Companies are increasingly turning to the global capital market for funds, as the opening Deutsche Telekom case illustrates. By using international capital markets, firms can lower the costs and increase their access to funds. Investors are also diversifying their portfolios and reducing their systematic risk by investing internationally, although new risks are created in the process. Figure 11.1 shows who the main players are in the capital market. In the case of international capital markets, there are simply more of all of these players and a greater diversity in the players and the possible combinations.
Firms can obtain funds via both debt and equity.
If there is limited liquidity in a purely domestic capital market, the cost of capital is higher relative to what would be found in an international market. Figure 11.2 shows this graphically for the Deutsche Telekom case. With an increase in the choices available to an investor, the investor is able to diversify holdings internationally, thereby reducing systematic risk below what could be achieved in a purely domestic market. Figure 11.3 shows this graphically. While the systematic risks are reduced with international portfolio investments, exchange rate risks now come into play.