The group of closed interconnected intercon nected 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.
The International Capital Market and the Gains From Trade
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 serv ices
Trades of goods or services for assets
Trades of assets for assets
The International Capital Market and the Gains From Trade The Three Types Types of o f International Transaction Transaction Home
Foreign
Goods and Services
Goods and Services
Assets
Assets
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.
The International Capital Market and the Gains From Trade
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.
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 Marketpla ce Resulted in a New Era of Global Capital Capit al 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.
STRUCTUR E
OF CAPITAL
MARK ET EQUITY
DEBT
1. Primary Market
1.
Govt. Securities
2.Secondary Market
-
Primary Secondary
-
Spot
-
-
Derivatives
2. Corporate Securities i)
Primary
-
Public issues
-
Private Placement
ii) secondary
The Structure of the International In ternational Capital Market
The main actors in the international interna tional 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 cond uct 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 deno minated in currencies of countries other than the one in which the bank is located It is referred to as Eurocurrency trading.
Eurodollars
Eurobanks
Dollar deposits located outside the U.S. 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 Eurocur rency Trading
London is the leading center of Eurocurrency Eur ocurrency trading.
The early growth in the Eurodollar Euro dollar 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
ON INDIAN CAPITAL MARK ET SIZE
Yrs( As at 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
SOUR CES
OF CAPITAL
Private sources of capital - FDI - Portfolio Investment Public source of capital - Off Officia cial non non-- conce oncesssiona onal loans oans : mult ultilater ateral al and bilateral aid - ODA ODA : Off Official cialss gra grant ntss and and conc conces essi sion onal al loans oans.. 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 e xchange market.
Banks
are at the center of the international interna tional capital market, and many operate offshore.
Regulatory and political factors have encouraged offshore banking and currency trading.
Creation Creation of a Eurocurrency deposit does not n ot 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.
