EURO MARKET

4. Parul Bhatnagar

6. Chetan Ganatra

7. Varun Goyal

14. Saurabh Kumar

22. Amish Pansuria

24. Shreedhar Rengarajan

NMIMS MBA Capital Markets- 2008-10

Background

International Capital market dealing in currencies outside the country of issue

Undertaken by Banks

London is the largest Euro Currency Market

Need arose out of the desire to hide the identity of the asset holder

Factors Contributing to the Growth

Regulation ‘M’ of the Federal Reserve Bank

Regulation ‘Q’ of the Federal Reserve Act

Tax Regulations by the US monetary authority

Characteristics of Euro Currency Market

This market is made up of borrowing and lending of currencies outside the country of issue

It is unregulated, uninsured and unsecured

Small number of operators dealing in large volumes

Highly competitive market

Investors prefer short term deposits and borrowers want long term loans

Loans are indexed against the LIBOR with a mark up for profit

It is made up of four components: Euro Currency deposit market, Euro currency credit market, Euro currency bond market, Euro currency notes market.

London Interbank Reference Rate

The London Interbank Offered Rate is a daily reference rate based on the

interest rates at which banks borrow unsecured funds from other banks in the

London wholesale money market.

LIBOR rates are provided for periods of up to 12 months. The most common rates

are the daily, weekly, one month, six month, and one year. LIBOR rates are also

provided in ten currencies, including the US dollar, Japanese yen, Euro, and

Pound Sterling.

Calculation of LIBOR

Libor is an average of actual rates used by banks -

The British Banker’s Association (BBA), surveys a variety of banks that reflect the general market.

The BBA then surveys the different banks’ interbank interest rate quotes. These

quotes are made available to the public. The 2 highest and 2 lowest quotations are ignored and the average of the

remaining 8 is declared as the LIBID-LIBOR quotation for that day.

Average of these 2 rates is called LIMEAN.

These rates imply the market rates. All transactions in the euro currency market are indexed against these rates.

Loan Syndication

A syndicated loan is provided by a group of lenders and is structured, arranged,

and administered by one or several commercial or investment banks known as

arrangers.

Advantages: Need for large amounts Time constraints Network building Can be cancelled any time Early repayment Single or staggered maturity Different tranches with different maturities

Process of Loan Syndication

Bank

Bank

Bank

Bank

Loan Underwriting

Project Implementa

tion

Participating Bank

LM decides the terms & conditions of the Loan

Investor

Euro Bond Market

The Eurobond market is the market for long-term debt instruments issued and traded in the offshore market.

A Eurobond is an international bond that is denominated in a currency not native to the country where it is issued.

Advantages of Eurobond Market

Eurobond market often allows firms to issue bonds more quickly and with lower disclosure costs.

For institutional investors, the Eurobond market offers a greater variety of high-quality issuers, ease of clearing and settlement, and larger issues with good liquidity.

The retail investor often sacrifices yield, apparently in exchange for a bearer instrument with no withholding taxes and no disclosures made to the tax authorities.

In particular, investors whose base currency is not the US$ may be more willing to sacrifice yield when they expect foreign exchange gains from a strong US$ and vice versa.

Foreign Bonds

In International market bonds are classified as Foreign/Offshore.

Foreign Bond is a debt instrument sold by a foreign entity in the local currency with the approval of local regulation authorities.

Major Foreign bonds are- Yankee Bonds Bulldog Bonds Samurai Bonds

Foreign Bonds

Yankee Bonds- These are instruments sold by a

foreign borrower in the U.S denominated in USD. If the bonds are sold through private placement

only to specific institutional investors and the bonds are tradable only on OTC basis then they are called sec144A bonds.

Bulldog Bonds – These are instruments sold by a foreign

borrower in the U.K denominated in GBP.

Samurai Bonds These instruments are sold by

foreign borrowers in Japan, denominated in JPY with the approval of the Japanese regulatory authority.

If the bonds are sold through private placement only to specific institutional investors and the bonds are tradable only on OTC basis then they are called Shibosai Bonds.

Foreign Bonds

Offshore Bonds

Offshore bonds are debt instruments sold by foreign borrowers in one or markets simultaneously, in a non resident currency.

No approval required from local authorities.

Such bonds are issued on bearer loans and are not subject to provisions of month holding tax.

Example:- Air India selling bonds in UK, Germany, Switzerland and Sweden; denominated in USD.

Types of Offshore Bonds

Straight Bonds: Bonds issued by borrowers with very good credit rating Long maturities extending to 50 years Carry fixed rate of interest, paid half yearly through life time Principal redeemed in full at maturity.

Sinking Fund Bonds: Such bonds are issued by borrowers with average credit rating. Repayment of principle through annual installments during the life

of the bond. Thus the half yearly coupon carries both the interest portion and

principal portion. The intention is to assure investors regarding the solvency of the

issuer.

Types of Offshore Bonds

Junk Bonds: These bonds are issued by borrowers with very low

credit rating. Thus carry a very high rate of interest Such instruments are purchased for short term

investments

Bonds with Options Bonds with Call Options: Such bonds provide the issuer

the right to repay the principal before actual maturity. Bonds with Put Options: Such bonds provide the

investor the right to get redemption of the principal before actual maturity.

Types of Offshore Bonds

Floating Rate Bonds: Bonds that provide a variable interest rate are floating

rate bonds. There are bonds that provide a ceiling rate of interest

which indicate the maximum liability of interest payments for the issuer

There are bonds that provide a floor rate of interest which represents the minimum level of return that the investor gets.

Deep Discount Bonds: These are bonds that are issued for long maturities at a

discount to face value and the redemption is done at the face value.

The difference represents the interest income to the investor.

EURO Currency Notes Market

Definition :-

Short term bonds sold by a borrower directly to the investors

with or without the underwriting support of commercial banks

Types of Notes

Euro Commercial Papers (ECPs)

Note Issuance Facilities (NIFs)

Euro Medium Term Notes (EMTNs)

Implementation of Euro Currency concept in India

Benefits:-

Increases efficiency of the local forex market

Provides an alternate source of finance to importers and exporters

Provides Indian banks access to foreign currency resources at competitive

rates

Provides NRI’s with alternate investment avenues

Provides the country with additional revenue and forex reserves

Gives Indian banking exposure to complex and sophisticated international

banking products

THANK YOU !!!