Globalization of Capital Markets

Question 1

Describe the Eurodollar market (Euromarket).

Answer 1

Eurodollars are U.S. dollars maintained outside the U.S. Investors holding these Eurodollars offer short-term and intermediate-term loans denominated in the U.S. dollar. These loans are outside the normal banking systems and, therefore, generally carry a lower cost of borrowing than conventional bank loans.

Question 2

Identify the potential benefits of international capital markets (as compared with domestic markets) to both lenders and borrowers.

Answer 2

For investors, a greater range of investments is available and an increase in portfolio diversification is possible.
For borrowers, a larger number of funding sources, increased levels of funding, and lower cost of borrowing are possible.

Question 3

Define “capital market”.

Answer 3

A market in which financial securities are traded.

Question 4

Capital markets consist of what three specific major component markets?

Answer 4

Capital markets consist of three specific major component markets:

a. Stock market;
b. Bond market;
c. Money market.

Question 5

___ ___ ___ traditionally have served as the intermediary between providers and users of capital.

Answer 5

Domestic capital markets

Question 6

The use of a strictly domestic capital market, however, has certain limitations even in the largest economies. These limitations include?

Answer 6

a. The pool of providers (investors) is limited by the size and wealth of domestic residents.
b. The limitations of a domestic market constrains supply, which increases the cost of capital - the rate of return that investors must be paid for the use of funds.
c. Providers are limited in the number of investment opportunities available.

Question 7

Define “global capital market”.

Answer 7

An interconnected set of financial institutions and national markets that permit the trading of financial securities between and among investor and borrowers world-wide.

Question 8

While many institutions make up the global capital market, what are the two formal major (most important) international financial markets?

Answer 8

1. Eurodollar market / Eurocurrency market (Euromarket)

2. International bond market (Eurobonds)

Question 9

___ are created when a U.S. dollar deposit is made outside the U.S. and is maintained in U.S. dollars.

Answer 9

Eurodollars

Question 10

___ provide short-term and intermediate-term loans, less than 5 years in maturity, denominated in U.S. dollars.

Answer 10

Eurodollars

Question 11

The ___ provides an alternative to domestic banks for financing by international firms.

Answer 11

Euromarket

Question 12

___ offer long-term loans outside the home country of the borrower.

Answer 12

Eurobonds

Question 13

___ are offered in most major currencies & avoid most government regulation.

Answer 13

Eurobonds

Question 14

What are two primary causes for the long-term increases in international capital flows?

Answer 14

1. Deregulation of international financial services by governments.
2. Advances in communications and data processing.

Question 15

While global capital markets offer benefits to both investors and borrowers, international capital activity is subject to an important risk not encountered in a domestic capital market - ___ ___ ___ ___.

Answer 15

foreign currency exchange risk.

Question 16

___ ___ ___ ___ is the possibility of loss resulting from changes in currency exchange rates.

Answer 16

Foreign currency exchange risk

Question 17

Foreign currency exchange risk is the possibility of loss resulting from changes in currency exchange rates; adverse changes in exchange rates can do these 2 things: ??

Answer 17

Reduce the domestic currency value of returns on investments,

and

Increase the domestic currency cost of borrowing.

Question 18

An investor or a borrower can mitigate the risk associated with foreign currency exchange rate changes by the use of ___/___ ___ contracts, ___ ___ contracts, or ___ ___ contracts.

Answer 18

forward/futures exchange contracts, forward option contracts, or currency swap contracts.

Question 19

If the dollar strengthens against a foreign currency, the dollar value of an investment denominated in the foreign currency will ___.

Answer 19

decline.

Question 20

If the dollar weakens against a foreign currency, the dollar value of an investment denominated in the foreign currency will ___.

Answer 20

increase.

Question 21

Eurodollars are measured in ??

Answer 21

U.S. dollars

Question 22

Globalization of capital markets facilitates investment ___ ___.

Answer 22

portfolio diversification.

Question 23

Globalization of capital markets is concerned with ?

Answer 23

international transactions in financial securities

Question 24

___ capital markets have more limitations than ___ capital markets.

Answer 24

Domestic; global

Question 25

___ ___ facilitate the interactions of investors and “borrowers.”

Answer 25

Capital markets