Multinational Financial Management Alan Shapiro 7th Edition Power Points by J.Wiley & Sons Joseph F Greco, Ph.D California State University, Fullerton CHAPTER 13 THE EUROMARKETS CHAPTER OVERVIEW: I THE EUROCURRENCY MARKETS II EUROBONDS III.NOTE ISSUANCE FACILITIES AND EURONOTES IV EUOR COMMERCIAL PAPER V THE ASIA CURRENCY MARKETS I THE EUROCURRENCY MARKETS THE EUROMARKETS -the most important international financial markets today A The Eurocurrency Market Composed of eurobanks who accept/maintain deposits of foreign currency Dominant currency: US$ THE EUROCURRENCY MARKETS B Growth of Eurodollar Market caused by restrictive US government policies, especially Reserve requirements on deposits Special charges and taxes Required concessionary loan rates Interest rate ceilings Rules which restrict bank competition THE EUROCURRENCY MARKETS C Eurodollar Creation involves A chain of deposits Changing control/usage of deposit THE EUROCURRENCY MARKETS Eurocurrency loans a Use London Interbank Offer LIBOR as basic rate Rate: b Six month rollovers c Risk indicator: size of margin between cost and rate charged THE EUROCURRENCY MARKETS Multicurrency Clauses a Clause gives borrower option to switch currency of loan at rollover b Reduces exchange rate risk THE EUROCURRENCY MARKETS 5.Domestic vs Eurocurrency Markets a Closely linked rates by arbitrage b Euro rates: tend to lower lending, higher deposit II EUROBONDS A DEFINITION OF EUROBONDS bonds sold outside the country of currency denomination Recent Substantial Market Growth -due to use of swaps a financial instrument which gives parties the right to exchange streams of income over time 10 EUROBONDS Links to Domestic Bond Markets arbitrage has eliminated interest rate differential Placement underwritten by syndicates of banks 11 EUROBONDS Currency Denomination a Most often US$ b “Cocktails” allow a basket of currencies Eurobond Secondary Market -result of rising investor demand Retirement a sinking fund usually b some carry call provisions 12 EUROBONDS Ratings a According to relative risk b Rating Agencies Moody’s, Standard & Poor Rationale For Market Existence a Eurobonds avoid government regulation b May fade as market deregulate 13 THE EUROMARKETS B a b c d e Eurobond vs Eurocurrency Loans Five Differences Eurocurrency loans use variable rates Loans have shorter maturities Bonds have greater volume Loans have greater flexibility Loans obtained faster 14 III NOTE ISSUANCE FACILITIES AND EURONOTES A Note Issuance Facility (NIF) Low-cost substitute for loan Allows borrowers to issue own notes Placed/distributed by banks 15 NOTE ISSUANCE FACILITIES AND EURONOTES B NIFs vs Eurobonds Differences: a Notes draw down credit as needed b Notes let owners determine timing c Notes must be held to maturity 16 IV EURO-COMMERCIAL PAPER I SHORT-TERM FINANCING A Euronotes and Euro-Commercial Paper Euronotes unsecured short-term debt securities denominated in US$ and issued by corporations and governments Euro-commercial paper(CP) euronotes not bank underwritten 17 EURO-COMMERCIAL PAPER B U.S vs Euro-CPs Average maturity longer (2x) for Euro-CPs Secondary market for Euro; not U.S CPs Smaller fraction of Euro use credit rating services to rate 18 ... ASIA CURRENCY MARKETS I THE EUROCURRENCY MARKETS THE EUROMARKETS -the most important international financial markets today A The Eurocurrency Market Composed of eurobanks who accept/maintain deposits... outside the country of currency denomination Recent Substantial Market Growth -due to use of swaps a financial instrument which gives parties the right to exchange streams of income over time 10 EUROBONDS