the 3 segments of global capital market

8/4/2019 The 3 Segments of Global Capital Market

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The 3 Segments of Global CapitalMarket

Prepared & Presented By: Mr. Abdul Saddam B. Gonting


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Global Capital

Market

A.) EurocurrencyMarket

C.) Global EquityMarket

B.) Global Bond

Market


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Eurocurrency

Defined

A Eurocurrency is any currency bankedoutside of its country of origin.

Eurodollars, which account for about two-thirds of all Eurocurrencies, are dollarsbanked outside of the United States.


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A.)Eurocurrency Market

Defined:

The money market in which Eurocurrency,currency held in banks outside of the

country where it is legal tender, is borrowedand lent by banks in Europe.

The Eurocurrency market allows for more

convenient borrowing, which improves theinternational flow of capital for tr adebetween countries and companies.


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Genesis & Growth of Eurocurrency

Present1950s 1957 1960s 1979-19801973 1973-1974

US Govt

Non-US

Residents

Europe

States US

Banks

Oil Price

Hike by

OPEC

$1 = 1.44130As of Aug. 23, 2011

BritishBanks

Non

British

Trade

Oil Price

Hike by

OPEC

Fall of

Bretton

Woods

System

OPEC (Org. Petroleum Exporting Countries)


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Attractions of the Eurocurrency

MarketWHY?


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Its lack of GOVERNMENTREGULATION


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Domestic Banks (e.g. NYC)

Bank Requirements:

A.)10% Reservation B.) 10% Loan Interest

$1 per$100 Operating Costpersay

A Man Deposits $100 thus ($100x0.10 Reservation) = $10 Reserve

Maximum Allowable Debt from that account is $90

Maximum Possible Interest Rate on Deposit: C.) 8% (tocoverO.C.)

$100 Deposit (0.08x $100) = $8 Acc. Interest$100 Loan (0.10x$90) = $9

$9 (Loan Interest) - $1 (Operating Cost) = $8 DepositInterestBalance = $0


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Euro Bank

Bank Requirements:

A.)0% Reservation B.) 10% Loan Interest

$1 per$100 Operating Costpersay

A Man Deposits $100

Maximum Allowable Debt from that account is the total$100

Maximum Possible Interest Rate on Deposit: C.) 9% (tocoverO.C.)

$100 Deposit (0.09x $100) = $9Acc. Interest$100 Loan (0.10x$100) = $10

$10 (Loan Interest) - $1 (Operating Cost) = $9 DepositInterestBalance = $0


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Clearly, there are very strong financialmotivations for companies to use the

Eurocurrency market. By doing so, they

receive a HIGHER INTEREST RATEON DEPOSITS and PAY LESS FOR

LOANS.


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Top 10 Largest Banks Based on Assets (as of March 31, 2011)

1. Banco De Oro (BDO) Php 965.1 billion

2. Metrobank Php 955.8 billion

3. Bank of the Philippine Islands (BPI) Php 751.8 billion

4. Landbank Php 605.2 billion

5. Rizal Commercial Banking Corporation (RCBC) Php 311.2

billion6. Philippine National Bank (PNB) Php 306.2 billion

7. Development Bank of the Philippines (DBP) Php 297.4

billion

8. Unionbank of the Philippines (UBP) Php 244.9 billion

9. Chinabank Php 235.2 billion10. Citibank Php 202.6 billion


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Top 10 Largest Banks Based on Capital (as of March 31,

2011)

1. Metrobank Php 98.9 billion2. Banco De Oro (BDO) Php 86.6 billion



5. Development Bank of the Philippines (DBP) Php 37.2billion

6. Rizal Commercial Banking Corporation (RCBC) Php 36.0

billion

7. Chinabank Php 31.5 billion

8. Unionbank of the Philippines (UBP) Php 31.2 billion9. Philippine National Bank (PNB) Php 29.5 billion

10. Security Bank Php 25.5 billion


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Top 10 Largest Banks Based on Deposits (as of March 31,

2011)

