Unit 5

Global Capital and Money Market Operations

Acapital marketis a market for securities (debtorequity), where business enterprises (companies) andgovernmentscan raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place on other markets (themoney market). The capital market includes thestock market(equity securities) and thebond market(debt). Financial regulators, such as the UK's Financial Services Authority (FSA) or theU.S. Securities and Exchange Commission(SEC), oversee the capital markets in their designated jurisdictions to ensure that investors are protected against fraud, among other duties.

Capital markets may be classified asprimary markets andsecondary markets . In primary markets, new stock or bond issues are sold to investors via a mechanism known asunderwriting. In the secondary markets, existing securities are sold and bought among investors or traders, usually on asecurities exchange,over-the-counter, or elsewhere

International Capital and Money Market Operations Internationalcapital market - is that financial market or world financial center where shares,bonds, debentures, currencies,hedge funds,mutual fundsand 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.

Development of International Capital MarketsInternational financial markets can develop anywhere, provided that the local regulators permit the market and potential users are attracted to it. The most important international financial centers are London, Tokyo and New York. All the major industrial countries have important domestic financial markets as well but only some such as Germany and France are also important international financial centers. On the other hand even though some countries have relatively unimportant domestic financial markets they are important world financial centers such as Switzerland, Luxembourg, Singapore and Hong Kong.

International capital markets also called as Euro markets are the markets where Euro currencies, Euro Bonds, Euro Equity, and Euro Bills are exchanged.

Major components of international capital markets The basic components of international capital markets are The Euro Credit Market,The Euro Bond market The Euro notes andThe Euro equities.

Euro credit Market Euro debt or Euro credit are medium term loans ( with variable rate linked to Euro currency deposits and accorded by an international bank syndicate).The different aspects of Euro credit market are Participants in Euro credit market The major lending banks in Euro credit market are the Euro banks, American, Japanese, Swiss, French, German and Asian (Singapore) banks BNP Paribas of France, J P Morgan Chase of USA and Barcalays of UK are some if the major participants of euro credit market. Among the borrowers, there are banks, multinational groups, public utilities, government agencies, local authorities etc.

Dealing in Euro credits : when a borrower approaches a bank for Euro credit, a formal document is prepared on behalf of potential borrowers. This document contains the principle terms and conditions of loan, objectives of loan and details about the borrower.

Before launching a syndication the approached bank decides primarily, in consultation with the borrower, on a strategy to be adopted i.e., whether to approach a large market or a restricted number of banks to form the syndicate.

Characteristics of Euro-credits A major part of Euro credit is made in US dollars, The others are Euro and pound sterling and Deutsche mark, Japanese Yen etc. On an average maturity periods are from 5 to 20 years. The rate of interest payable is normally tied to LIBOR ( London Interbank Offered Rate) There exists a strong secondary market for such instruments

Euro Bond Market Euro bonds are bonds that are issued in Euro currencies and placed simultaneously and in similar conditions in several countries through an international bank syndicate or consortium. These bonds represent a medium or long term from 5 15 years and generally carry an interest. the lender is a non resident.

Participants in Euro Bond Market The major participants are enterprises and financial institutions as well as investing agencies.

Principal borrowers In the order of importance they are as follows Private enterprisesPublic enterprisesFinancial InstitutionsGovernment and central banksInternational organizations such as World Bank, European Bank of Investment etc

Types of Euro Bonds There are different types of Euro Bonds such asStraight Bonds These carry a fixed interest rateFloating rate bonds The interest rate of these bonds is revised every six months. It is based on LIBOR to which a margin is addedConvertible bonds These bonds may be converted into shares of the issuing company

Floating rate bonds with collar the rates of these bonds can fluctuate between a certain minimum and a fixed maximum. Zero-coupon bondspay no regular interest. They are issued at a substantial discount to par value, so that the interest is effectively rolled up to maturity. Euro notes They consist of three categories, namely Renewable Euro-notes, Euro- commercial paper, Euro medium term notes.

Euro equities Euro equities or international shares are the shares issued by resident companies but sold in Euro currencies to non residents. The Euro equities market developed around the early eighties and since developed rapidly. Several factors explain this growth, these factors are DeregulationDe-intermediationDecompartmentalisationDecrease in interest rates which resulted in an increase of market prices of shares on different stock exchangesIncreasing privatization

Organizing a Euro share issue Organizing a Euro share issue is similar to that of Euro bonds. the methods used varied over time. Those used now a days fall into two categories subscription and book building.Subscription According to this method the issuing company sells its shares to an international syndicate which in turn sells them to final buyers. First the price is fixed and then a period of subscription is given to private and institutional investors. Once the shares are sold, the issuer has no control over final investors.Book building According to this technique the lead manager constitutes both guarantee and placement syndicate. The members of syndicate do marketing of shares to potential buyers over a period which may last for few weeks. The lead manager supervises operations, coordinated activities, registers demands for shares and then decides in consultation with the issuing company, the price of the share according to the volume of the issue.

