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CHAPTER 13 The Euromarkets I. THE EUROCURRENCY MARKETS THE EUROMARKETS -the most obvious example of the globalization of financial markets A. The Eurocurrency Market 1. Composed of eurobanks who accept/maintain deposits of foreign currency 2. Dominant currency: US$

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chapter 13

CHAPTER 13

The Euromarkets

i the eurocurrency markets
I. THE EUROCURRENCY MARKETS
  • THE EUROMARKETS
  • -the most obvious example of the globalization of financial markets
  • A. The Eurocurrency Market
  • 1. Composed of eurobanks who accept/maintain deposits of foreign currency
  • 2. Dominant currency: US$
the eurocurrency markets
THE EUROCURRENCY MARKETS
  • B. Growth of Eurodollar Market
  • caused by restrictive US government policies, especially
  • 1. Reserve requirements on deposits
  • 2. Special charges and taxes
  • 3. Required concessionary loan rates
  • 4. Interest rate ceilings
  • 5. Rules which restrict bank competition.
the eurocurrency markets4
THE EUROCURRENCY MARKETS
  • C. Eurodollar Creation involves
  • 1. A chain of deposits
  • 2. Changing control/usage of deposit
the eurocurrency markets5
THE EUROCURRENCY MARKETS
  • 3. Eurocurrency loans
  • a. Use London Interbank Offer Rate: LIBOR as basic rate
  • b. Six month rollovers
  • c. Risk indicator: size of margin between cost and rate charged.
the eurocurrency markets6
THE EUROCURRENCY MARKETS
  • 4. Multicurrency Clauses
  • a. Clause gives borrower option to switch currency of loan at rollover.
  • b. Reduces exchange rate risk
the eurocurrency markets7
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
II. EUROBONDS
  • A. DEFINITION OF EUROBONDS
  • bonds sold outside the country of currency denomination.
  • 1. Recent Substantial Market Growth
  • due to use of swaps.
  • a financial instrument which gives 2 parties the right to exchange streams of income over time.
eurobonds
EUROBONDS
  • 2. Links to Domestic Bond Markets
  • arbitrage has eliminated interest
  • rate differential.
  • 3. Placement
  • underwritten by syndicates of banks
eurobonds10
EUROBONDS
  • 4. Currency Denomination
  • a. Most often US$
  • b. “Cocktails” allow a basket of currencies
  • 5. Eurobond Secondary Market
  • -result of rising investor demand
  • 6. Retirement
  • a. sinking fund usually
  • b. some carry call provisions.
eurobonds11
EUROBONDS
  • 7. Ratings
  • a. According to relative risk
  • b. Rating Agencies
  • Moody’s, Standard & Poor
  • 8. Rationale For Market Existence
  • a. Eurobonds avoid government
  • regulation
  • b. May fade as market deregulate
eurobonds12
EUROBONDS
  • B. Eurobond vs. Eurocurrency Loans
  • 1. Five Differences
  • a. Eurocurrency loans use variable rates
  • b. Loans have shorter maturities
  • c. Bonds have greater volume
  • d. Loans have greater flexibility
  • e. Loans obtained faster
iii note issuance facilities and euronotes
III. NOTE ISSUANCE FACILITIES AND EURONOTES
  • A. Note Issuance Facility (NIF)
  • 1. Low-cost substitute for loan
  • 2. Allows borrowers to issue own notes
  • 3. Placed/distributed by banks
note issuance facilities and euronotes
NOTE ISSUANCE FACILITIES AND EURONOTES
  • B. NIFs vs. Eurobonds
  • 1. Differences:
  • a. Notes draw down credit as needed
  • b. Notes let owners determine timing
  • c. Notes must be held to maturity
iv euro commercial paper
IV. EURO-COMMERCIAL PAPER
  • I. SHORT-TERM FINANCING
  • A. Euronotes and Euro-Commercial Paper
  • 1. Euronotes
  • unsecured short-term debt securities denominated in US$ and issued by corporations and governments.
  • 2. Euro-commercial paper(CP)
  • euronotes not bankunderwritten
euro commercial paper
EURO-COMMERCIAL PAPER
  • B. U.S. vs. Euro-CPs
  • 1. Average maturity longer (2x)
  • for Euro-CPs
  • 2. Secondary market for Euro;
  • not for U.S. CPs.
  • 3. Smaller fraction of Euro use
  • credit rating services to rate.
  • Problems: 2, 3, 4