Briefly discuss the international capital markets.

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Briefly discuss the international capital markets.

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With the growth in demand for exotic foods, Possum Inc.’s CEO Michael Munger is considering expanding the geographic footprint of its line of dried and smoked low-fat opossum, ostrich, and venison jerky snack packs. Historically, jerky products have performed well in the southern United States, but there are indications of a growing demand for these unusual delicacies in Europe. Munger recognizes that the expansion carries some
risk. Europeans may not be as accepting of opossum jerky as initial research suggests, so the expansion will proceed in steps. The first step will be to set up sales subsidiaries in France and Sweden (the two countries with the highest indicated demand), and the second is to set up a production plant in France with the ultimate goal of product distribution throughout Europe.
 
Possum Inc.’s CFO, Kevin Uram, although enthusiastic about the plan, is nonetheless concerned about how an international expansion and the additional risk that entails will affect the firm’s financial management process. He has asked you, the firm’s most recently hired financial analyst, to develop a 1-hour tutorial package that explains the basics of multinational financial management. The tutorial will be presented at the next board of directors meeting. To get you started, Uram has supplied you with the following list of questions:
j. Briefly discuss the international capital markets.

Explanation & AnswerSolution by a verified expert

Verified Answer

The financial markets which consolidate buyers and traders together to trade stocks, bonds, currencies and other financial assets are referred to as capital markets. The regulation and management of financial assets is different in international markets. There are certain determined tools to maintain uniformity in capital market transactions across the countries.
 
Eurodollar market: When a US dollar is deposited in a bank outside the USA it is called Eurodollar. Dollar is the leading international currency, and is used for most of the international transactions. Thus, to make sufficient availability of funds with foreign countries, eurodollar is deposited in their banks. It is outside the ambit of the U.S. authorities and thus the USA cannot regulate the interest rate associated with Eurodollar. Hence, Eurodollar deposits in different countries earn varied returns. Interest offered on Eurodollar deposits depends on the lending ability of the bank and the rate of return prevailing in the U.S. money markets. Depending on these, Eurodollar is deposited in or sent back to the US to reap higher benefits. To bring uniformity in the interest rate associated with Eurodollar, it is linked to a standard rate known as London Interbank Offered Rate (LIBOR).
 
Bond markets and stocks are two major components of the capital markets
 
International bond market: The bonds issued in the domestic country, when sold in the foreign country are called international bonds or a foreign bonds. These foreign bonds are always quoted in currency of the country in which they are initially issued. Though issued to foreign borrowers, these bonds are regulated by the U.S. under SEC (securities and exchange commission). These bonds are also called "Yankee bonds". Also, when a U.S. firm issues bonds in a currency other than dollars, it is called a "Reverse Yankee bonds". Certain bonds are issued in the home country but are quoted in foreign currencies. These are known as euro bonds. For example, A british company in germany issues bonds in dollars. Due to privacy reasons or to evade taxes, foreign bonds are issued as bearer bonds and not as registered bonds. Most of the governments do not levy taxes on the interest payment of the foreign bonds to maintain uniformity of the yield on such bonds.
 
International Stock markets: Multinational corporations often issue capital stocks in the foreign markets for the expansion of business. Similarly domestic investors can also invest in foreign company stocks. For such transactions a certificate is issued which represents ownership of foreign stocks held in the trust. For example, U.S. investors can invest in foreign company stocks through ADR (American depository receipts).

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