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Foundations of Multinational Financial Management Alan Shapiro 5 th Edition J.Wiley & Sons Power Points by Joseph F. Greco, Ph.D. California State University, Fullerton THE EUROMARKETS CHAPTER 13 CHAPTER OVERVIEW: I. THE EUROCURRENCY MARKETS II. EUROBONDS

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foundations of multinational financial management alan shapiro 5 th edition j wiley sons

Foundations of Multinational Financial ManagementAlan Shapiro5th Edition J.Wiley & Sons

Power Points by

Joseph F. Greco, Ph.D.

California State University, Fullerton

the euromarkets

THE EUROMARKETS

CHAPTER 13

chapter overview
CHAPTER OVERVIEW:

I. THE EUROCURRENCY MARKETS

II. EUROBONDS

III. NOTE ISSUANCE FACILITIES AND EURONOTES

IV. EURO COMMERCIAL PAPER

V. THE ASIA CURRENCY MARKETS

i the eurocurrency markets
I. THE EUROCURRENCY MARKETS

THE EUROMARKETS

- The most important international financial markets today.

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 markets6
THE EUROCURRENCY MARKETS

C. Eurodollar Creation involves:

1. A chain of deposits

2. Changing control/usage of deposit

the eurocurrency markets7
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 markets8
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 markets9
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.

eurobonds12
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.

eurobonds13
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.

the euromarkets14
THE EUROMARKETS

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 bank underwritten.

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 U.S. CPs.

3. Smaller fraction of Euro use

credit rating services to rate.