6.5.5 Summary: Part C
In this part we looked at the international (global) capital market which consists of borrowers, investors and 'market makers' (that is, commercial and investment banks operating in financial centres across the world). We noted that the global capital market is much larger than any domestic market and that there is wider choice for both borrowers and investors. Two things ensue from this:
- the cost of capital is less in the larger market
- there is more scope for portfolio diversification and the lowering of systematic risk
Eurocurrency is defined as any currency banked outside its country of origin and we noted that eurocurrency owes its popularity to the absence of government control. This characteristic applies also to eurobonds in the international bond market, where there are both foreign bonds and eurobonds.
We said that there is an international money market, an international bond market, but no international equity market. However, that may be merely a play on words. Money and bonds may be bought and sold in a number of centres in the international market and the same is true for equities: shares in companies are increasingly available for buying and selling on stock exchanges around the world.
Finally we noted that foreign exchange risk makes investment in currencies other than one's own just that - risky - because of possible fluctuations in the value of other currencies. However, on the equities side, we noted that the greater potential for diversification of a portfolio lowers the risk in that portfolio.
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