Importance of Euro-sharesEuro shares present several advantages for companies taking recourse to themThey improve the prestige of the company in the eyes of international financial community..They facilitate the operations of external growthThey reinforce internationalization of capital. This internationalization ensures stability of capital since it allows an international diversification.

The major market segments the funding avenues potentially open to a borrower in the global markets can be categorized as follows Bonds- there are various types of bonds available such as the straight bonds; Floating rate bonds (FRNs); Zero coupon and deep discount bonds; Bonds with a variety of option features embedded in them

Syndicated Credits these are bank loans usually at a floating rate of interest, arranged by one or more lead managers (banks) with a number of other banks participating in the loan. A number of variations o the basic theme are possible.

Medium Term Notes (MTNs) Initially conceived as instruments to fill the maturity gap between short term money market instruments like commercial paper and long term instruments like bonds, these subsequently evolved into very flexible borrowing instruments for well rated issuers, particularly in their Euro version as Euro Medium Term Notes.

Committed Underwritten facilities the basic structure under this is the Note Issuance Facility (NIF) . An NIF is a medium term legally binding commitment under which a borrower can issue short term paper in its own name , but where underwriting banks are committed either to purchase ay notes which the borrower is unable to sell, or to provide standing credit. The borrower obtains medium term credit by repeatedly rolling over its short term notes. If at any roll over the borrower is unable to place the entire issue with the market, the underwriting banks either take up the remainder or provide a short term loan.

Money market instruments the short term borrowing instruments or the money market instruments include the commercial paper, certificates of deposit and bankers acceptances among others

Foreign Exchange MarketsThe foreign exchange market is the market where the currency of one country is exchanged for that of another currency and where the rate of exchange is determined.Currency Trading is the world's largest market consisting of almost trillion in daily volume and as investors learn more and become more interested, the market continues to rapidly growThere is no central marketplace for the exchange of currency, but instead the trading is conducted over-the-counter

All trades that take place in the foreign exchange market involve the buying of one currency and the selling of another currency simultaneously.

This is because the value of one currency is determined by its comparison to another currency.

The first currency of a currency pair is called the "base currency," while the second currency is called the counter currency.

The currency pair shows how much of the counter currency is needed to purchase one unit of the base currency. Currency pairs can be thought of as a single unit that can be bought or sold. When purchasing a currency pair, the base currency is being bought, while the counter currency is being sold. The opposite is true, when the sale of a currency pair takes place. There are four major currency pairs that are traded most often in the foreign exchange market. These include the EUR/USD, USD/JPY,GBP/USD, andUSD/CHF.

Features of foreign exchange market are The following are the features of foreign exchange market - Its huge trading volume, leading to highliquidity;

Its geographical dispersion;

Its continuous operation: 24 hours a day except weekends,

The variety of factors that affectexchange rates;

The low margins of relative profit compared with other markets of fixed income; and

The use ofleverageto enhance profit margins with respect to account size.

Global Financial Institutions The most prominent international institutions are the IMF, the World Bank and the WTO:The International Monetary Fund keeps account of international balance of payments accounts of member states. The IMF acts as a lender of last resort for members in financial distress, e.g., currency crisis, problems meeting balance of payment when in deficit and debt default. Membership is based on quotas, or the amount of money a country provides to the fund relative to the size of its role in the international trading system.

The World Bank aims to provide funding, take up credit risk or offer favorable terms to development projects mostly in developing countries that couldn't be obtained by the private sector. The other multilateral development banks and other international financial institutions also play specific regional or functional roles.

The World Trade Organization settles trade disputes and negotiates international trade agreements in its rounds of talks

Government institutions

Governments act in various ways as actors in the GFS: they pass the laws and regulations for financial markets and set the tax burden for private players, e.g., banks, funds and exchanges. They also participate actively through discretionary spending. They are closely tied (though in most countries independent of) to central banks that issue government debt, set interest rates and deposit requirements, and intervene in the foreign exchange market.

Private participantsPlayers acting in the stock-, bond-, foreign exchange-, derivatives- and commodities-markets and investment banking are

Commercial banks Hedge funds and Private Equity Pension funds

All the Best for the Final Examination

Please do not forget to submit the term paper before the final examination