BUS 353

Part III: Global Capital Markets

A. Two Broad Categories: Developed and Emerging

1. Mature (Developed) Markets – Highly regulated, with efficient systems to match seekers and providers of capital with an active secondary market

2. Developing (Emerging) Markets – Smaller, with less liquidity (fewer buyers and sellers), greater volatility, less efficient trading mechanisms; more subject to political influences

B. ADRs – American Depository Receipts

1. ADRs allow non-U.S. companies to participate in United States capital markets

2. Depository banks hold company shares, then issue receipts which trade on U.S. markets, with each receipt representing a bundle of shares

3. Requires companies to follow U.S. accounting standards, issue English language reports, grant shareholders rights, and follow exchange rules in order to be listed – however, not all ADRs are listed (can be OTC or PK)

C. Global Depository Receipts

1. Similar to ADRs, GDRs are issued in more than one country, representing shares in a foreign company -- shares represented by GDRs are held by a foreign branch of an international bank, trading as domestic shares, but with the representative shares selling globally through branches of the bank

2. Can be denominated in either U.S. dollars or Euros

D. Back Door Mergers and Shell Companies

1. Shell Company - Shell companies are do not possess actual assets or conduct business operations. The stock may be listed on an exchange but inactive, or may be unlisted, with the company used for a tax shelter, money laundering, or other purposes.

2. Back Door Merger – where a foreign privately held corporation “merges” with a shell company listed on a stock exchange to avoid the financial scrutiny that is required for an initial public offering.

E. The World Bank

1. Financed by bonds guaranteed by the 178 countries that own the bank

2. Lends money to finance internal projects of smaller countries

http://www.worldbank.org/

F. The World of Money

1. The primary source of a currency’s value as compared to other currencies is whether individuals and governments are interested in using that currency to make purchases or investments, or whether they wish to hold that currency as a source of long term security

2. Relative currency values can vary depending upon relative interest rates and upon the perceived economic prospects of each country

F. The World of Money (cont’d)

3. How Currency Trading Worksa. The currency trader seeks a quote for buying or selling

currency from a bank that is a market maker (one that regularly trades in those currencies)

b. The bank responds with a bid – the price that it would pay to buy or sell that currency

c. The terms are agreed to by the trader and the bank

d. The trader enters information into the dealing system, obtaining a confirmation, while confirmations are also generated by the banks involved in the transaction

e. Payment is sent electronically to the corresponding currency bank

F. The World of Money (con’t)

4. Currencies are traded on the global foreign exchange market (forex)

a. Spot Trading – where the currency exchange deal is concluded within 2 days at current exchange rates

b. Forward Transaction – where an exchange rate is agreed upon to apply to a currency transaction that will occur in the future

c. Currency Swap – an exchange of cash flows, for example, where a stream of income in one currency, to continue into the future, is agreed to be paid in another currency