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Multinational Financial Management Alan Shapiro

7th Edition J.Wiley & SonsPower Points byJoseph F. Greco, Ph.D.California State University, Fullerton

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CHAPTER 13THE EUROMARKETS

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CHAPTER OVERVIEW:

I. THE EUROCURRENCY MARKETSII. EUROBONDSIII.NOTE ISSUANCE FACILITIES AND

EURONOTESIV. EUOR COMMERCIAL PAPERV. THE ASIA CURRENCY MARKETS

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I. THE EUROCURRENCY MARKETS

THE EUROMARKETS-the most important international financial markets today.

A. The Eurocurrency Market1. Composed of eurobanks who

accept/maintain deposits of foreign currency

2. Dominant currency: US$

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THE EUROCURRENCY MARKETS

B.Growth of Eurodollar Marketcaused by restrictive US governmentpolicies, especially

1. Reserve requirements on deposits2. Special charges and taxes3. Required concessionary loan rates4. Interest rate ceilings5. Rules which restrict bank competition.

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THE EUROCURRENCY MARKETS

C. Eurodollar Creation involves1. A chain of deposits2. Changing control/usage of

deposit

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THE EUROCURRENCY MARKETS

3.Eurocurrency loansa. Use London Interbank Offer

Rate: LIBOR as basic rateb. Six month rolloversc. Risk indicator: size of

margin between cost and rate charged.

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THE EUROCURRENCY MARKETS

4. Multicurrency Clausesa. Clause gives borrower option to switch currency of loan at

rollover.b. Reduces exchange rate risk

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THE EUROCURRENCY MARKETS

5.Domestic vs. Eurocurrency Marketsa. Closely linked rates by

arbitrageb. Euro rates: tend to lower lending, higher deposit

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II. EUROBONDS

A. DEFINITION OF EUROBONDSbonds 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.

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EUROBONDS

2. Links to Domestic Bond Marketsarbitrage has eliminated interestrate differential.

3. Placementunderwritten by syndicates of banks

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EUROBONDS

4. Currency Denominationa. Most often US$b. “Cocktails” allow a basket of

currencies5. Eurobond Secondary Market -result of rising investor demand6. Retirement

a. sinking fund usuallyb. some carry call provisions.

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EUROBONDS7. Ratings

a. According to relative riskb. Rating Agencies Moody’s, Standard & Poor

8. Rationale For Market Existencea. Eurobonds avoid government

regulationb. May fade as market

deregulate

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THE EUROMARKETS

B. Eurobond vs. Eurocurrency Loans1. Five Differences

a. Eurocurrency loans use variable rates

b. Loans have shorter maturitiesc. Bonds have greater volumed. Loans have greater flexibilitye. Loans obtained faster

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III. NOTE ISSUANCE FACILITIES AND EURONOTES

A. Note Issuance Facility (NIF)1. Low-cost substitute for loan2. Allows borrowers to issue own

notes3. Placed/distributed by banks

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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

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IV. EURO-COMMERCIAL PAPER

I. SHORT-TERM FINANCINGA. Euronotes and Euro-Commercial

Paper1. Euronotes

unsecured short-term debt securities denominated in US$ and issued by corporations and governments.

2. Euro-commercial paper(CP)euronotes not bank underwritten

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EURO-COMMERCIAL PAPER

B. U.S. vs. Euro-CPs1. Average maturity longer (2x)

for Euro-CPs2. Secondary market for Euro;

not U.S. CPs.3. Smaller fraction of Euro use

credit rating services to rate.