1. Banco De Oro (BDO) Php 745.5 billion2. Metrobank Php 714.7 billion



5. Philippine National Bank (PNB) Php 232.3 billion

6. Rizal Commercial Banking Corporation (RCBC) Php 214.9billion

7. Unionbank of the Philippines (UBP) Php 195.4 billion


9. United Coconut Planters Bank (UCPB) Php 148.5 billion10. Allied Bank Php 146.2 billion


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Top 10 Largest Banks Based on Loans * (as of March 31,

2011)

1. Banco De Oro (BDO) Php 541.5 billion


3. Metrobank Php 363.9 billion


5. Rizal Commercial Banking Corporation (RCBC) Php 141.8billion

6. Citibank Php 116.1 billion

7. Philippine National Bank (PNB) Php 102.9 billion


9. Development Bank of the Philippines (DBP) Php 100.0billion

10. Allied Bank Php 91.0 billion


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Drawbacks of Euro CurrencyMarket

1. Unregulated Banking System = High ProbabilityBank Failure for Loss

In an unregulated system such as the Eurocurrencymarket, the probability of a bank failure that would cause

depositors to lose theirmoney is greater (although in absoluteterms, still low). Thus, the lower interest rate received on home-country deposits reflects the costs of insuring against bankfailure.

2. Borrowing funds internationally can expose a company

to foreign exchange risk.Many companies borrow funds in theirdomestic currency

to avoid foreign exchange risk, even though the Eurocurrencymarkets may offermore attractive interest rates.


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B.) Global Bond Market

The globalbond market grew rapidly during the 1980s and1990s

The mostcommon kind of bond is a fixed-rate bond.


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International Bonds

Foreign BondsForeign bonds are sold outside of the borrower's country

and are denominated in the currency of the country in whichthey are issued.

Euro BondsEurobonds are normally underwritten by an international

syndicate of banks and placed in countries other than theone in whose currency the bond is denominated.

Eurobonds are routinely issued by multinational corporations,large domestic corporations, sovereign governments, andinternational institutions. They are usually offered simultaneously inseveral national capital markets, but not in the capital market of thecountry, neither to residents of the country, in whose currency they

are denominated.


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Attractions of the EurobondMarket

An absence of regulatory interference.

Less stringent disclosure requirementsthan in most domestic bond markets.

A favorable tax status.


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C.) Global Equity Market

Strictly speaking there is no international equity market inthe sense that there are international currency and bondmarkets. Rather, many countries have their own domestic equitymarkets in which corporate stock is traded

United States Britain

Japan

Germany.

Increasingly, US citizens are buying stock in companies

incorporated abroad, and foreigners are buying stock incompanies incorporated in the United States. Looking into thefuture, Robert Reich has mused about "the coming irrelevance ofcorporate nationality."


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Foreign Exchange Risk and theCost of Capital

Korean Bank

Interest Rate: 10%(1B won x 1.10 = 1.10B)

Payback after 1 year: 1.1B Korean won

International Bank

1 won = $1000

Interest Rate: 6%($1Mx 1.06 = $1.06M)

Payback after 1 year: 1.06B Korean won/

1.06M US Dollars

(assuming exchange rate remains

constant)

What if it depreciates

1 won = $1,500

($1.5M x 1.06 = $1.59M)

Payback after 1 year: 1.59B Korean won/

1.59M US Dollars

Assume a Korean Firm wants toborrow 1B Korean won for1year


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Implications for Business

The growth of the global capital market hascreated opportunities for international businesses thatwish to borrow and/or invest money.

On the borrowing side, by using the globalcapital market, firms can often borrow funds at alower cost than is possible in a purely domesticcapital market.

On the investment side, the growth of the

global capital market is providing opportunities forfirms, institutions, and individuals to diversify theirinvestments to limit risk.


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Marc Faber

His arguments revolved on the following:

Market has experience Huge Technical Damage.

Markets are oversold, we will see short term Rebound, thus useit as a Selling Opportunity.

One problem is that people don't trust paperany more.

Weakness in Gold should be used as buying opportunity.

Global Economy needs to be "Rebooted.

We could see short term equity rebound and Gold selloff.

NEXT GLOBAL ECONOMIC CRISIS WILL BE MUCHWORSE THAN 2008.


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Thank you for Listening..

the 3 segments of global capital market

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